report
stringlengths 320
1.32M
| summary
stringlengths 127
13.7k
|
|---|---|
Over the last decade, nursing home ownership and operating structures have continued to evolve, including the development of more complex structures and an increase in private investment ownership of nursing homes. The federal government plays an important role in funding nursing home care and ensuring that residents in the nation’s approximately 16,000 nursing homes participating in the Medicare or Medicaid programs receive appropriate care; collection of nursing home ownership information is one part of this effort. Nursing homes must be licensed by the states in which they operate in order to participate in Medicare or Medicaid. The entity that is licensed to operate the facility is known as the provider. A provider can be an independent company that operates one facility or the provider can be part of a multiprovider chain organization. Some providers contract with separate entities to manage nursing homes. In addition, the provider may or may not own the real estate where care is delivered and any associated medical or other equipment. Nursing home real estate assets can be separated from nursing home operations for a number of reasons, including to limit liability or to obtain financing. The ownership and control relationships among these various entities can be complex. For example, the provider may own all or part of the entity it contracts with to operate the nursing home. Providers can be one of three business types—for profit, nonprofit, or government. The majority of nursing home providers—about two-thirds— are for-profit businesses. For-profit nursing home providers include a wide range of business ownership types from sole proprietorships to large publicly traded corporations. Within the for-profit provider type, private investment firms—generally investment firms whose ownership interests are not publicly traded on a stock exchange—have been acquiring both entire nursing home chains as well as individual homes since at least the late 1990s. Restructuring of the nursing home industry following bankruptcies among several large nursing home chains, as well as increased liability litigation in states such as Florida and Texas, which prompted some chains to sell their homes in these states, created an opportunity for private investment firms to acquire nursing homes that were being sold by these chains. In addition, reliable income streams from nursing home ownership made investment in the industry attractive for PI firms. In general, PI firms use a combination of investment capital and borrowed capital to acquire companies with the goal of making a profit and eventually returning that profit to investors and the firm. In contrast to publicly traded firms, PI firms generally are not subject to periodic disclosure and other SEC requirements, including public reporting of income, assets, and information about company operations and leadership. Consequently, information on the operations of PI firms— including a firm’s acquisition and sale of companies—is generally not as readily available as that of publicly traded firms. PI firm managers say this advantage allows them to make business improvements their publicly traded competitors may be less willing to make, such as developing investment strategies that are not tied to producing profits on a quarter-by- quarter basis. In recent years, attention has been given to a subclass of private investment called private equity. One investment strategy undertaken by private equity firms is the “leveraged buyout.” In a typical leveraged buyout, a private equity firm establishes a fund and obtains capital commitments from investors. These investors often include public and corporate pension plans, endowments and foundations, insurance companies, and individuals. The fund’s capital is then used in combination with borrowed capital to acquire majority or complete ownership of a company. However, most of the necessary financing for the acquisition comes from this borrowed capital, with the fund’s capital representing only a small portion of the total acquisition cost. After attempting to improve the financial performance of the company (which can be over a 3- to 5-year period but may be longer), the fund sells the company; any profits from the sale are returned to the fund and generally distributed to fund investors and the private equity firm. (See fig. 1.) To be eligible for Medicare and Medicaid payments, nursing homes are required to submit information on individuals or certain entities, such as corporations, that have an ownership or control interest in the provider. The Social Security Act requires all Medicare and Medicaid nursing homes to disclose information on the identities of persons who have an ownership or control interest in the nursing home in order to participate in the programs. Specifically, the act and related regulations define “a person with an ownership or control interest” to include a person (including certain entities) who has a direct or indirect ownership interest of 5 percent or more in the is the owner of a whole or partial interest in any mortgage, deed of trust, note, or other obligation secured by the nursing home or any of its property or assets, equal to 5 percent or more of the total property and assets; is an officer or director of the nursing home, if it is organized as a corporation; or is a partner in the nursing home, if it is organized as a partnership. In addition, the act specifies that, to the extent determined feasible under regulations of the Secretary of HHS, nursing home providers must disclose for each person with an ownership or control interest, the name of any other provider with respect to which that same person has an ownership or control interest. The Patient Protection and Affordable Care Act, enacted in March 2010, expanded the ownership and control reporting requirements for Medicare and Medicaid nursing homes by adding a new subsection to the statute. Within 2 years of enactment (March 2012), the act will require nursing home providers to report additional information on the nursing home, including the name and title of each member of the governing body of the nursing home; each person or entity who is an officer, director, member, partner, trustee, or who directly or indirectly manages, advises, or supervises any element of the practices, finances, or operations of the facility; and persons or entities—referred to as “additional disclosable parties”—that with respect to the facility exercise operational, financial, or managerial control; provide policies or procedures for operations; provide financial or cash management services; provide management, administrative, clinical consulting, accounting, or financial services; lease or sublease real property to the facility; or own an interest of 5 percent or more in the real estate. Moreover, the additional disclosable parties must report information on their organizational structure (including the legal structure by which the disclosing entity operates) and describe their relationship to the nursing home and to one another. For example, an additional disclosable party that is a (1) corporation must report its officers and directors and any shareholders whose ownership interest is equal to or exceeds 5 percent of the corporation, and (2) limited liability company, must report the percentage ownership interest for its members and managers. Within 2 years of the enactment of these new provisions, HHS is required to promulgate final regulations that require facilities to report the information to HHS in a standardized format. The act also requires the Secretary to establish procedures to make such information available to the public within 1 year after the date the final rules are promulgated and published. Until the date the information is made available to the public, nursing homes must have this information available for HHS and other parties, including the state in which the nursing home is located, upon request. Nursing homes report ownership and managing control information to CMS through the agency’s Medicare enrollment application when they apply to participate in the Medicare program. CMS stores this information in a national database called PECOS. The Medicare enrollment application requires nursing homes to report identifying information, such as their legal business name, licensure information, tax identification number, and any chain affiliation. Nursing homes must also report their ownership (by both individuals and organizations) and managing control information, as well as any adverse legal action taken against these entities. To report chain affiliation, nursing homes are asked to identify their “chain home office”—the entity responsible for providing centralized management and administrative services to homes under common ownership and common control. Nursing homes are required to submit updated information if they undergo a change of ownership or when there are any changes to ownership or other information previously provided on the Medicare enrollment application. (See table 1.) Nursing homes are required to sign the application, to certify, among other things, that the information in it is “true, correct, and complete.” CMS stores information collected through the Medicare enrollment application in the PECOS database. According to CMS, PECOS, implemented in 2002, was designed to serve three purposes: (1) collect information for a provider and record the associations between a provider and entities that have an ownership or control interest in the provider, including any chain associations; (2) allow CMS to make informed enrollment decisions based on a provider’s past and present business history, any reported exclusions, sanctions, and felonious behavior; and, (3) ensure that CMS makes correct payments under the Medicare program. PECOS replaced the multiple contractor systems that previously housed provider enrollment data, facilitating the nationwide screening of providers billing Medicare. The database contains information on nursing homes that have submitted a Medicare enrollment application to CMS since 2002. As of July 2010, about 81 percent of active Medicare- participating nursing homes were in PECOS. Statutes and CMS regulations indicate that certain ownership information must be provided to the public upon request. In a Federal Register announcement about PECOS, CMS noted its plan for the data to be shared with federal and state agencies as necessary to ensure proper payment of Medicare benefits, to assist with the administration of other federally funded health programs, or to assist with other activities within the state. Provider enrollment and oversight of nursing homes are managed by two different entities within CMS; state entities also have an oversight role. CMS’s Division of Provider and Supplier Enrollment, within the Office of Financial Management, is responsible for the Medicare enrollment process. CMS uses contractors to handle administrative tasks related to enrollment, including the collection and verification of enrollment applications and associated information submitted by providers. For example, in processing a provider’s Medicare enrollment application, CMS contractors are required to examine the adverse legal history as reported on the application for individuals and organizations having an ownership or control interest in the provider and refer matters to CMS as necessary; this adverse legal history could make the provider ineligible to participate in the Medicare program. Each contractor is responsible for these tasks within a certain geographic region of the U.S. CMS’s Survey and Certification Group is responsible for oversight of state survey activities and enforcement of nursing home quality. To participate in the Medicare program, nursing homes must pass regular inspections, also known as surveys, to ensure they comply with federal quality standards. These inspections are conducted by state survey agencies under contract with CMS. Most deficiencies identified, which can range from minor and isolated in scope to very serious and widespread throughout the nursing home, require the home to prepare a plan of correction. Results from state surveys of nursing homes are posted and routinely updated on CMS’s Nursing Home Compare Web site. About 1,900 unique nursing homes were acquired by PI firms from 1998 through 2008. While some of the acquisitions involved entire nursing home chains—which included both the operations and any owned real estate— other acquisitions involved only real estate. Ten PI firms accounted for most of the acquired nursing homes. Six of the 10 PI firms responded to questions and described similar investment rationales. Firms reported that they were more involved in operations after acquiring a chain than after acquiring real estate only. We identified 77 acquisitions of nursing homes by PI firms from 1998 through 2008, involving a total of 1,876 unique nursing homes. These acquisitions represent about 12 percent of the 15,711 nursing homes that participated in Medicare and Medicaid as of December 2008 and about 18 percent of for-profit nursing homes. Sometimes the same nursing homes were involved in more than one acquisition. For example, in some cases a nursing home operating company was purchased by a PI firm in one acquisition and the real estate for the same home was purchased by a different PI firm in a separate acquisition. In other cases, nursing homes were acquired more than once by different PI firms. For example, one set of nursing homes was acquired three separate times by three different PI firms from 1998 through 2008. Considering the 77 acquisitions cumulatively, the nursing homes involved would total over 2,500. Figure 2 shows the number of homes acquired, by year, over the 11-year time period. The majority of nursing homes (73 percent) were acquired by PI firms from 2004 through 2007, a period characterized by acquisitions of large nursing home chains. Considering only the most recent acquirers as of the end of 2008, 10 PI firms accounted for most nursing homes acquired from 1998 through 2008. Table 2 shows the names of the nursing home chains, if applicable, and the number of nursing homes acquired by the 10 firms from 1998 through 2008 and still owned as of the end of the period. In some cases, the PI firms owned only operations or only real estate as of December 2008. The 10 firms accounted for 89 percent of the 1,876 unique nursing homes acquired by PI firms during the period. Six of the top 10 PI firms acquired an entire nursing home chain or founded a company that became a nursing home chain. For example, the PI firm The Carlyle Group acquired the nursing home chain HCR ManorCare. Another PI firm, Warburg Pincus, cofounded Florida Healthcare Properties in 2001, which then became a chain by acquiring the operations for 49 nursing homes. Two of the top 10 PI firms acquired only the real estate and leased at least a portion of their nursing homes to operating companies acquired by other PI firms. Two firms—SMV/SWC and GE Capital, Healthcare Financial Services—acquired the real estate for 353 nursing homes and leased 299 (85 percent) of their properties to nursing home operating companies acquired by other top 10 PI firms. For example, GE Capital, Healthcare Financial Services leased 112 properties to operating companies acquired by Warburg Pincus. (Fig. 3 illustrates how Warburg Pincus and GE Capital, Healthcare Financial Services separately acquired the operations and real estate of the Centennial Healthcare nursing home chain.) Two of the top 10 PI firms both acquired a nursing home chain and made real-estate-only acquisitions. Formation Capital bought the Genesis nursing home chain, but it also partnered with GE Capital, Healthcare Financial Services to acquire the real estate of five nursing homes. A second firm, The Straus Group, invested in the CareOne nursing home chain but also separately purchased the real estate only of 58 nursing homes. According to information gathered from 2009 through 2010, 9 of the top 10 PI nursing home acquirers reported owning 1,503 nursing homes, compared to the 1,496 nursing homes that they acquired as of December 31, 2008. We were unable to obtain current ownership data from 1 of the top 10 PI nursing home acquirers. Most of the six PI firms that responded to our questions described similar reasons for investing in the nursing home industry; officials from five of these six PI firms cited increased demand for long-term care due to an aging population. For example, officials at one PI firm noted that no new homes had been built in recent years and anticipated that demand for senior housing would exceed the available supply. Officials at four PI firms told us they expected to hold their investments for time frames ranging from 3 to more than 20 years. However, one of these PI firms has already sold one of the portfolios it acquired and had planned on selling its other portfolios. (See app. I for more details on each firm’s nursing home investment rationale.) Of those that responded to our questions, four PI firms reported acquiring entire nursing home chains. Officials from all four of these firms reported holding seats on the chains’ corporate boards of directors. In general, they characterized their involvement as related to the strategic direction of the chain rather than overseeing day-to-day operations, which all four of these PI firms described as the dominion of each chain’s executive management. Three of the four PI nursing-home-chain acquirers said they kept the same executive management after they acquired a chain because it was already well managed; one firm believed the chain it acquired had quality-of-care challenges and ultimately hired a new chief executive officer, who is a physician. Some firms noted improvements made across chains since acquisition. For example, according to officials of one PI firm acquirer, among other things, it directed capital to hire directors of clinical education, train facility staff, and reduce staff turnover. Another firm helped create an independent quality committee to provide the board with independent expert guidance on assessing quality-of-care data. Two of the four PI nursing-home-chain acquirers reported dividing the operations and real estate into separate companies for tax or financing purposes while still retaining them under common ownership. Officials at these two firms noted the benefits of having nursing home operations and real estate under the same ownership. One commented that when operating and real estate companies are unaffiliated, tensions can arise over responsibility for improvements, reducing incentive to make improvements to the facility. One real-estate-only acquirer strongly disagreed with this statement and noted that a landlord with a triple net lease has a great incentive for ensuring the real estate is appropriately maintained. This firm said such leases clearly state the responsibilities of the real estate owner and the operator with respect to facility improvements and said that disagreements have been few and limited. The three PI firms (of those that responded to our questions) that made real estate-only acquisitions had no representation on the boards of the operating companies to which they leased real estate, and so were not in a position to directly control the resources or change the policies of these companies. All three real estate-only acquirers leased real estate to nursing home operators under “triple net” agreements, through which, in addition to rent, the operator agrees to pay all real estate taxes, property insurance, and maintenance on the property (including capital costs). Two firms’ leases calculated a base rent plus rent as a percentage of the operator’s adjusted net income or excess cash flow—ranging from 35 to as much as 50 percent. In addition, while officials at all three firms emphasized that they “do not tell the nursing home operators how to run their businesses,” officials at two of the three PI firms that acquired real estate indicated they monitor clinical performance at acquired homes. These officials said they would consider terminating a lease if poor or declining care persisted, although they had not encountered such a situation. The remaining real estate acquirer told us it had never monitored the quality of care provided by the operators to whom it leased facilities, but would like to start monitoring operations, given the risk to its investment should an operator it leases to lose its state license to operate a nursing home. PECOS provided a confusing picture of the ownership structures and chain affiliations of the six PI-owned nursing home chains we reviewed. For example, nursing homes had multiple owners listed in PECOS, but no indication of the hierarchy or relationships among the owners was provided. PI ownership of the homes, moreover, was not always readily apparent in the data. Some states we interviewed collect ownership information that better captures the relationships among owners, but states still report challenges untangling complex ownership structures. Adding to the difficulties deciphering the data, we also found that in some cases the data were incomplete—including ownership information for homes whose real estate was acquired by a PI firm and chain information for several homes. CMS’s ability to determine the accuracy and completeness of ownership data reported by nursing homes is limited. Even though our analysis of PECOS was informed by extensive research on PI nursing home acquisitions, the complex ownership structures established by some PI-owned nursing home chains we reviewed made PECOS data hard to decipher and PI ownership was not always evident. Nursing homes often have numerous owners listed, but no information provided in PECOS to indicate how they may be related. For the six chains we reviewed, the number of organizational owners listed per home ranged from 1 to 26, with an average of 8 organizational owners per home. The multitude of organizational owners may have reflected the complex ownership structures created by some nursing home companies. For example, one PI entity that owned a nursing home chain created: separate limited liability companies for the operation of each individual home in the chain; separate limited liability companies that owned the nursing home real a separate company that leased all the properties from the real estate holding companies and then subleased them to the operating companies; and a holding company set up to own the entire chain. Beyond inventorying these ownership entities, PECOS currently provides no information to indicate any hierarchy or relationships among the organizational owners listed, such as whether one entity is a parent or a subsidiary of another. Moreover, while entities with at least 5 percent direct or indirect ownership of the assets of the provider are listed in PECOS, the database does not include information on their specific ownership percentage, adding difficulty to determining the hierarchy and relationships among the owners listed. Because we had additional information, we were able in some cases to recognize the varying levels of ownership reported in the data, including entities that were holding companies, private investment funds with no employees, or entities that were investors in the private investment firm or an affiliate, relationships that were not otherwise apparent from the data. For example, the Washington State Investment Board, which invests state and local pension funds, was listed among the owners for homes acquired by one PI firm, and the California Public Employees Retirement System was listed among the owners for nursing homes acquired by another PI firm. According to the PI firms, these two entities are passive investors; that is, they do not play a role in management of the nursing home chains. Fully capturing these complex relationships among nursing home owners poses challenges for a data system such as PECOS. For example, in documents one PI-owned nursing home chain submitted to a state agency, the chain’s delineation of its ownership structure took several pages to describe and included a detailed chart of the ownership structure. CMS officials said that providers can supply such organizational charts when they submit Medicare enrollment information, but these documents are maintained outside of PECOS by CMS contractors; currently, PECOS does not have the capacity to store them. Some states that we interviewed that collect nursing home ownership information for licensure purposes collect information to capture relationships among owners. Officials at two states we interviewed maintain databases that attempt to capture the hierarchy of the ownership structure surrounding the nursing home. Missouri’s ownership database, for example, can be used to identify successive levels of ownership (see fig. 4), which is not possible to discern with the data in PECOS. State officials also told us, however, that they are challenged by complex ownership structures among nursing homes. State officials from Missouri, Maryland, New Jersey, Illinois, and California cited complex ownership structures—including multiple layers—as obscuring ownership or making oversight difficult. State officials also observed that nursing home chains have set up separate limited liability companies as operators of each home and they do not always obtain information that identifies the ultimate parent owner. For example, Illinois officials noted that they do not always obtain ownership information for the parent company, such as a private equity firm, and sometimes their records only show the individual limited liability company as the owner, such that a nursing home set up as an individual limited liability company in one town would not be linked to a home from the same chain set up as a limited liability company in another town. Expanded reporting requirements contained in the Patient Protection and Affordable Care Act and regulations to implement the act provide CMS with an opportunity to address some of these issues. In particular, the act requires homes to provide the identity of and information on “additional disclosable parties” and their relationship to the nursing home and one another. In addition, the act requires that nursing homes report the organizational structure of additional disclosable parties organized as limited liability companies including, for example, their members, and managers, and as applicable, their percentage ownership interest in the company. While these expanded reporting requirements may provide more insights into the relationships among some of the owners in PECOS, they may not capture the hierarchy and relationships across all the numerous owners currently being reported. PI ownership was often not readily apparent in PECOS. The Medicare enrollment application does not ask for information on the business type of organizational owners, including whether they are PI firms, so it is not possible to use PECOS to identify all PI-owned nursing homes. When we tried to identify the specific private investment firms we were aware of in the ownership data in PECOS, we found that the entities through which the PI firms acquired nursing homes were often listed. In some cases, associating these entities with the PI firm was relatively straightforward, as the entities had names that were readily identifiable with the PI firms. For example, among the many owners listed for homes in the HCR ManorCare chain, were the entities Carlyle Partners V MC, L.P. and Carlyle MC Partners, L.P., two private investment funds managed by The Carlyle Group, the PI acquirer of the chain. In contrast, PI ownership of other homes we examined was difficult to identify in PECOS. In four of the PI-owned chains we examined, PI firms or entities readily identifiable with the PI firms were not apparent among the organizational owners reported for any of the nursing homes in the chains or were listed for only a small fraction of the homes. The number of homes in these four-PI owned chains for which PI ownership was not readily apparent in PECOS accounted for 62 percent of the 1,003 nursing homes we examined. We were not able to fully explain this situation. It is possible that some PI firms, by virtue of how they structured their transactions to acquire the homes, may not have been required to be reported by the governing statute at the time. It is also possible that entities were reported that we did not recognize were related to the PI firm. On the other hand, PI firms may not have been reported, even if required, for other reasons, for example, due to confusion about the reporting requirements. Specifically, we found the following: Representatives of one PI firm that was not listed in PECOS among the owners for any of the homes in the chain it acquired said that a special purpose entity (SPE) was created for the acquisition of the chain and was reported as an owner on the Medicare enrollment application. The SPE, which was not readily identifiable with the PI firm, was reported for only about three-quarters of the chain’s homes. The representatives said that the PI firm itself did not own any interests in the SPE and so was not on the application. Individuals associated with the PI firm were listed as officers/directors for most of the homes in the chain. Another PI firm, which was also not reported as an owner for any of the homes in the chain it acquired, did own the SPE used to acquire the chain, according to officials of the nursing home chain. However, the officials said that after closing on the acquisition, the title to each of the homes was held by a subsidiary of the company that operates all the homes and therefore the SPE neither holds title to nor operates the homes but rather is an indirect owner. The SPE, which was not readily identifiable with the PI firm, was listed among the organizational owners in PECOS for a small portion of the homes. The statute currently requires the reporting of persons and certain entities that have an ownership or control interest of at least 5 percent, including indirect interests, in the assets of the provider entity. A third PI firm sold the real estate for most of the homes in the chain to another company shortly after the acquisition; the company then leased the facilities back to an affiliate of the PI firm. The affiliate was listed as an owner in PECOS for most of the homes in the chain; the PI firm was not. The individuals involved in the PI firm’s purchase of the nursing home chain are also principals of the affiliate, some of whom were reported in PECOS as individuals having an ownership interest for a portion of the homes in the chain. Finally, for one PI firm, the company the PI firm formed to fund its acquisition of the chain, which was readily identifiable with the firm, appeared as an owner in PECOS but for less than 20 percent of the homes in the chain. In this case, the chain’s representatives said they had been instructed by the CMS contractor to report only two levels of ownership above the nursing home. As a result, the ownership information reported by this chain was far from complete, and no common owner, including the PI firm, was apparent for all of the homes. The representatives of the chain said that they decided to submit complete ownership information for their homes, on their own initiative, and were in the process of doing so, working with a new CMS contractor. PECOS does not provide a clear picture of individuals in the ownership structure. The information in PECOS on individuals with an ownership or control interest in the provider is collected separately from and is not linked to information about organizational owners and does not provide a clear picture of where they fit in the ownership structure. Specifically, the Medicare enrollment application asks for the names and even the birth dates of individuals with an ownership or control interest— including those with 5 percent or more direct or indirect ownership in the provider, with a partnership interest in the provider, or who are directors or officers of the provider—but it does not ask for the organization they are affiliated with or their titles. As a result, it is not clear if individuals reported as having a 5 percent or more ownership or control interest are direct or indirect owners of the nursing home provider. In addition, CMS has not required providers to report information about individuals who are partners, officers, or directors of entities above the nursing home provider level, such as members of the nursing home chain’s board of directors, which in some cases would include representatives of the PI firm. Identification of these entities is important because they are ultimately responsible for the management of the chain. Providers may be reporting such individuals, but it was not possible for us to distinguish this in the data because they are broadly categorized as officers or directors with no information included on their affiliated organizations. This issue could be addressed when HHS implements the reporting provisions of the Patient Protection and Affordable Care Act. In contrast, two states we contacted—Missouri and Texas—collect more comprehensive information about individuals with ownership or control interests in the nursing home provider and in entities above the provider level. These states also collect information on the specific positions of reported individuals in these entities, such as president, secretary, member, or general or limited partner. In addition to the challenges in identifying PI owners in PECOS data, we found that the data were sometimes incomplete and that the information on chain ownership was not collected in a straightforward manner, making chain associations difficult to identify. One PI firm that acquired real estate only was not reported. A PI firm that leased nursing home real estate to a provider but that also had a security interest in the assets of the provider was not reported in PECOS; however, a security interest may constitute an ownership or control interest for purposes of Section 1124 that could obligate disclosure as an owner on the Medicare enrollment application. For example, we found that one firm was not reported in PECOS among the owners of the nursing homes within the chain for which it owned the real estate. However, a lease agreement indicates that the PI firm also had a security interest in the nursing home’s assets that could obligate reporting of the entity as the holder of an ownership or control interest. Officials with the PI firm told us that they were not familiar with the application’s reporting requirements. CMS officials noted that it may not be clear to providers that these entities must be reported, as the instructions on the application do not specifically indicate that a security interest is a reportable interest, and that going forward CMS may need to revise the application to make this explicit. The Patient Protection and Affordable Care Act requires that entities and individuals that lease or sublease real property to nursing homes be reported, whether or not they have a security interest or other reportable interests. Such information, however, will not be reported to HHS until after it issues a final rule implementing the act’s requirements, which may not be for several years. Some states currently collect information on nursing home real estate owners. For example, Illinois collects information on nursing home real estate owners, if different from the operator, and requires the submission of any lease agreements. Illinois officials told us that the state also requires operators to report individuals who directly or indirectly own at least 5 percent of the nursing home real estate and their percentage stake. With this information the state can then identify at the state level if the same individuals have ownership stakes in both the nursing home real estate and the operating company. CMS also has acknowledged real estate owners in issuing guidelines on its notification policy for poorly performing nursing homes designated as Special Focus Facilities. The guidelines direct notification to owners of the building and land if separate from the holder of the provider agreement and described such owners as an “accountable party.” PECOS chain information was not straightforward and sometimes was incomplete. PECOS was established in part to make provider-chain associations clear, but we found that making these associations in PECOS was not straightforward because of the way the data were collected; in addition, the chain data were sometimes incomplete. Rather than requiring providers to report all of the homes that are part of the same chain, CMS requires each home to report its chain home office. The chain home office is the entity responsible for providing centralized management and administrative services to providers under common ownership and common control. When we reviewed the chain data in PECOS for the six PI-owned chains for which we had information, we found that most, but not all, of the homes belonging to the same chain could be identified through their chain home office information, in particular by using the name of the chain home office administrator. Not all homes within the same chain were associated with the same chain home office. For example, most of the homes in the Trilogy Health Services chain were divided among three different chain home offices. The three groups of homes could not be effectively linked by the chain home office name or address fields in PECOS, but they did share the same chain home office administrator. CMS officials told us that the one way they have to link homes reported under different chain homes offices is if the homes have the same chain home office administrator listed. However, in some cases, homes belonging to the same PI-owned chain were reported under different chain home offices with different chain home office administrators, which can make linking all of the homes belonging to the same chain more challenging. Table 3 shows chain information in PECOS for the six nursing home chains we examined. In addition to the difficulty of using PECOS to identify all homes in a chain, we found that one large PI-owned chain did not report chain home- office information for more than 200 homes. Officials from the nursing home chain indicated that when the chain was acquired by the PI firm, most of the nursing homes were set up under separate licensees and had not yet been branded with the chain name, so the company made the decision not to report these homes as part of a chain. The officials said they have since reversed this decision and are in the process of updating the chain information for these homes. They noted that prior to the acquisition by the PI firm, they reported all the homes in the chain under one chain home office. Some of the problems we observed with the ownership and chain data in PECOS are due in part to CMS’s limited ability to recognize when the information reported by providers is incomplete or inaccurate. CMS’s contractors have several responsibilities for verifying information reported on the Medicare enrollment application. For example, contractors are required to check that the reported legal business names and tax identification numbers of providers and organizational owners match those in Internal Revenue Service documentation. CMS contractors are also responsible for following up with providers to resolve missing or inconsistent information. For example, a CMS official explained that if contractors independently came across ownership associations that should be reported, the contractor should contact the provider. A CMS official acknowledged, however, that the agency and its contractors may not always be aware of missing or inconsistent information. For example, the CMS official confirmed that the agency would not necessarily know if a provider’s chain affiliation was not reported. One CMS official explained that the agency does not have the resources to delve into the relationships of the entities reported to identify if there are any more owners not being reported. The official explained that CMS relies on the ownership information that is self-reported to CMS and that the agency is not “looking behind” what is reported to verify that the ownership information is complete. Contractor performance may also contribute to the completeness of the data in PECOS. As noted earlier, representatives of one nursing home chain told us that its CMS contractor instructed them to report only two levels of ownership above the nursing home provider, resulting in several entities going unreported as owners for many of the homes. In another example involving the same contractor, chain information was not reported for more than 200 homes. After some investigation, a CMS official confirmed that, based on the information reported on the Medicare enrollment application for these homes, the contractor should have followed up with the provider about the lack of data reported. However, the contractor’s office responsible for processing this provider’s applications had since closed, and the current contractor was not able to ascertain whether this follow up had occurred. Finally, in a third example, when we noted that a specific organizational owner was not reported for all homes in a chain, an official from the PI firm that acquired the chain said this entity was reported on all the Medicare enrollment applications submitted and suggested that the data may reflect the CMS contractor’s preference for what is entered into PECOS from the application. The performance of CMS contractors is overseen by project officers in the agency’s Center for Medicare Management, which developed a new on-site audit program to review contractors’ management of provider enrollment functions. According to a CMS official, the on-site audits are designed to pick up on instances in which contractors failed to follow up with providers about missing information on the Medicare enrollment application. The on-site audits, however, cover all provider types, not just nursing homes; focus on the processing of the application as a whole, not on particular sections of the application, such as the ownership sections; and, according to a CMS official, do not attempt to verify the accuracy or completeness of the ownership information reported on the application. According to a CMS official, as of August 2009, the agency had conducted two on-site audits under the new program. Beyond on-site audits CMS does not conduct checks on the PECOS database for internal consistency, such as whether nursing homes reported to be part of a chain in fact have a common owner reported. A CMS official said the agency would like to be able to conduct such checks but lacks the necessary resources given other priorities. The use of PECOS nursing home ownership data has generally been limited to the Medicare enrollment process and only CMS’s Division of Provider and Supplier Enrollment has routine access to the database. State survey agencies expressed interest in having routine access to nationwide ownership data, such as the information stored in PECOS because they lack a systematic way of learning about the performance of nursing homes in other states with the same owners as those applying to operate in their states. CMS officials told us that the PECOS database was not developed with the objective of providing access to external users, such as states or other offices within HHS. Although these officials indicated that CMS had no immediate plans to give states access to the database, they are considering how such access could be provided. Within HHS, use of the PECOS ownership data has been limited. Only CMS’s provider enrollment division has routine access to PECOS data. To date, the division has focused primarily, but not exclusively, on populating PECOS and has not developed any standardized internal reports on nursing home ownership data that could be shared within HHS. Specifically, ownership data are used when providers apply to participate in Medicare to screen out individuals or entities that are not approved to participate in the Medicare program. CMS contractors review the ownership information to identify if any reported owners are in the HHS OIG’s Medicare Exclusion Database or on General Services Administration’s (GSA) debarment list of entities debarred or excluded from receiving federal contracts. The contractors perform such reviews when the Medicare enrollment application is submitted and ownership information is entered into PECOS, but until recently did not perform subsequent checks as the GSA or OIG lists were updated. During a CMS program integrity check in June 2009, CMS found individuals and organizations that were in the OIG Medicare Exclusion Database or on the GSA debarment list and should have been denied association with a Medicare provider, but were nonetheless affiliated with active PECOS enrollment records. Prior to the enactment of the Patient Protection and Affordable Care Act, officials in CMS’s Survey and Certification Group told us that they did not consider ownership when looking at nursing home quality issues. In an April 2010 letter, however, the group’s director indicated that with respect to the expanded nursing home ownership disclosure requirements in the Patient Protection and Affordable Care Act, the group’s responsibilities include linking quality of care performance information with ownership data. Other CMS components and HHS organizations we spoke with also do not have access to PECOS or similar ownership data and have noted challenges to oversight and enforcement. For example, the CMS regional offices we spoke with reported relying on informally collected ownership information, and several expressed some interest in access to a national nursing home ownership database, such as PECOS, as a means to identify quality-of-care problems at homes under common ownership. One regional office official said it would be helpful to have all ownership percentage stakes disclosed. Officials from HHS’s OIG division that negotiates quality- of-care Corporate Integrity Agreements with nursing home chains, told us that they may learn about systemic issues across commonly owned homes through anecdotes or multiple referrals, but otherwise do not have a systematic way to determine if the owner of a home it investigates owns other nursing homes, which might cause the HHS OIG to expand its investigation. Furthermore, an official from CMS’s Office of Financial Management said that he often has to rely on Google Web searches to identify nursing home owners because he does not have access to PECOS despite his role in financial integrity. A CMS official from the agency’s Financial Management Systems Group told us that the agency was just starting a workgroup to examine the PECOS interests of other groups within CMS and how to provide access to accommodate those groups’ needs. The scope of this workgroup, however, does not extend to providing access to PECOS to groups outside CMS or other HHS offices, including OIG. While the state survey agencies we interviewed collect and use nursing home ownership data, that information is limited to nursing homes that operate in their states, but many nursing home companies operate in multiple states. Several state officials we interviewed expressed an interest in nationwide ownership data, such as the information stored in PECOS, as a means for more effective oversight. Many state agencies collect nursing home ownership information primarily through state licensure and renewal applications. Each state is responsible for establishing its own licensing requirements. Among the six states we interviewed who used ownership data, agency officials reported using the information for oversight purposes and to engage directly with the owners of nursing home chains to improve conditions at particular homes. For example, officials in Maryland, Illinois, and New Jersey cited cases where they used ownership information to contact the owners, including landlords, to address patterns of poor care within a home or across a chain. A Maryland official said that providing oversight at the higher chain level is important because they have observed instances of chain owners shifting staff from other nursing homes to the home where the state identified problems, resulting in problems showing up at the homes that lost staff resources. However, state agency officials in four states we interviewed told us that they have difficulty obtaining information on chains that operate homes in other states, even though many nursing home companies operate in multiple states. As a result, state agencies, which with CMS share responsibility for nursing home oversight, have limited information about the poor performance of nursing home owners in other states, including the owners who currently are applying to operate in their state. With limited access to ownership data, many of the state officials we interviewed told us that they learn about owners of poorly performing nursing homes informally. In a recent case investigated for quality and fraud issues by the Connecticut Attorney General’s Office, officials were only able to learn about a nursing home chain’s complex ownership structure, including the 44 related entities that owned the nursing homes, through bankruptcy documents. Connecticut state officials noted that they rely on gathering information on out-of-state owners from other states on a case–by-case basis. State agencies we spoke with expressed strong interest in routine access to national nursing home ownership data, such as PECOS, as a means for more effective oversight of entities controlling nursing homes. Officials in one state told us access to PECOS would enable them to check the ownership information nursing homes submit to the state and compare it to what homes are reporting to CMS. CMS officials confirmed that states do not have access to the PECOS database and, in fact, it was not developed with the objective of providing access to external users, such as states or other offices within HHS. According to CMS officials, states may request specific information in PECOS, such as a list of all nursing homes owned by a specific individual or entity, but no such requests have been made. As noted earlier, the agency has not developed any standardized reports on nursing home ownership that it could easily share with states. Rather, it would respond to each request on a case-by-case basis. Recognizing the growing interest in PECOS data, CMS is considering whether and how it could provide access to external parties, such as states. The official responsible for this effort said that it is a long- term project. Several state officials and a nursing home patient advocate told us that nursing home ownership information should be readily available to the public. The Patient Protection and Affordable Care Act requires that ownership and control information be publicly available no later than 1 year after the promulgation of final regulations that implement expanded collection of such data. Even prior to this act, federal law required CMS to make ownership information available to the public upon request. According to a CMS official, the agency has responded to public requests for nursing home ownership information by providing copies of individual Medicare enrollment applications after redacting any privacy protected information, such as owners’ Social Security numbers. CMS has received some extensive requests for information stored in PECOS, but when individuals were told the cost of redacting privacy protected information, the requests were withdrawn. We found that five of the six state agencies we interviewed—California, Illinois, Maryland, New Jersey, and Texas—have posted or are in the process of posting some of the statewide nursing home ownership information they collect on publicly available Web sites. According to a Maryland official, the state decided to post detailed nursing home ownership information on its Web site because it concluded that access to ownership information was a “consumer issue” and that residents and their families had a right to know who owns any given nursing home. New Jersey survey agency officials told us that the state had enacted a law in 2007 giving the public access to state-collected nursing home ownership information because a nursing home resident’s family wanted to move a relative to a nursing home with a different owner but found that they could not identify which nursing homes were owned by which owners. Consistent with the name private investment, the information on PI nursing home acquisitions is private—limited to what such firms choose to release. We found that the identification of PI firm nursing home acquisitions was difficult and that CMS’s PECOS database had limitations in identifying and helping users to decipher PI nursing home ownership structures. The ability of PECOS to shed any further light on these acquisitions is undermined by several factors, including the increasing complexity of nursing home ownership structures since the development of requirements for reporting such data, CMS’s focus on populating PECOS with limited oversight of the reporting and recording of the data, and limited use of the data. State experiences with the collection, use, and public disclosure of ownership data provide insights on how HHS could address these limiting factors. Moreover, our findings can help inform HHS as it develops regulations to implement the Patient Protection and Affordable Care Act and refines the Medicare enrollment application and PECOS to reflect the expanded reporting requirements on nursing home ownership and control contained in the act. Because limited information is available about companies that are not publicly traded, the acquisition of nursing homes by PI firms underscores the need for complete, accurate, and clear ownership and chain affiliation data. PECOS does not include information on the business type of organizational owners that would identify them as PI firms, making our research and the cooperation of PI firms essential to examining PI ownership and chain affiliation in the database. When we reviewed the data in PECOS for homes we knew were PI-owned, we noted the following limitations: Numerous owners were reported for each home with no information on the hierarchy of, or relationship among, the owners. However, some states that collect ownership data do attempt to capture the hierarchy of the ownership structure. Three of the six PI firms we reviewed were not listed in PECOS as the owners of any of the nursing homes they acquired and an entity readily identifiable with a fourth firm was listed as the owner for less than 20 percent of its homes. We were not able to ascertain whether or not all of these PI firms were required to be reported. However, the goal of collecting ownership and control information is undermined if all entities with reportable ownership or control interests are not reported, including the ultimate owners. Information on individual ownership is collected separately from, and is not linked to, organizational owners. Further, providers are not required to report individuals who are partners, officers, or directors above the nursing home provider levels, such as members of the board of directors who provide strategic direction to a nursing home chain. Homes belonging to the same chain were not always associated with the same chain home office, requiring us to link homes through the use of other data elements, such as the address of the chain home office or the chain home administrator. In addition, confusion about what was required to be reported on the Medicare enrollment application and CMS contractor performance contributed to problems with PECOS data. Although it may be difficult for CMS’s contractors to recognize when the information reported by providers is incomplete or inaccurate, oversight of these contractors with respect to their verification of ownership data is limited. The importance of CMS oversight is demonstrated by the fact that PI firms told us that (1) some of the data we found missing on the application had been submitted to CMS’s contractor or (2) data were missing because they were following their contractor’s instructions. Provisions in the recently passed Patient Protection and Affordable Care Act may provide an opportunity to address some of the problems we found. For example, the act requires that the organizational structure of what are termed “additional disclosable parties” be provided along with descriptions of the relationships of these parties to the nursing home and to each other. More detailed information on persons and entities with an ownership or control interest would clarify the relationships among some of the organizational owners listed in PECOS. The act also requires providers to identify members of the governing body of the nursing home. Only CMS’s Division of Provider and Supplier Enrollment has routine access to PECOS and this division has been largely focused on populating the database, which was about 81 percent complete as of July 2010. Although this division has made limited use of nursing home ownership data, CMS recognizes that other groups within the agency may have an interest in such data and has started a workgroup to study the issue. In addition, state survey agencies have expressed interest in more routine access to nationwide ownership data to improve nursing home oversight. For example, one state official told us that the state had made state- collected nursing home ownership data publicly available because consumers had a right to know if the owner of a home operated other nursing homes. Currently, CMS addresses both state and public requests for nursing home ownership data on a case-by-case basis and is unable to give states direct access to the database. CMS is aware of state interest in PECOS data and is beginning to think about how to provide such access. Although the utility to states and consumers of the ownership information in PECOS in its present state is debatable because the information is sometimes hard to decipher, the implementation of the Patient Protection and Affordable Care Act provides CMS with an opportunity to collect meaningful ownership information and to make it available in an intelligible way. We are making 11 recommendations to the Secretary of HHS and the Administrator of CMS. As the Secretary of HHS develops regulations to implement the expanded nursing home ownership reporting and disclosure requirements contained in the Patient Protection and Affordable Care Act, we recommend that the Secretary, given the complex arrangements under which nursing homes can be acquired and operated, consider requiring the reporting of the following five types of information: the organizational structure and the relationships to the facility and to one another of all persons or entities with direct or indirect ownership or control interests in the provider (as defined in the act), such that the hierarchy of all intermediate persons and entities from the provider level up to the chain and the ultimate owner is described; for entities reported as having ownership or control interests, specify whether or not the entities have an operational role; for example, special purpose entities created solely for the purpose of acquiring the nursing home but having no operational role should be identified as such; the percentage ownership interest in the provider for all entities and individuals who have an ownership or control interest (as defined in the act); the names and titles of the members of the chains’ governing body; and the organizational affiliation of individuals with an ownership or control interest (as defined in the act). To ensure proper administration of current reporting requirements, we recommend that the Administrator of CMS issue guidance on the circumstances under which the holder of a security interest in a provider may be considered to have a reportable interest. To ensure that all providers that belong to the same nursing home chain can be readily identified, we recommend that the Administrator of CMS require each provider to report the identity of other nursing homes that are part of the same chain. To improve the usability and accuracy of the ownership and control information collected and stored in PECOS, we recommend that the Administrator of CMS take the following three actions: Expand the scope of CMS’s existing workgroup intended to make PECOS data available within the agency by developing a comprehensive strategy for disseminating PECOS data to HHS, states, and the public; for example, CMS could develop and make available standardized reports on nationwide ownership data and could include ownership information on its Nursing Home Compare Web site. Examine state systems to identify best practices for the collection and public dissemination of nursing home ownership and chain information, including ways in which states make the hierarchy among owners more apparent. More closely monitor the activities of CMS contractors that review the ownership and control information submitted by providers that participate in Medicare and Medicaid to help ensure its accuracy and completeness. To help ensure that the requirements for the collection of ownership and control information from nursing home providers that participate in Medicare and Medicaid keep pace with evolving ownership structures, we recommend that the Administrator of CMS periodically review the requirements related to reporting on the agency’s provider enrollment form to ensure that it promotes accurate and complete reporting of nursing home ownership information consistent with the statute. We provided a draft of this report to HHS for comment and also invited the nine PI firms that cooperated with our study to review the draft. In its written comments, HHS concurred with all 11 of our recommendations and provided CMS’s response to those recommendations. HHS’s comments are reproduced in appendix II. In addition, five of the nine PI firms reviewed the draft and provided oral comments. Officials from some of the firms noted that our report offered a fair and balanced depiction of the subject matter, but some PI firm officials also expressed concerns about how PI firms were portrayed. Two of the six state survey agencies we interviewed provided technical comments on relevant excerpts of the draft report, which we incorporated as appropriate. CMS concurred with all of our recommendations and said that it planned to implement them in various ways, including through the development of new regulations or revisions to the Medicare enrollment process. Specifically, CMS said that it would consider mandating the reporting of the five types of information we specified in our recommendations, such as the names and titles of the members of the nursing home chain’s governing body, when developing regulations to implement the expanded ownership disclosure and reporting requirements in the Patient Protection and Affordable Care Act; require reporting of the holders of a security interest in a provider and identifying all the homes belonging to the same chain through revisions to the Medicare enrollment application and instructions; develop a strategy for examining the wider dissemination of ownership information, as well as an action plan for contacting states about their collection and dissemination of ownership and chain information; conduct additional monitoring of CMS contractors to include, but not be limited to, evaluating the ownership and control information submitted with enrollment applications as part of annual reviews of the enrollment process, other focused reviews of provider enrollment, and general contract oversight; and periodically review the Medicare enrollment application to ensure it is updated to reflect complete reporting of nursing home ownership information consistent with the statute. CMS also provided several technical comments, which we incorporated as appropriate. Officials from two of the five PI firms that provided oral comments said our report provided a fair and balanced depiction of PI ownership of nursing homes. Officials from one firm said the report described real- estate-only acquisitions well and officials from the other PI firm considered the report to be a thorough and comprehensive treatment of the subject matter. In general, PI firm officials commented on our portrayal of the firms, the data in PECOS on the nursing homes they owned, and expanded nursing home ownership reporting requirements in the Patient Protection and Affordable Care Act. Portrayal of PI firms. Officials from some PI firms expressed concerns that our report implied that PI ownership of nursing homes was somehow unique and therefore warranted special scrutiny. Officials from one firm stated that there was little difference between nursing homes owned by PI firms and those owned by public shareholders, beyond SEC reporting requirements for the latter. For example, officials from one firm noted that all homes, regardless of ownership, are subject to state licensure and disclosure requirements and routine surveys to ensure compliance with federal quality standards. Officials representing two firms also commented that the use of complex ownership structures is not unique to companies owned by PI firms. One official made the point that the nursing home’s ownership structure prior to its acquisition by a PI firm was in many ways just as complex and not at all unusual for a public company. Other officials noted that multiple layers of ownership exist across the corporate world and are not particular to the nursing home industry or to health care. Similarly, officials at one firm wanted us to note that PECOS ownership data and chain affiliation are hard to decipher for all nursing homes, not just those owned by PI firms. Because our study focused on the ownership of nursing homes by PI firms and how PI nursing home ownership was captured in PECOS, we did not examine how PECOS captures the ownership of nursing homes by other entities. As a result, our conclusions were limited to the complexity of PI ownership structures and the limited ability of PECOS to help to clarify the relationships among the entities and individuals reported as having an ownership or control interest. PI firms’ PECOS data. Officials representing two PI firms were concerned that our report implied that the ownership information in PECOS was not clear or was problematic because providers did not submit necessary information to CMS. Officials at one firm also thought the tone of the report suggested that PI firms were trying to hide information and stressed that they had disclosed all required information and were very forthcoming with information. Officials representing two PI firms also said that there was no way for firms to see whether the information they provided on the Medicare enrollment application was correctly entered into PECOS. Nursing home providers now have the option of using CMS’s internet-based PECOS to submit, change, and view their enrollment information online, but we did not review this system, which was implemented for nursing homes in April 2009. Our finding that the ownership data in PECOS were hard to decipher focused in large part on shortcomings in the collection of data for PECOS, such as the lack of information on how entities and individuals with reported ownership or control interests are related. We also found that in one case complete ownership information was not reported for homes in one PI-owned chain in part due to incorrect advice provided to a PI firm by a CMS contractor. In another instance, PI ownership was not reported because it may not have been clear that entities with a security interest should be reported. Finally, chain home office information, which is required to be reported was missing for most of the homes in the chain acquired by one PI firm. An official with the nursing home chain said that the company had separately provided information on the homes in the chain it acquired to another office in CMS but that this information had not been integrated into PECOS. The official commented in general about problems with information being siloed at CMS in separate data systems. Patient Protection and Affordable Care Act. Officials representing two of the PI firms noted their support for the expanded ownership reporting requirements included in the Patient Protection and Affordable Care Act, but officials at these firms also expressed caution on which entities or individuals should be subject to disclosure and how detailed reportable ownership data should be. For example, officials with one firm told us that decision makers, but not necessarily all owners or investors, should be reportable, and in particular, they did not believe that owners they considered passive investors, such as public pension funds, should be reported. An official from this PI firm suggested that what should matter from a policy perspective is the entity responsible for the care provided (the nursing home company) and the entity that controls it (the private investment firm). An official with another PI firm stressed the importance of a reporting system that makes clear which entities control or play a role in decision-making, and that even a system that displays a hierarchy and ownership percentages may not adequately reflect this role. The official stated that a designation such as managing partner denoted an entity with decision-making responsibility. We recommended that HHS consider requiring providers to identify whether reported ownership entities have an actual operational role, which we believe would help address this issue. An official representing another PI firm expressed a different view and said that CMS needs to capture more detailed ownership information similar to what some states collect so that it has complete information on all ownership layers. This comment is consistent with our recommendation that CMS examine states systems to identify best practices for the collection of nursing home ownership information. The PI firms also provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and appropriate congressional committees. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or at dickenj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. Of the six firms that responded to our questions, most described similar investment rationales. While leasing arrangements with nursing home operators may have the potential to influence the operations of the homes, firms that acquired a chain reported that they were more involved in nursing home operations than firms that acquired real estate only. Table 4 summarizes PI firm responses on such issues as the time frames for closing out their investments, or exit strategy, and being on the board of directors of the nursing home chain. Investment Rationale. Four of the six PI firms (firms A, B, C, and D) acquired nursing home chains, and officials at all four described increased demand for long-term care due to an aging population as their attraction to those investments. To help meet demographic demand, officials at firms A and D said they sought high-quality chains that focused on providing post- acute care to high-acuity patients (those with clinically complex problems) and indicated that these chains had top notch management already in place. An official at firm C said the firm was attracted by the improvements it could make to the nursing home chain. Officials at all four PI firms characterized their investments as “long term,” but the number of years they planned to hold the investments differed. Officials at firm A said they planned to hold their investment 3 to 9 years, during which time the firm intended to expand the number of patients the chain served to meet the long-term growth potential of the industry. An official at firm C indicated that it was likely the firm would maintain its investment in the chain for at least 20 years. Officials at firms B and D did not specify a range or number of years. Structural Changes. Officials at firms A and C said they divided the operations and the real estate into separate companies for tax or financing purposes but kept those companies under common ownership. An official at firm C explained that the creation of separate operating and real estate companies was designed to attract investors who wanted exposure to only one side of the nursing home company. In hindsight, however, the official said that the separate entities created for the acquisition were not worth the legal costs and reporting requirements and that the firm planned on collapsing the operating and real estate companies to simplify the organizational structure. Officials at firms B and D did not mention any changes to the organizational structure of the chains they acquired. Officials at firms A and C explained the benefits from having operations and real estate under the same chain ownership. An official at firm A stated that it was unlikely that the real estate could be converted to another use and that therefore it made sense for the nursing home operator, who is licensed to run the home, to own the real estate. An official noted that an operating company that does not own its real estate is unable to use the property as collateral for a loan. Finally, officials at this PI firm told us that the chain’s common ownership structure should reassure patients that the chain would take responsibility for any problems that occur. An official at firm C said that the chain leases some of its nursing homes from unaffiliated real estate owners but that it planned to cease operations at those locations if it was unable to purchase the real estate. Another firm official noted that tension over responsibility for improvements can arise in any industry with unaffiliated operating and real estate companies—leaving the operator with less incentive to make those improvements. One real-estate-only acquirer strongly disagreed with this statement and noted that a landlord with a triple net lease has a great incentive for ensuring the real estate is appropriately maintained. This firm said such leases clearly state the responsibilities of the real estate owner and the operator with respect to facility improvements and said that disagreements have been few and limited. Involvement in Nursing Home Operations. Officials at all four PI firms that acquired a chain said that they held seats on the chains’ boards of directors. In general, they characterized their involvement as related to the strategic direction of the chain and indicated that they are not involved in day-to-day operations. They noted that the updates they receive at board meetings help to guide their decisions for the strategic direction of the chain. Strategic direction. Officials at all four PI firms described the chain’s executive management as the ultimate decision maker for the chain, and officials at firms A, B, and D indicated their involvement in nursing home operations primarily ensured that the chain continued the objectives it already had set for itself. Officials at firm A said they had helped the chain implement an ongoing transformation from a focus on custodial care to becoming primarily a provider of postacute care and rehabilitative services to higher acuity patients. This official said that the board of directors ensured that the staff at the facilities could meet this goal. Although the nursing home chain already had this goal in place as a publicly traded company, officials at the PI firm said that they helped to achieve this goal by allowing the chain to make investments more quickly. They also emphasized that the chain does not turn away residents to meet its strategic objective. Management changes. Officials at firms A, B, and D said they kept the same executive management after they acquired the chain because the chain was already well managed. An official who worked at the chain prior to firm A’s acquisition told us that the firm helped hire more regional office managers and more managers overall but also felt that minimal organizational changes had occurred after acquisition by the PI firm. In contrast, an official at firm C believed that the chain the firm acquired had quality of care challenges and later hired a physician as chief executive officer. An official at this firm indicated that the firm’s goal was to help transform the nursing home industry and, as a result, the firm recruited managers that held the same values. Quality-of-care monitoring. Officials at two firms gave specific examples of how they oversee quality of care. An official at firm C told us that the firm helped its chain introduce best practices and standardized training to nursing home staff. According to firm officials, the firm directed capital to, among other things, hire directors of clinical education, train facility staff to focus on the awareness of each patient’s individual needs, and reduce staff turnover. One senior official at this chain said that all the personnel, from the caregivers to management, have gone through a significant cultural change since the PI firm had acquired it. An official at the firm said that if the firm had not purchased this particular chain, a different PI firm would have taken over and he believes that the quality of care would have suffered. However, an official of the firm emphasized that each nursing home within the chain made more decisions about the care provided inside the home than did the chain’s board of directors. Officials at another firm explained that they receive reports on quality of care—including CMS’s 5-star ratings—to help guide management decisions. The firm helped create an Independent Quality Committee to provide the board with independent expert guidance on reading and assessing quality of care data. After examining the data, the board discusses how to address problems. An official with the chain said that it can take underperforming homes and improve them by sharing resources across the chain. Capital improvements. Officials at all four PI firms indicated that they were directly involved in capital improvements or expansion plans for the chains they acquired. Firm A said it helped the chain to undertake investments that furthered the chain’s long-term expansion strategy. This chain has sought approval from state governments to build several new facilities. Firm B said it mainly helps with decisions about the nursing homes’ capital structure and the capacity to fund the development of new homes. Investment Rationale. Three of the six PI firms (firms D, E, and F) made real-estate-only acquisitions. Officials of firms D and E described increased demand in long-term care due to an aging population as a factor that attracted them to those investments. For example, officials at firm D said the business and organizational models they developed brought needed investment into the nursing home industry after a decline in the late 1990s. Similarly, officials at firm E said that no new nursing homes had been built in recent years and that the demand for senior housing will exceed the available supply. In contrast, an official of firm F described the firm’s investments in nursing home real estate as an opportunity to acquire additional real estate; that is, they did not view their nursing home real estate acquisitions any differently than their acquisitions of commercial or residential real estate. These three firms had different exit strategies for their nursing home real estate investments. Although officials at firm D described one of their nursing home real estate investments as “long term,” they did not specify a time frame. However, they have sold other nursing home real estate investments in 1 to 5 years from the initial investment. Officials at firm E said they acquired nursing home real estate with the goal of selling the investments at a profit 3 to 5 years later. After declining growth in real estate value, the firm sold one portfolio of such investments about 2 years after the initial acquisition and had planned on selling its other portfolios. In contrast, an official at firm F said the firm’s acquisitions were a mechanism to collect rent and they had no intention of selling. Involvement in Nursing Home Operations. The three PI firms that made real-estate-only acquisitions had no representation on the boards of the operating companies to which they leased real estate. Through their lease arrangements with nursing home operators, however, they may have the potential to influence the operations of the homes. Lease arrangements. All three PI firms lease the real estate to nursing home operators under “triple net” agreements. Officials at firm E told us that triple net leases are the industry standard for nursing homes. Under these agreements, in addition to rent, the operator agrees to pay all real estate taxes, property insurance, and maintenance on the property (including capital costs). These officials said that because the average age of their facilities was 30 years, they required the operators to make an annual per-bed deposit for maintenance. This deposit was refunded when the nursing home operator submitted evidence (paid invoices) that it had undertaken maintenance. Firms D and E had leases with the nursing home operators that calculated a base rent plus rent as a percentage of the operator’s adjusted net income or excess cash flow—ranging from 35 to 50 percent. Officials at firm E said that they examined whether an operator could meet the terms of the lease before they made an initial investment in the property. According to officials at this PI firm, the major variable that influenced a nursing home operator was not the operator’s ability to pay debts and rent, but rather the level of reimbursement received for resident care. However, officials at a PI firm that purchased a nursing home chain told us that such leasing arrangements can have negative consequences. They explained that the real estate owner shares profits with minimal risk, but when revenues decline, nursing home operators are more likely to cut staff to pay the base rent and to maintain a level of profitability. Separation of real estate from operations. Officials at firms D and E told us that the separation of real estate and operations under unaffiliated companies benefited the operator by allowing greater access to capital for the nursing home. Officials at firm D said that they purchased nursing homes and separated the entities that owned the real estate from those that operated the facilities. They said they created this structure to attract financial lenders and investors back to the nursing home industry and reduce the risk associated with the closure of facilities because of high insurance premiums resulting from litigation. According to officials at this firm, this structure still ensured that the legal process could reach an accountable party to help address potential quality-of-care problems. Quality-of-care monitoring. While officials at all three firms reported that they do not tell the nursing home operators to whom they lease how to run their businesses, officials at firms D and E monitored the operators’ quality of care. Officials at both firms said that good quality of care resulted in good financial outcomes. They indicated that they would consider terminating a lease if poor or declining care persisted, but officials at neither firm said they had encountered such a situation. Officials at firm D said their involvement at the operating level is typically limited to oversight of their tenants through an affiliated asset management company. The asset managers are expected to monitor compliance with the lease, perform financial reviews and analyses, conduct on-site inspections of each facility’s physical plant, and continuously review each facility’s clinical performance. Officials at firm E said that the terms of their leases required nursing home operators to have plans of correction that addressed quality-of-care problems. Officials at this firm told us that they have clinical staff to help them interpret state survey reports of the nursing homes to which they lease real estate. If clinical care declined below a certain point at a home, the officials said that they would increase their monitoring. While these officials said they would ask the home’s operator how it planned to address resident care problems, they emphasized that they would not tell the operator what to do. In the more than 5 years they had owned nursing home real estate, an official at firm F told us that the firm had not monitored the quality of care provided by the operators to whom it leased facilities. However, the official said the firm would like to start monitoring operations, because— unlike their other commercial investments—they do not manage the operations of their nursing homes. Should an operator lose its state license to operate a nursing home, the official of the firm told us that their investment would be at risk, because it can be difficult to identify a new nursing home operator or to convert the property to another use. Although the official at this firm said the firm would intervene before an operator lost its license, the firm did not consider monitoring quality of care until approached by an independent third party that said it could help interpret operators’ state survey results. In addition to the contact name above, Walter Ochinko, Assistant Director; Jennie Apter; Ramsey Asaly; Joanne Jee; Dan Lee; Linda McIver; Luis Serna; Amy Shefrin; and Jessica Smith made key contributions to this report. Poorly Performing Nursing Homes: Special Focus Facilities Are Often Improving, but CMS’s Program Could Be Strengthened. GAO-10-197. Washington, D.C.: March 19, 2010. Nursing Homes: Addressing the Factors Underlying Understatement of Serious Care Problems Requires Sustained CMS and State Commitment. GAO-10-70. Washington, D.C.: November 24, 2009. Nursing Homes: Opportunities Exist to Facilitate the Use of the Temporary Management Sanction. GAO-10-37R. Washington, D.C.: November 20, 2009. Nursing Homes: CMS’s Special Focus Facility Methodology Should Better Target the Most Poorly Performing Homes, Which Tended to Be Chain Affiliated and For-Profit. GAO-09-689. Washington, D.C.: August 28, 2009. Medicare and Medicaid Participating Facilities: CMS Needs to Reexamine Its Approach for Funding State Oversight of Health Care Facilities. GAO-09-64. Washington, D.C.: February 13, 2009. Nursing Homes: Federal Monitoring Surveys Demonstrate Continued Understatement of Serious Care Problems and CMS Oversight Weaknesses. GAO-08-517. Washington, D.C.: May 9, 2008. Nursing Home Reform: Continued Attention Is Needed to Improve Quality of Care in Small but Significant Share of Homes. GAO-07-794T. Washington, D.C.: May 2, 2007. Nursing Homes: Efforts to Strengthen Federal Enforcement Have Not Deterred Some Homes from Repeatedly Harming Residents. GAO-07-241. Washington, D.C.: March 26, 2007. Nursing Homes: Despite Increased Oversight, Challenges Remain in Ensuring High-Quality Care and Resident Safety. GAO-06-117. Washington, D.C.: December 28, 2005. Nursing Home Quality: Prevalence of Serious Problems, While Declining, Reinforces Importance of Enhanced Oversight. GAO-03-561. Washington, D.C.: July 15, 2003. Nursing Homes: Public Reporting of Quality Indicators Has Merit, but National Implementation Is Premature. GAO-03-187. Washington, D.C.: October 31, 2002. Nursing Homes: Federal Efforts to Monitor Resident Assessment Data Should Complement State Activities. GAO-02-279. Washington, D.C.: February 15, 2002. Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives. GAO/HEHS-00-197. Washington, D.C.: September 28, 2000. Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better Ensure Quality. GAO/HEHS-00-6. Washington, D.C.: November 4, 1999. Nursing Home Oversight: Industry Examples Do Not Demonstrate That Regulatory Actions Were Unreasonable. GAO/HEHS-99-154R. Washington, D.C.: August 13, 1999. Nursing Homes: Proposal to Enhance Oversight of Poorly Performing Homes Has Merit. GAO/HEHS-99-157. Washington, D.C.: June 30, 1999. Nursing Homes: Complaint Investigation Processes Often Inadequate to Protect Residents. GAO/HEHS-99-80. Washington, D.C.: March 22, 1999. Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal Quality Standards. GAO/HEHS-99-46. Washington, D.C.: March 18, 1999. California Nursing Homes: Care Problems Persist Despite Federal and State Oversight. GAO/HEHS-98-202. Washington, D.C.: July 27, 1998. | Since 2007, attention has been focused on nursing home ownership by private investment (PI) firms. Nursing home providers are required to disclose parties with an ownership or control interest in order to participate in Medicare or Medicaid. CMS, the HHS agency responsible for managing these two programs, maintains ownership and chain data in its Provider Enrollment, Chain, and Ownership System (PECOS). GAO examined (1) the extent of PI nursing home ownership and firms' involvement in homes' operations, (2) whether PECOS reflects PI ownership, and (3) how HHS and states use ownership data for oversight. GAO identified PI ownership using a proprietary database and analyzed data from six PI firms about their interest and involvement in nursing homes. GAO examined PECOS data for selected PI-owned nursing home chains and discussed ownership data with officials from HHS, CMS, and six states that also collect data. GAO found that 1,876 unique nursing homes were acquired by PI firms from 1998 through 2008. While some of the acquisitions involved entire nursing home chains, which included both the operations and any owned real estate, other acquisitions involved only the real estate. Sometimes the same nursing homes were acquired more than once. Ten PI firms accounted for 89 percent of the 1,876 unique nursing homes acquired by PI firms during this period. Of the six PI firms from which GAO collected information, those that acquired a chain reported being more involved in nursing home operations than those that only acquired the real estate. These firms had representatives on the nursing home chain's board of directors, but they generally characterized their involvement as related to the chain's strategic direction rather than day-to-day operations. PI firms that acquired real estate only had no representation on the boards of the operating companies, but officials at one PI firm observed that some leasing arrangements have the potential to affect operations. PECOS provided a confusing picture of the complex ownership structures and chain affiliations of the six PI-owned nursing home chains GAO reviewed. The database did not provide any indication of the hierarchy or relationships among the numerous organizational owners listed for PI-owned nursing homes. Further, PI ownership was often not readily apparent in the data, which could be the result of (1) PI firms not being required to be reported because of how they structured their acquisitions, (2) provider confusion about the reporting requirements, or (3) related entities that were reported but were not easily identifiable with the PI firms. Finally, PECOS chain information was not straightforward and was sometimes incomplete, making it difficult to link all the homes in a chain. Compounding these shortcomings, CMS's ability to determine the accuracy and completeness of the reported ownership data is limited. HHS has made limited use of PECOS ownership data. The only CMS division with routine access to PECOS data has been largely focused on populating the database and has not developed any standardized reports on nursing home ownership that it could share with interested parties. Some states collect their own ownership information but it can be limited to owners that operate in their state. As a result, tracking compliance problems among commonly owned homes or multistate chains can be ad hoc. State officials and others expressed interest in nationwide ownership data, such as PECOS, to improve nursing home oversight. Recognizing the growing interest in PECOS data, CMS has established a workgroup to consider how to accommodate the PECOS interests of other groups within the agency and is considering whether and how to provide access to external parties such as states. The implementation of the Patient Protection and Affordable Care Act provides CMS with an opportunity to address shortcomings in the current PECOS database and to make ownership information available to states and consumers in a more intelligible way. GAO recommends that the Secretary of HHS and CMS Administrator consider requiring the reporting of certain information to make nursing home ownership structures more understandable and take other actions to improve the accuracy and dissemination of these data as HHS implements new ownership reporting requirements in the 2010 Patient Protection and Affordable Care Act. HHS concurred with all of GAO's recommendations. |
California moved to a deregulated electricity market in April 1998. For roughly 2 years, wholesale prices were fairly low on average. However, the state experienced periods of higher prices, especially during peak summer hours. Average prices rose dramatically in May 2000 and remained high. For example, average prices of electricity sold in the California Power Exchange during the months of May through December 2000 were between 2 and 13 times higher than in the same months of the previous year. In addition to higher prices, the frequency and duration of periods when the system is in danger of service disruptions have increased. Actual rolling blackouts occurred on 6 separate days in winter and spring 2001, for a total of 16 hours with shortfalls ranging from 400 to 1,000 MW. Blackouts adversely affected consumers and caused business and traffic disruptions. The California electricity market operates within a larger western system consisting roughly of 11 states, and while California relies on imports for about 20 percent of its supplies, it also exports power at times to other states. As a result of this interconnectedness, the price and availability of power in California influence markets in other western states and vice versa. Industry experts and academics generally agree that a tight power supply in California and other western states is one reason why prices increased and service reliability deteriorated starting in May 2000. The demand for electricity in California has grown rapidly since 1995, while very little new generating capacity has been added. For example, from 1995 through 2000, total electricity consumption grew by about 13 percent, compared with about 2-percent growth in electricity generating capacity in the state. In addition, last summer saw an increase in the price of natural gas—used to produce about 40 percent of California’s electricity supply—and in the price of emissions permits that are required to operate certain generators in California. Lower levels of available hydroelectricity during summer 2000 in the Pacific Northwest reduced California’s access to imports of hydroelectricity. Rapid demand growth in other states has also reduced California’s ability to import electricity from those states. Finally, flaws in market design in California are widely believed to have contributed to California’s problems. For example restrictions on the use of long-term contracts to purchase electricity increased the reliance of California’s three investor-owned utilities on spot markets and left them substantially exposed to market risks. While these factors contributed to California’s electricity problems, a number of state officials, economists, and industry experts now believe that the market design adopted by California has enabled individual electricity-generating companies to exercise market power by withholding capacity when supplies are tight in order to drive up prices. They argue that generating firms have withheld supplies of electricity by staging outages in order to drive up prices, and point to higher-than-normal levels of outages since summer 2000. FERC’s study differed from the other two in its methodological approach and reached different conclusions. In addition, all three studies covered different time periods, so their results are not entirely comparable. FERC performed an audit of specific generating plants and companies that had experienced outages during December 2000. On the basis of these audits, FERC found that there was no evidence that the audited companies were incurring physical outages in an effort to drive up prices. The other two studies examined market prices and compared them with estimates of the costs of producing electricity to determine if prices were consistent with generating companies’ exercising market power. Both of these studies, conducted during different time periods, concluded that there was evidence of market power used to increase electricity prices. FERC followed a case-study methodology, analyzing generating plant outages to determine if generating companies used them strategically to push up electricity prices or if they resulted from unavoidable or routine repairs or maintenance. FERC analysts conducted telephone interviews with generating companies to verify the reasons for outages. These telephone interviews covered about 60 percent of the reported outages. In addition, they visited the headquarters of two companies whose generating plants were down for maintenance or repairs to discuss in more detail the companies’ repair policies, maintenance schedules, and operating practices. They also performed on-site inspections of generators at three plant sites and observed maintenance and repairs. In order to evaluate the legitimacy of the repairs or maintenance being performed, FERC employed private-sector consultants familiar with plant operations to accompany FERC analysts during the on-site visits. In addition to the audits, FERC examined market prices, levels of demand, and generator outages for the month of December 2000 to determine whether high levels of outages were correlated with higher prices of power. Based on the results of its audits, FERC found that there was no evidence that the audited generating companies were withholding power in an attempt to influence prices. On the contrary, in every case, FERC found that legitimate repairs or maintenance was performed on the downed generating plants. Moreover, it found that these plants were typically older—30 to 40 years old—and had been used more intensively than usual during the summer and fall of 2000. In addition, FERC found that prices in the month of December were not strongly correlated with levels of outages. In fact, it found that the highest prices occurred during periods with relatively lower levels of generator outages. The other two studies looked for evidence of the existence and exercise of market power in the entire market, rather than focusing on particular instances of generator outages. They employed a methodology that compared market prices with estimates of the marginal costs of producing additional electricity. Marginal cost is the additional cost incurred to produce one more unit of electricity. Prices close to the marginal cost are consistent with a competitive market. High prices, however, may suggest that the market is not competitive and that individual electricity- generating companies can manipulate prices. The first study we examined, by Borenstein, Bushnell, and Wolak, compared prices with estimated costs of producing electricity in the period from June 1998 through September 1999. The authors constructed the market supply of electricity by estimating the cost of generating each additional unit of electricity, starting with the lowest-cost generating plants and adding increasingly costly plants. They used statistical simulation methods to take account of random generator outages, which decrease the electricity supply as units go off-line for repairs or maintenance and increase it as generating plants come back on-line. By matching actual demand at any point in time with their simulated supply of electricity, the authors were able to estimate the competitive price of electricity—that is, the price equal to the marginal cost incurred to supply the last unit of electricity demand. Then they compared the estimated competitive price with the actual price. Based on their analysis, Borenstein, Bushnell, and Wolak concluded that there were periods of high prices and high demand from June1998 to September 1999, which they attribute to the exercise of market power. The authors found that on average, the prices during this period were 16 percent higher than they would have been had generators behaved competitively. In discussion with one of the authors, we were told that while their study provides strong evidence of market power, it does not suggest any illegal activity on the part of electricity-generating companies. On the contrary, he believes that individual companies are sometimes able to exercise unilateral market power to raise prices without violating antitrust laws. The authors did not examine outages to try to determine whether the level or pattern was consistent with companies’ withholding power, nor did they seek to determine precisely how generating companies exercised market power. In discussions with one of the authors, we were told that it is not possible to tell the difference between an unavoidable outage and a strategic outage designed simply to drive up prices. Moreover, a generating company might exercise market power in other ways. For example, a company can simply submit selling bids that are so high that all of its power will not be purchased, thus effectively reducing the volume of electricity sold in the market and causing prices to rise. The second study, by Joskow and Kahn, examined electricity prices during summer 2000. The authors conducted a similar study to that of Borenstein, Bushnell, and Wolak, but their access to data was more limited. As a result, Joskow and Kahn relied on publicly available data for some key variables rather than the confidential and proprietary data used in the other study. Their study also differed from the first in that Joskow and Kahn analyzed outages during June 2000 to determine the extent to which withheld generating capacity was a factor in explaining high electricity prices. In doing so, they compared the volume of electricity generated at specific prices with their estimates of how much electricity could have been produced profitably at those prices, taking into account normal levels of unplanned outages and capacity held in reserve for system reliability reasons. Based on their analysis, Joskow and Kahn concluded that there was strong evidence that market power was exercised to raise prices in summer 2000. They found that higher prices of electricity were caused in part by higher natural gas prices, increased demand, reduced availability of imports and higher prices for air emissions permits. However, they also found that prices in summer 2000 were greater than they would have been had the market behaved competitively. In addition, they concluded that the level of outages experienced during June 2000 cannot be explained by reasonable expectations about repairs or maintenance requirements, or by the need to hold power in reserve for system reliability reasons. However, the authors acknowledge that data limitations make their analysis of withheld generating capacity somewhat rough. Specifically, they lacked data on generating units outside of but selling power in California and contractual arrangements by electricity power marketers doing business in the state. Therefore, they were unable to measure generator outages outside of California. FERC’s study of electricity generator outages was not thorough enough to support its overall conclusion that the audited companies did not physically withhold electricity supplies to influence prices. FERC’s study was largely focused on determining whether or not there were actual physical problems—such as leaks in cooling tubes—in generating units experiencing outages. Under this approach, if FERC found that there were physical problems with downed generating plants and that repairs or maintenance were performed, then it concluded that the outage was legitimate and not designed to simply reduce supply and push up prices. In fact, FERC determined that most of one company’s generating plants were old and suffered from mechanical problems. In addition, FERC found that many of these plants had run at higher-than-usual rates in the summer and fall of 2000, prior to their shutting down for repairs or maintenance. These facts do suggest that a higher level of outages than normal should be expected. However, the industry experts we spoke with generally agree that it is practically impossible to accurately determine whether such outages are legitimate or not because plants frequently run with physical problems, and the timing of maintenance or repairs is often a judgment call on the part of plant owners or operators. Another weakness in the FERC study—or any study that seeks to determine whether specific outages are legitimate—is the lack of data for past outages to use as a benchmark with which to compare the number, type, and duration of outages during the study period. In discussions with FERC, officials told us that accurate outage data do not exist for the years prior to their study. Without a baseline comparison, it is not possible to conclude that observed outages are above normal in number, type, and duration. Finally, strategic use of plant outages is not the only way that a generating company could exercise market power, and FERC’s methodology did not look at other ways. As FERC acknowledged in its report, the agency did not analyze whether companies were using other techniques to influence prices, such as not offering bids to sell some capacity, or bidding at prices high enough to practically ensure exclusion from the market. A thorough and conclusive study of market power in California since May 2000 would combine the market-wide approach of the other two studies, with a quantification of the extent to which outages or other supply disruptions were caused by factors other than companies’ attempts to drive up prices. In its study, FERC pointed out two such factors that could lead to higher-than-normal levels of outages: (1) some plants had been run at above-normal rates prior to being shut down for repairs or maintenance, and (2) many plants that were shut down were older. A third factor, suggested by other industry sources, is that a number of companies were simply refusing to operate their generators at various times during 2000 because they had not been paid for electricity they had previously sold to California’s utilities. None of the studies covered the entire period of high prices, nor did they evaluate all the factors that could have led to greater- than-normal levels of generator outages. Therefore, their results are inconclusive about the precise extent to which market power versus these other factors explains high electricity prices in California since May 2000. However, the authors of the two market power studies believe, based on their results and on results of other studies, that the case for the existence of market power has been conclusively made and that this is enough to warrant a policy response from FERC and the state of California. FERC officials acknowledge that simply looking at outages and maintenance records of generators is not sufficient to determine whether generating companies are exercising market power. Accordingly, they told us that FERC has recently implemented a more comprehensive plan for monitoring the exercise of market power. Under this plan, FERC will continue to look at outages and to determine if the number, type and duration of outages are warranted. In addition, FERC will monitor generators’ bids to try to detect bidding behavior designed to exclude generating capacity from the market. FERC officials also said they have notified electricity generators that their ability to earn unregulated market prices for electricity will be in jeopardy if they are found to be withholding power in order to drive up prices. We did not evaluate FERC’s current plan for monitoring generators’ behavior. We provided the Chairman of FERC with a draft of this report for review and comment. We also discussed the findings in our report with authors of the other two studies. Generally, FERC and the academic authors agreed with the basic findings in the report. However, FERC took issue with our characterization of its conclusion, saying that FERC had only concluded the absence of evidence of withholding electric power, rather than the absence of withholding to influence prices. In addition, FERC pointed out that it is important to make a distinction between its study, which focused on engineering reasons for outages, and the other two studies, which focused on economic reasons for withholding electric power (see appendix II for a copy of the FERC’s comments). In addition, two of the authors of the other studies added several clarifying points that we have incorporated into the report. In responding to FERC’s first comment, we believe that our characterization of their overall conclusion is correct. In the conclusion section of its report, FERC made several statements. First of all, FERC stated that its “staff did not discover any evidence suggesting that the audited companies were scheduling maintenance or incurring outages in an effort to influence prices.” On the contrary, FERC stated that “it appears that these companies accelerated maintenance and incurred additional expense to accommodate the ISO’s [Independent System Operator] operating needs.” FERC also pointed out the age and higher- than-normal usage of generating units as mitigating factors in explaining outages. Finally, FERC stated that its detailed site reviews are consistent with a finding that “prices are driven by demand, not the companies’ maintenance practices.” On the basis of these statements, we believe the report concludes that the companies they audited were not physically withholding electricity in an effort to influence prices. From a practical standpoint, a public statement, made shortly after the FERC’s outage report was released indicates that others felt the FERC was reaching such conclusions. For example, an article in the Los Angeles Times on February 3, 2001 quoted a spokesman for one of the generating companies as saying that the FERC report affirms the company’s operating procedures in the face of “incorrect and inflammatory allegations that we have somehow been withholding power from our four plants in California.” The distinction between physical and economic withholding was pointed out by FERC in its second comment. We agree with FERC that the other two studies were wider in scope than its review of generator outages. As we pointed out in our report, a thorough and conclusive study of market power in California would combine the market wide approach of the other two studies, with a quantification of the extent to which outages or other supply disruptions were caused by factors other than companies’ attempts to drive up prices. We have added clarifying language in the body of the report that makes the distinction between the FERC report on physical outages and the other two, which looked more broadly for evidence of market power. FERC’s report comes on the heels of some of the most dramatic electricity price increases in history. These price increases caused consumers, other market participants, and members of Congress to question whether electricity-generating companies have been charging unfair prices and making very large profits at their expense. In short, the public and others were looking for clear answers as to whether sellers of electricity in California were withholding power in an effort to raise prices. In this environment, FERC’s report—“focusing on whether unplanned maintenance or outages occurred to raise prices”—was important. In addition, as the federal government’s market monitoring entity, FERC’s views, opinions, and orders clearly send important signals to the marketplace, including the investment community, and influence public confidence. We believe that, as the federal government’s market- monitoring entity, FERC has an important responsibility to fully investigate potential market power and clearly report its results. In light of changes in the electricity industry as it undergoes restructuring, and the changing role of FERC in overseeing this industry, we recognize that FERC’s monitoring role is evolving and that its outage report was simply one part of its ongoing effort. To develop an understanding of the issues surrounding market power in the electricity industry, we interviewed numerous economists from Stanford University, the University of California, Berkeley, and the University of California, Irvine, and reviewed written studies of market power and related issues. We also interviewed officials from state and federal energy agencies, including the California Public Utilities Commission, the California Independent System Operator, and FERC. To compare the FERC outage study and the other two studies on market power, we reviewed the three studies, evaluating the methodologies used and the results. After our initial review, we discussed our findings with FERC officials and authors of the other studies. We also reviewed related studies of market power. To determine whether FERC’s methodology was thorough enough to support its conclusion that generating capacity has not been withheld without legitimate reason, we evaluated their methodology and results. We also discussed our findings with state and federal energy officials and an economist at the University of California, at Irvine who was familiar with all three studies. We performed our work from May through June 2001 in accordance with generally accepted government auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of the report until 14 days after the date of the letter. At that time, we will send copies of this report to FERC and the authors of the two studies. We will also provide copies to others on request. If you or your staff have any questions about this report, please call me on (202) 512-3841 or Dan Haas on (202) 512-9828. Other key contributors to this report were Jon Ludwigson and Frank Rusco. “Report on Plant Outages in the State of California,” prepared by the Office of the General Counsel, Market Oversight & Enforcement and the Office of Markets, Tariffs and Rates, Division of Energy Markets, Federal Energy Regulatory Commission, February 1, 2001. “Diagnosing Market Power in California’s Restructured Wholesale Electricity Market,” Severin Borenstein, James Bushnell, and Frank Wolak, August 2000 . Severin Borenstein is a professor of business economics in the Haas School of Business, University of California, and Director of the University of California Energy Institute. James Bushnell is a lecturer in the Haas School of Business, University of California, and a Research Associate at the University of California Energy Institute. Frank Wolak is a professor of economics at Stanford University and chairman of the Market Surveillance Committee of the California Independent System Operator. “A Quantitative Analysis of Pricing Behavior in California’s Wholesale Electricity Market During Summer 2000,” Paul Joskow and Edward Kahn, January 2001 . Paul Joskow is the Elizabeth and James Killian Professor of Economics and Management at the Massachusetts Institute of Technology (MIT) and Director of the MIT Center for Energy and Environmental Policy Research. Edward Kahn is a principal at Analysis Group/Economics, a private consulting firm. | Wholesale electricity prices in California rose sharply in May 2000 and have remained high. In addition, there were disruptions in service--blackouts--this winter and spring. The California Independent System Operator, the state agency in charge of balancing electricity supply with demand, expects high prices and service disruptions to continue and perhaps worsen this summer. In response to concerns about high prices and generator outages in California, the Federal Energy Regulatory Commission (FERC) undertook a study, released in February 2001, to determine whether outages were being used to withhold power and drive up prices of electricity in California. Other studies of the electricity market in California have been conducted by economists and industry experts. One study, conducted by three economists from Stanford University, the University of California at Berkeley, and the University of California Energy Institute examined whether market prices of electricity in California in 1998 and 1999 were higher than competitive levels. A second, similar study by two economists--one from the Massachusetts Institute of Technology and one from a private consulting firm--examined the California market during 2000. This report reviews the FERC study, as well as the two studies on the California electricity market to determine (1) how the methodologies and results of the three studies compare and (2) if FERC's study was thorough enough to support its conclusions that audited companies did not physically withhold electricity supplies to influence prices. GAO found that FERC's study used a very different methodological approach from the approach used by the other two studies and reached different conclusions. FERC's study performed an audit of specific generating plants and companies that experienced outages to determine if audited companies were incurring outages in an effort to drive up prices, while the other two studies compared market prices with estimates of the costs of producing electricity. GAO further found that FERC's study was not thorough enough to support its conclusion that audited companies were not withholding electricity supply to influence prices. |
In recent years, abuses in home mortgage lending—commonly referred to as “predatory lending”—have increasingly garnered the attention and concern of policymakers, consumer advocates, and participants in the mortgage lending industry. Once relatively rare, government enforcement actions and private party lawsuits against institutions accused of abusive home mortgage lending have increased dramatically in the last 10 years. In 2002 alone, there were dozens of settlements resulting from accusations of abusive lending. In the largest of these, a major national mortgage lender agreed to pay up to $484 million to tens of thousands of affected consumers. Predatory lending is an umbrella term that is generally used to describe cases in which a broker or originating lender takes unfair advantage of a borrower, often through deception, fraud, or manipulation, to make a loan that contains terms that are disadvantageous to the borrower. While there is no universally accepted definition, predatory lending is associated with the following loan characteristics and lending practices: Excessive fees. Abusive loans may include fees that greatly exceed the amounts justified by the costs of the services provided and the credit and interest rate risks involved. Lenders may add these fees to the loan amounts rather than requiring payment up front, so the borrowers may not know the exact amount of the fees they are paying. Excessive interest rates. Mortgage interest rates can legitimately vary based on the characteristics of borrowers (such as creditworthiness) and of the loans themselves. However, in some cases, lenders may charge interest rates that far exceed what would be justified by any risk- based pricing calculation, or lenders may “steer” a borrower with an excellent credit record to a higher-rate loan intended for borrowers with poor credit histories. Single-premium credit insurance. Credit insurance is a loan product that repays the lender should the borrower die or become disabled. In the case of single- premium credit insurance, the full premium is paid all at once—by being added to the amount financed in the loan—rather than on a monthly basis. Because adding the full premium to the amount of the loan unnecessarily raises the amount of interest borrowers pay, single-premium credit insurance is generally considered inherently abusive. Lending without regard to ability to repay. Loans may be made without regard to a borrower’s ability to repay the loan. In these cases, the loan is approved based on the value of the asset (the home) that is used as collateral. In particularly egregious cases, monthly loan payments have equaled or exceeded the borrower’s total monthly income. Such lending can quickly lead to foreclosure of the property. Loan flipping. Mortgage originators may refinance borrowers’ loans repeatedly in a short period of time without any economic gain for the borrower. With each successive refinancing, these originators charge high fees that “strip” borrowers’ equity in their homes. Fraud and deception. Predatory lenders may perpetrate outright fraud through actions such as inflating property appraisals and doctoring loan applications and settlement documents. Lenders may also deceive borrowers by using “bait and switch” tactics that mislead borrowers about the terms of their loan. Unscrupulous lenders may fail to disclose items as required by law or in other ways may take advantage of borrowers’ lack of financial sophistication. Prepayment penalties. Penalties for prepaying a loan are not necessarily abusive, but predatory lenders may use them to trap borrowers in high-cost loans. Balloon payments. Loans with balloon payments are structured so that monthly payments are lower but one large payment (the balloon payment) is due when the loan matures. Predatory loans may contain a balloon payment that the borrower is unlikely to be able to afford, resulting in foreclosure or refinancing with additional high costs and fees. Sometimes, lenders market a low monthly payment without adequate disclosure of the balloon payment. Predatory lending is difficult to define partly because certain loan attributes may or may not be abusive, depending on the overall context of the loan and the borrower. For example, although prepayment penalties can be abusive in the context of some loans, in the context of other loans they can benefit borrowers by reducing the overall cost of loans by reducing the lender’s prepayment risk. According to federal and industry officials, most predatory mortgage lending involves home equity loans or loan refinancings rather than loans for home purchases. Homeowners may be lured into entering refinance loans through aggressive solicitations by mortgage brokers or lenders that promise “savings” from debt consolidation or the ability to “cash out” a portion of a borrower’s home equity. Predatory lending schemes may also involve home improvement contractors that work in conjunction with a lender. The contractor may offer to arrange financing for necessary repairs or improvements, and then perform shoddy work or fail to complete the job, while leaving the borrower holding a high-cost loan. Abuses in loan servicing have also increasingly become a concern. Abusive mortgage lenders or servicing agents may charge improper late fees, require unjustified homeowner’s insurance, or not properly credit payments. In November 2003, the Federal Trade Commission (FTC) and the Department of Housing and Urban Development (HUD) reached a settlement with a large national mortgage servicer, Fairbanks Capital, after the company was accused of unfair, deceptive, and illegal practices in the servicing of mortgage loans. The settlement will provide $40 million to reimburse consumers. Originating lenders or brokers that engage in abusive practices can make high profits through the excessive points and fees that they charge, particularly when borrowers make their payments regularly. Even when a loan enters foreclosure, the originator of a predatory loan may still make a profit due to the high up-front fees it has already collected. Moreover, a lender that sells a loan in the secondary market shortly after origination no longer necessarily faces financial risk from foreclosure. Similarly, a mortgage broker that collects fees up front is not affected by foreclosure of the loan. According to HUD and community groups, predatory lending not only harms individual borrowers but also can weaken communities and neighborhoods by causing widespread foreclosures, which reduce property values. Predatory lending also serves to harm the reputation of honest and legitimate lenders, casting them in the same suspicious light as those making unfair loans and thus increasing their reluctance to extend credit to the traditionally underserved communities that are often targeted by abusive lenders. The market for mortgage loans has evolved considerably over the past 20 years. Among the changes has been the emergence of a market for subprime mortgage loans. Most mortgage lending takes place in what is known as the prime market, which encompasses traditional lenders and borrowers with credit histories that put them at low risk of default. In contrast, the subprime market serves borrowers who have poor or no credit histories or limited incomes, and thus cannot meet the credit standards for obtaining loans in the prime market. It is widely accepted that the overwhelming majority of predatory lending occurs in the subprime market, which has grown dramatically in recent years. Subprime mortgage originations grew from $34 billion in 1994 to more than $213 billion in 2002 and in 2002 represented 8.6 percent of all mortgage originations, according to data reported by the trade publication Inside B&C Lending. Several factors account for the growth of the subprime market, including changes in tax law that increased the tax advantages of home equity loans, rapidly increasing home prices that have provided many consumers with substantial home equity, entry into the subprime market by companies that had previously made only prime loans, and the expansion of credit scoring and automated underwriting, which has made it easier for lenders to price the risks associated with making loans to credit-impaired borrowers. Originating lenders charge higher interest rates and fees for subprime loans than they do for prime loans to compensate for increased risks and for higher servicing and origination costs. In many cases, increased risks and costs justify the additional cost of the loan to the borrower, but in some cases they may not. Because subprime loans involve a greater variety and complexity of risks, they are not the uniformly priced commodities that prime loans generally are. This lack of uniformity makes comparing the costs of subprime loans difficult, which can increase borrowers’ vulnerability to abuse. However, subprime lending is not inherently abusive, and certainly all subprime loans are not predatory. Although some advocacy groups claim that subprime lending involves abusive practices in a majority of cases, most analysts believe that only a relatively small portion of subprime loans contain features that may be considered abusive. In addition, according to officials at HUD and the Department of the Treasury, the emergence of a subprime mortgage market has enabled a whole class of credit-impaired borrowers to buy homes or access the equity in their homes. At the same time, however, federal officials and consumer advocates have expressed concerns that the overall growth in subprime lending and home equity lending in general has been accompanied by a corresponding increase in predatory lending. For example, lenders and brokers may use aggressive sales and marketing tactics to convince consumers who need cash to enter into a home equity loan with highly disadvantageous terms. Originators of subprime loans are most often mortgage and consumer finance companies, but can also be banks, thrifts, and other institutions. Some originators focus primarily on making subprime loans, while others offer a variety of prime and subprime loans. According to HUD, 178 lenders concentrated primarily on subprime mortgage lending in 2001. Fifty-nine percent of these lenders were independent mortgage companies (mortgage bankers and finance companies), 20 percent were nonbank subsidiaries of financial or bank holding companies, and the remainder were other types of financial institutions. Only 10 percent were federally regulated banks and thrifts. About half of all mortgage loans are made through mortgage brokers that serve as intermediaries between the borrower and the originating lender. According to government and industry officials, while the great majority of mortgage brokers are honest, some play a significant role in perpetrating predatory lending. A broker can be paid for his services from up-front fees directly charged to the borrower and/or through fees paid indirectly by the borrower through the lender in what is referred to as a “yield spread premium.” Some consumer advocates argue that compensating brokers this way gives brokers an incentive to push loans with higher interest rates and fees. Brokers respond that yield spread premiums in fact allow them to reduce the direct up-front fees they charge consumers. Currently no comprehensive and reliable data are available on the extent of predatory lending nationwide, for several reasons. First, the lack of a standard definition of what constitutes predatory lending makes it inherently difficult to measure. Second, any comprehensive data collection on predatory lending would require access to a representative sample of loans and to information that can only be extracted manually from the physical loan files. Given that such records are not only widely dispersed but also generally proprietary, to date comprehensive data have not been collected. Nevertheless, policymakers, advocates, and some lending industry representatives have expressed concerns in recent years that predatory lending is a significant problem. Although the extent of predatory lending cannot be easily quantified, several indicators suggest that it may be prevalent. Primary among these indicators are legal settlements, foreclosure patterns, and anecdotal evidence. In the past 5 years, there have been a number of major settlements resulting from government enforcement actions and private party lawsuits accusing lenders of abusive lending practices affecting large numbers of borrowers. Among the largest of these settlements have been the following: In October 2002, the lender Household International agreed to pay up to $484 million to homeowners across the nation to settle allegations by states that it used unfair and deceptive lending practices to make mortgage loans with excessive interest and charges. In September 2002, Citigroup agreed to pay up to $240 million to resolve charges by FTC and private parties that Associates First Capital Corporation and Associates Corporation of North America (The Associates) engaged in systematic and widespread deceptive and abusive lending practices. According to FTC staff, under the settlement close to 1 million borrowers will receive compensation for loans that misrepresented insurance products and that contained other abusive terms. In response to allegations of deceptive marketing and abusive lending, First Alliance Mortgage Company entered into a settlement in March 2002 with FTC, six states, and private parties to compensate nearly 18,000 borrowers more than $60 million dollars. Further, between January 1998 and September 1999, the foreclosure rate for subprime loans was more than 10 times the foreclosure rate for prime loans. While it would be expected that loans made to less creditworthy borrowers would result in some increased rate of foreclosure, the magnitude of this difference has led many analysts to suggest that it is at least partly the result of abusive lending, particularly of loans made without regard to the borrower’s ability to repay. Moreover, the rate of foreclosures of subprime mortgage loans has increased substantially since 1990, far exceeding the rate of increase for subprime originations. A study conducted for HUD noted that while the increased rate in subprime foreclosures could be the result of abusive lending, it could also be the result of other factors, such as an increase in subprime loans that are made to the least creditworthy borrowers. In the early 1990s, anecdotal evidence began to emerge suggesting that predatory lending was on the rise. Legal services agencies throughout the country reported an increase in clients who were facing foreclosure as a result of mortgage loans that included abusive terms and conditions. These agencies noted that for the first time they were seeing large numbers of consumers, particularly elderly and minority borrowers, who were facing the loss of homes they had lived in for many years because of a high-cost refinancing. Similar observations were also reported extensively at forums on predatory lending sponsored by HUD and the Department of the Treasury in five cities during 2000, at hearings held in four cities during 2000 by the Board of Governors of the Federal Reserve System (the Board), and at congressional hearings on the issue in 1998, 2001, 2002, and 2003. Federal officials and consumer advocates maintain that predatory lenders often target certain populations, including the elderly and some low- income and minority communities. Some advocates say that in many cases, predatory lenders target communities that are underserved by legitimate institutions, such as banks and thrifts, leaving borrowers with limited credit options. According to government officials and legal aid organizations, predatory lending appears to be more prevalent in urban areas than in rural areas, possibly because of the concentration of certain target groups in urban areas and because the aggressive marketing tactics of many predatory lenders may be more efficient in denser neighborhoods. The federal government began addressing predatory home mortgage lending as a significant policy issue in the early 1990s. In 1994, the Congress passed the Home Ownership and Equity Protection Act (HOEPA), an amendment to the Truth in Lending Act that set certain restrictions on “high-cost” loans in order to protect consumers. In 1998, as part of an overall review of the statutory requirements for mortgage loans, HUD and the Board released a report recommending that additional actions be taken to protect consumers from abusive lending practices. HUD and the Department of the Treasury formed a task force in 2000 that produced the report Curbing Predatory Home Mortgage Lending, which made several dozen recommendations for addressing predatory lending.14, As discussed in chapters 2 and 3, a variety of federal, state, and local laws have been used to take civil and criminal enforcement actions against institutions and individuals accused of abusive lending practices. Various federal agencies have responsibilities for enforcing laws related to predatory lending. In addition, some state or local enforcement authorities—including attorneys general, banking regulators, and district attorneys—have used state and local laws related to consumer protection and banking to address predatory lending practices. In addition, many private attorneys and advocacy groups have pursued private legal actions, including class actions, on behalf of borrowers who claim to have been victimized by abusive lending. Our objectives were to describe (1) federal laws related to predatory lending and federal agencies’ efforts to enforce them; (2) the actions taken by the states in addressing predatory lending; (3) the secondary market’s role in facilitating or inhibiting predatory lending; (4) how consumer education, mortgage counseling, and loan disclosures may deter predatory lending; and (5) the relationship between predatory lending activities and elderly consumers. The scope of this work was limited to home mortgage lending and did not include other forms of consumer loans. HUD-Treasury Task Force on Predatory Lending, Curbing Predatory Home Mortgage Lending: A Joint Report, June 2000. Department of Justice (DOJ), the Department of the Treasury, the Federal Deposit Insurance Corporation (FDIC), FTC, the Board, the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS). We asked each agency to provide us with the enforcement actions they have taken that—in their assessment—were related to predatory home mortgage lending. We compiled and reviewed data on these enforcement actions and other steps these agencies have taken to address abusive lending practices. We also reviewed and analyzed federal laws that have been used to combat these practices. To identify actions taken by states and localities, we reviewed and analyzed a publicly available database maintained by the law firm of Butera & Andrews that tracks state and municipal antipredatory lending legislation. We reviewed information related to this database and conducted interviews with the person who maintains it. In order to identify gaps in the completeness or accuracy of data, we compared data elements from this database and from three similar databases maintained by Lotstein Buckman, the National Conference of State Legislatures, and the Mortgage Bankers Association of America. We determined that the data were sufficiently reliable for use in this report. We also interviewed officials representing a wide range of state and local government agencies, lending institutions, and advocacy groups in a number of states and municipalities. In order to illustrate approaches taken in certain states with regard to predatory lending, we collected and analyzed additional information from two states, North Carolina and Ohio. We chose these states to illustrate the differing characteristics of two states’ approaches to addressing predatory lending—particularly with regard to legislation restricting high-cost loans and tightening regulation of mortgage lenders and brokers. We also conducted meetings with the Conference of State Bank Supervisors and the National Association of Attorneys General that included representatives from several states. Additionally, we conducted interviews with OCC, OTS, and NCUA to understand their policies and processes on federal preemption of state antipredatory lending laws. To describe the secondary market’s role, we interviewed officials and reviewed documents from the Bond Market Association, the Securities Industry Association, Fannie Mae, Freddie Mac, a due diligence contractor, and two credit rating agencies. We also spoke with officials representing federal and state agencies, and with representatives of the lending industry and consumer groups. In addition, we reviewed and analyzed several local and state laws containing assignee liability provisions. To describe the role of consumer education, mortgage counseling, and disclosures in deterring predatory lending, we interviewed officials from entities that engage in consumer financial education, including several federal and state agencies, industry trade groups, and local nonprofit organizations such as the Long Island Housing Partnership, the Greater Cincinnati Mortgage Counseling Service, and the Foreclosure Prevention Project of South Brooklyn Legal Services. We also reviewed and analyzed the materials these entities produce. Additionally, we conducted a literature review of studies that have evaluated the effectiveness of consumer education and homeownership counseling. To describe the impact on older consumers, we conducted a literature review on predatory lending and the elderly and examined studies on financial exploitation of the elderly. We also examined certain enforcement activities and private party lawsuits in which elderly consumers may have been targeted by abusive lenders. We interviewed federal and state agencies that have addressed issues of financial abuse of the elderly, including the Department of Health and Human Services’ Administration on Aging and the National Institute on Aging, as well as nonprofit groups that have addressed this issue, including AARP (formerly known as the American Association of Retired Persons). In addressing all of the objectives, we met with a wide range of organizations that represent consumers, among them the National Community Reinvestment Coalition, the Coalition for Responsible Lending, the National Consumer Law Center, the Association of Community Organizations for Reform Now, and AARP. We also met with organizations representing various aspects of the mortgage lending industry, among them the American Financial Services Association, the Consumer Mortgage Coalition, the Coalition for Fair and Affordable Lending, America’s Community Bankers, the National Association of Mortgage Brokers, the Mortgage Bankers Association of America, and the National Home Equity Mortgage Association. We provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, NCUA, OCC, OTS, and the Department of the Treasury for review and comment. The agencies provided technical comments that have been incorporated, as appropriate, as well as general comments that are discussed at the end of chapter 2. The written comments of the Board, DOJ, HUD, and NCUA are printed in appendixes II through V. We conducted our work between January 2003 and January 2004 in accordance with generally accepted government auditing standards in Atlanta, Boston, New York, San Francisco, and Washington, D.C. While HOEPA is the only federal law specifically designed to combat predatory mortgage lending, federal agencies, including federal banking regulators, have used a number of federal consumer protection and disclosure statutes to take actions against lenders that have allegedly engaged in abusive or predatory lending. These statutes have enabled agencies to file complaints on behalf of consumers over issues such as excessive interest rates and fees, deceptive lending practices, and fraud. FTC, DOJ, HUD, and federal banking regulators have taken steps to address predatory lending practices through enforcement and civil actions, guidance, and regulatory changes. In some cases, agencies have coordinated their efforts through joint enforcement actions and participation in interagency working groups or task forces. However, questions of jurisdiction regarding certain nonbank mortgage lenders may challenge efforts to combat predatory lending. While the Board has authority to examine many such nonbank mortgage lenders under certain circumstances, it lacks clear authority to enforce federal consumer protection laws against them. As shown in figure 1, Congress has passed numerous laws that can be used to protect consumers against abusive lending practices. Federal agencies have applied provisions of these laws to seek redress for consumers who have been victims of predatory lending. Among the most frequently used laws are TILA, HOEPA, the Real Estate Settlement Procedures Act (RESPA), and the FTC Act. Congress has also given certain federal agencies responsibility for writing regulations that implement these laws. For example, the Board writes Regulation Z, which implements TILA and HOEPA, and HUD writes Regulation X, which implements RESPA. Also, in some cases, DOJ has brought actions under criminal fraud statutes based on conduct that can constitute predatory lending. TILA, which became law in 1968, was designed to provide consumers with accurate information about the cost of credit. Among other things, the act requires lenders to disclose information about the terms of loans— including the amount being financed, the total finance charge, and information on the annual percentage rate—that can help borrowers understand the overall costs of their loans. TILA also provides borrowers with the right to cancel certain loans secured by a principal residence within 3 days of closing or 3 days of the time at which the final disclosure is made, whichever is later. In 1994, Congress enacted the HOEPA amendments to TILA in response to concerns about predatory lending. HOEPA covers certain types of loans made to refinance existing mortgages, as well as home equity loans, that satisfy specific criteria. HOEPA covers only a limited portion of all subprime loans, although there is no comprehensive data on precisely what that portion is. The law is designed to limit predatory practices for these so-called “high-cost” HOEPA loans in several ways. First, it places restrictions on loans that exceed certain rate or fee thresholds, which the Board can adjust within certain limits prescribed in the law. For these loans, the law restricts prepayment penalties, prohibits balloon payments for loans with terms of less than 5 years, prohibits negative amortization, and contains certain other restrictions on loan terms or payments. Second, HOEPA prohibits lenders from routinely making loans without regard to the borrower’s ability to repay. Third, the law requires lenders to include disclosures in addition to those required by TILA for consumer credit transactions to help borrowers understand the terms of the high-cost loan and the implications of failing to make required payments. Each federal banking regulator is charged with enforcing TILA and HOEPA with respect to the depository institutions it regulates, and FTC is primarily responsible for enforcing the statutes for most other financial institutions, including independent mortgage lenders and nonbank subsidiaries of holding companies. In enforcing TILA and HOEPA, FTC has required violators to compensate borrowers for statutory violations. Under certain circumstances, HOEPA provides for damages in addition to the actual damages a person sustains as a result of a creditor’s violation of the act. RESPA, passed in 1974, seeks to protect consumers from unnecessarily high charges in the settlement of residential mortgages by requiring lenders to disclose details of the costs of settling a loan and by prohibiting certain other costs. Among its provisions is a prohibition against kickbacks— payments made in exchange for referring a settlement service, such as lender payments to real estate agents for the referral of business. RESPA also prohibits unearned fees such as adding an additional charge to a third party fee when no or nominal services are performed. These practices can unjustly increase the costs of loans and the settlement process. HUD enforces RESPA, working closely with federal banking regulators and other federal agencies such as the FTC and the Department of Justice. HUD often brings joint enforcement actions with these agencies, using RESPA and the statutes enforced by the other federal agencies. In addition, the banking regulators may prohibit violations of RESPA in their own regulations. The FTC Act, enacted in 1914 and amended on numerous occasions, provides the FTC with the authority to prohibit and take action against unfair or deceptive acts or practices in or affecting commerce. FTC has used the act to address predatory lending abuses when borrowers have been misled or deceived about their loan terms. Various criminal fraud statutes prohibit certain types of fraud sometimes used in abusive lending schemes, including forgery and false statements. DOJ and HUD have used these statutes to fight fraudulent schemes that have resulted in borrowers purchasing homes worth substantially less than their mortgage amounts or borrowers being unfairly stripped of the equity in their homes. HUD officials have described some of these fraudulent activities as constituting predatory lending. The following other federal laws have been used to a lesser extent to address abusive lending: The Fair Housing Act prohibits discrimination based on race, sex, and other factors in housing-related transactions, and the Equal Credit Opportunity Act (ECOA) prohibits discrimination against borrowers in the extension of credit. Federal agencies have used both laws in cases against lenders that have allegedly targeted certain protected groups with abusive loans. The Home Mortgage Disclosure Act (HMDA) requires lenders to make publicly available certain data about mortgage loans. Federal agencies have used the data provided by HMDA to help identify possible discriminatory lending patterns, including those that involve abusive lending practices. The Community Reinvestment Act (CRA) requires that banking regulators consider a depository institution’s efforts to meet the credit needs of its community—including low- and moderate-income neighborhoods—in examinations and when it applies for permission to take certain actions such as a merger or acquisition. An institution's fair lending record is taken into account in assessing CRA performance. CRA regulations state that abusive lending practices that violate certain federal laws will adversely affect an institution’s CRA performance. Also, federal banking regulators may rely on their supervisory and enforcement authorities under the laws they administer, as well as on the Federal Deposit Insurance Act, to enforce these consumer protections laws and ensure that an institution’s conduct with respect to compliance with consumer protection laws does not affect its safety and soundness or that of an affiliated institution. Finally, FTC and the banking regulators can also use the Fair Debt Collection Practices Act and Fair Credit Reporting Act in enforcement actions related to predatory lending that involve violations of credit reporting and loan servicing provisions. Although a number of federal laws have been used to protect borrowers from abusive lending or to provide them redress, not all potentially abusive practices are illegal under federal law. Enforcement officials and consumer advocates have stated that some lenders make loans that include abusive features but are designed to remain below the thresholds that would subject them to the restrictions of HOEPA. For loans not covered under HOEPA, certain lending practices many consider to be abusive are not, depending on the circumstances, necessarily a violation of any federal law. For example, it is not necessarily illegal to charge a borrower interest rates or fees that exceed what is justified by the actual risk of the mortgage loan. Nor is it per se illegal under federal law to “steer” a borrower with good credit who qualifies for a prime loan into a higher cost subprime loan. Finally, with the exception of loans covered under HOEPA, there are no federal statutes that expressly prohibit making a loan that a borrower will likely be unable to repay. FTC, DOJ, and HUD have taken enforcement actions to address violations related to abusive lending. As of December 2003, FTC reported that the agency had taken 19 actions against mortgage lenders and brokers for predatory practices. DOJ has addressed predatory lending that is alleged to be discriminatory by enforcing fair lending laws in a limited number of cases. HUD’s efforts have generally focused on reducing losses to the Federal Housing Administration (FHA) insurance fund, including implementing a number of initiatives to monitor lenders for violations of FHA guidelines. HUD reported having taken a small number of actions to enforce RESPA and the Fair Housing Act in cases involving predatory lending. Federal banking regulators stated that their monitoring and examination activities have revealed little evidence of predatory lending practices by federally regulated depository institutions. Accordingly, most banking regulators reported that they have taken no formal enforcement actions related to predatory mortgage lending abuses by the institutions they supervise. Regulators have addressed predatory lending primarily by issuing guidance to their institutions on guarding against direct or indirect involvement in predatory lending practices and by making certain changes to HOEPA and HMDA regulations. In addition, several federal agencies have coordinated certain efforts to pursue enforcement actions related to predatory lending and have shared information on their efforts to address fair lending and predatory lending. FTC is responsible for implementing and enforcing certain federal laws among lending institutions that are not supervised by federal banking regulators. FTC reported that between 1983 and 2003, it filed 19 complaints alleging deceptive or other illegal practices by mortgage lenders and brokers, 17 of them filed since 1998. For a list of these FTC enforcement actions, see appendix I. As of December 2003, FTC had reached settlements in all but one of the cases. In most of these settlements, companies have agreed to provide monetary redress to consumers and to halt certain practices in the future. In some cases, the settlements also imposed monetary penalties that the companies have paid to the government. Among the recent enforcement actions related to predatory lending that the FTC identified are the following: The Associates. In 2002, FTC settled a complaint against Associates First Capital Corporation and Associates Corporation of North America (collectively, The Associates), as well as their successor, Citigroup. The complaint alleged that the lender violated the FTC Act and other laws by, among other things, deceiving customers into refinancing debts into home loans with high interest rates and fees and purchasing high-cost credit insurance. The settlement, along with a related settlement with private parties, provides for up to $240 million in restitution to borrowers. First Alliance. In 2002, FTC, along with several states and private plaintiffs, settled a complaint against First Alliance Mortgage Company alleging that it violated federal and state laws by misleading consumers about loan origination and other fees, interest rate increases, and monthly payment amounts on adjustable rate mortgage loans. The company agreed to compensate nearly 18,000 borrowers more than $60 million in consumer redress and to refrain from making misrepresentations about future offers of credit. Fleet Finance and Home Equity U.S.A. In 1999, Fleet Finance, Inc., and Home Equity U.S.A., Inc., settled an FTC complaint alleging violations of the FTC Act, TILA, and related regulations. These violations included failing to provide required disclosures about home equity loan costs and terms and failing to alert borrowers to their right to cancel their credit transactions. To settle, the company agreed to pay up to $1.3 million in redress and administrative costs and to refrain from violating TILA in the future. Operation Home Inequity. In 1999, FTC conducted “Operation Home Inequity,” a law enforcement and consumer education campaign that sought to curb abusive practices in the subprime mortgage lending market. FTC reached settlements with seven subprime mortgage lenders that had been accused of violating a number of consumer protections laws, including the FTC Act, TILA, and HOEPA. Six companies were required to pay $572,000 in consumer redress, and all lenders were required to adhere to future lending restrictions. FTC staff told us that the operation was intended in large part to increase consumers’ awareness of predatory lending and to provide a deterrent effect by warning lenders that FTC is able and willing to take action against them. FTC staff expressed their belief that the agency’s enforcement actions over the years have been successful in deterring other lenders from engaging in abusive practices. However, in a congressional hearing in 2000 FTC had requested statutory changes that would improve its ability to enforce HOEPA. For example, FTC recommended that Congress expand HOEPA to prohibit the financing of lump-sum credit insurance premiums in loans covered by HOEPA and to give FTC the power to impose civil penalties for HOEPA violations. DOJ’s Housing and Civil Enforcement Section is responsible for enforcing certain federal civil rights laws, including the Fair Housing Act and ECOA. DOJ identified two enforcement actions it has taken related to predatory mortgage lending practices that it alleged were discriminatory. Delta Funding. In 2000, DOJ, in cooperation with FTC and HUD, brought charges against Delta Funding Corporation, accusing the consumer finance company of violations of the Fair Housing Act, HOEPA, ECOA, RESPA, and related federal regulations. Delta allegedly approved and funded loans that carried substantially higher broker fees for African American females than for similarly situated white males. Delta was also accused of violating certain consumer protection laws by paying kickbacks and unearned fees to brokers to induce them to refer loan applicants to Delta and by systematically making HOEPA loans without regard to borrowers’ ability to repay. The settlement placed restrictions on the company’s future lending operations and victims were compensated from previously established monetary relief funds. Long Beach Mortgage. In 1996 DOJ settled a complaint alleging violations of the Fair Housing Act and ECOA against Long Beach Mortgage Company. According to the complaint, the company’s loan officers and brokers charged African American, Hispanic, female, and older borrowers higher loan rates than it charged other similarly situated borrowers. The company agreed to set up a $3 million fund to reimburse 1,200 consumers who had received Long Beach loans. Representatives from both FTC and DOJ have stated that their enforcement actions can be very resource intensive and can involve years of discovery and litigation. For example, FTC filed a complaint against Capitol City Mortgage Corporation in 1998 that is still in litigation more than 5 years later. FTC staff told us that because cases involving predatory lending can be so resource intensive, the agencies try to focus their limited resources on the cases that will have the most impact, such as those that may result in large settlements to consumers or that will have some deterrent value by gaining national exposure. Similarly, DOJ officials select certain discrimination cases, including those mentioned above, in part because of their broad impact. HUD’s enforcement and regulatory activity with regard to abusive mortgage lending comes primarily through its management of the FHA single-family mortgage insurance programs, its rule-making and enforcement authority under RESPA, and its enforcement of the Fair Housing Act. Most of HUD’s enforcement activities related to abusive lending have focused on reducing losses to the FHA insurance fund. Investigators from HUD’s Office of the Inspector General have worked with investigators from U.S. Attorneys’ Offices and the FBI in a joint law enforcement effort to target fraud in the FHA mortgage insurance program, which can result in defaults and thus in losses to the insurance fund. The fraudulent activities sometimes involve property flipping schemes, which can harm borrowers by leaving them with mortgage loans that may far exceed the value of their homes. Under certain circumstances, such activity can involve predatory lending practices. To address these crimes, investigators have presented evidence of false statements and other criminal fraud and deception. In addition, representatives from HUD told us that they have processes in place to ensure that lenders adhere to agency guidelines and make loans that satisfy FHA requirements. The Office of Lender Activities and Program Compliance approves, recertifies, and monitors FHA lenders and works with them to ensure compliance. If necessary, the office refers violating lenders to HUD’s Mortgagee Review Board, which has the authority to take administrative actions such as withdrawing approval for a lender to make FHA-insured loans. HUD officials told us that the board has taken many administrative actions to address violations that could be indicative of predatory lending, such as charging excessive and unallowable fees, inflating appraisals, and falsifying documents showing income or employment. In an effort to address abusive property flipping schemes involving homes secured by FHA-insured loans, HUD issued a final rule in May 2003 that prohibits FHA insurance on properties resold less than 90 days after their previous sale. HUD officials say that programs they have in place to improve the monitoring of FHA lenders also serve to deter predatory lending. For example, HUD’s Credit Watch Program routinely identifies those lenders with the highest early default and insurance claim rates and temporarily suspends the FHA loan origination approval agreements of the riskiest lenders, helping to ensure that lenders are not making loans that borrowers cannot repay. Also, the Neighborhood Watch program provides information to FHA participants about lenders and appraisers whose loans have high default and FHA insurance claim rates. HUD told us that it has also taken a series of actions to better ensure the integrity of appraisals used to finance FHA insured loans. As of December 2003, HUD was in the final stages of issuing a rule that would hold lenders accountable for appraisals associated with loans they make. HUD’s Office of RESPA and Interstate Land Sales is responsible for handling complaints, conducting investigations, and taking enforcement actions related to RESPA. HUD has taken several enforcement actions related to RESPA’s prohibition of kickbacks and referral fees, three of which related directly to abusive mortgage lending, as of December 2003. Also, as discussed above, in November 2003 HUD and FTC jointly filed a case against and reached settlement with a mortgage loan servicing company charged with violations of the FTC Act, RESPA, and other laws. HUD has also recently hired additional staff to enhance its RESPA enforcement efforts. Finally, in 2002, HUD issued a proposed rule designed to change the regulatory requirements of RESPA to simplify and potentially lower the costs of the home mortgage settlement process. According to HUD, as of December 2003, the final rule had been submitted to the Office of Management and Budget and was being reviewed. HUD’s Office of Fair Housing and Equal Opportunity is responsible for enforcing the Fair Housing Act. HUD identified one action—a letter of reprimand to a financial institution—related to enforcement of this act in a case involving predatory lending. According to federal banking regulators and state enforcement authorities, federally regulated depository institutions—banks, thrifts, and credit unions—have not typically engaged in predatory lending practices. Federal banking regulators have systems in place to track customer complaints and reported that they have received few complaints related to predatory lending by the institutions they supervise. The regulators conduct routine examinations of these institutions and have the authority, in cases of suspected predatory lending, to enforce a variety of fair lending and consumer protection laws. Banking regulators noted that the examination process, which involves routine on-site reviews of lenders’ activities, serves as a powerful deterrent to predatory lending by the institutions they examine. Officials of OTS, FDIC, the Board, and NCUA said that they had taken no formal enforcement actions related to predatory mortgage lending against the institutions they regulate. Officials at OCC said they have taken one formal enforcement action related to predatory mortgage lending to address fee packing, equity stripping, and making loans without regard to a borrower’s ability to pay. In November 2003, the agency announced an enforcement action against Loan Star Capital Bank seeking to reimburse 30 or more borrowers for more than $100,000 in abusive fees and closing costs that violated the FTC Act, HOEPA, TILA, and RESPA. The bank also was required to conduct a comprehensive review of its entire mortgage portfolio and to provide restitution to any additional borrowers who may have been harmed. While most federal banking regulators stated that they have taken no formal enforcement actions, representatives from some said they had taken informal enforcement actions to address some questionable practices among their institutions. For example, OTS has examined institutions that may have charged inappropriate fees or violated HOEPA and resolved the problems by requiring corrective action as part of the examination process. In addition, most of the banking regulators have taken formal enforcement actions, including issuing cease-and-desist orders, in response to activities that violated fair lending and consumer protection laws but were not necessarily deemed to constitute “predatory lending.” Federal banking regulators have issued guidance to their institutions about both predatory lending and subprime lending in general. In February 2003, OCC issued two advisory letters related to predatory lending to the national banks and the operating subsidiaries it supervises. One letter provided specific guidelines for guarding against predatory lending practices during loan originations, and the other alerted institutions to the risk of indirectly engaging in predatory lending through brokered or purchased loans. The advisory letters described loan attributes that are often considered predatory and established standards for policies and procedures for monitoring loan transactions to avoid making, brokering, or purchasing loans with such attributes. For example, the first letter stated that banks should establish underwriting policies and procedures to determine that borrowers have the capacity to repay their loans. The advisory letter also stated OCC’s position that predatory lending will also affect a national bank’s CRA rating. The advisories have also clarified ways in which predatory practices can create legal, safety and soundness, and reputation risks for national banks. For example, they laid out ways in which the origination or purchase of predatory loans may constitute violations of TILA, RESPA, HOEPA, the FTC Act, and fair lending laws. In addition, in January 2004, OCC issued a rule adopting antipredatory lending standards that expressly prohibit national banks from making loans without regard to the borrower’s ability to repay and from engaging in unfair and deceptive practices under the FTC Act. In 1999 and 2001, the Board, FDIC, OCC, and OTS issued joint guidance to their institutions on subprime lending in general. The guidance highlighted the additional risks inherent in subprime lending and noted that institutions engaging in such lending need to be aware of the potential for predatory practices and be particularly careful to avoid violating fair lending and consumer protection laws and regulations. The NCUA issued similar guidance to insured credit unions in 1999. Federal banking regulators have also previously issued guidance about abusive lending practices, unfair or deceptive acts or practices, and other issues related to predatory lending. The Board is responsible for issuing regulations that implement HOEPA and HMDA, two laws that play a role in addressing predatory lending. In December 2001, in response to concerns that HOEPA may not be adequately protecting consumers from abusive lending practices, the Board amended Regulation Z, which implements HOEPA, to lower the interest rate “trigger” that determines whether loans are covered under HOEPA in order to bring more loans under the protection of the law, require that fees paid for credit insurance and similar debt protection products be included when determining whether loans are subject to HOEPA, prohibit creditors that make HOEPA loans from refinancing the loan within one year of origination with another HOEPA loan, unless the refinancing is in the borrower’s interest, and clarify the prohibition against engaging in a “pattern or practice” of lending without regard to borrowers’ ability to repay. In February 2002, the Board also made changes to Regulation C, which implements HMDA. The changes, which went into effect in January 2004, require lenders to provide additional data that may facilitate analyses of lending patterns that may be predatory. For example if the costs to the borrower of financing a loan exceed a certain threshold determined by the Board, the lender must report the cost of the loan; if an application or loan involves a manufactured home, the lender is required to identify that fact, in part to help identify predatory practices involving these types of homes; and if a loan is subject to HOEPA, the lender is required to identify that fact in order to give policymakers more specific information about the number and characteristics of HOEPA loans. Because HOEPA expressly grants the Board broad authority to issue rules to regulate unfair or deceptive acts and practices, some consumer advocacy organizations have argued that the Board should use its authority to do more to curb predatory lending. For example, some consumer groups have called on the Board to use its rule-making authority to prohibit the financing of single-premium credit insurance—a product that is believed by many to be inherently predatory. Under the McCarran Ferguson Act, unless a federal statute is specifically related to the business of insurance, the federal law may not be construed to invalidate, impair, or supercede any state law enacted to regulate the business of insurance. Board officials say it is not clear the extent to which rules issued by the Board under HOEPA seeking to regulate the sale of single- premium credit insurance would be consistent with that standard. The Board has previously recommended that it would be more appropriate for Congress to address this issue through changes in law. Some consumer groups also have argued that the Board should increase the loan data reporting requirements of HMDA to help detect abusive lending. The Board has added certain loan pricing and other items to the HMDA reporting requirements, effective in January 2004, but did not add other data reporting requirements, such as the credit score of the applicant. Board officials said this is based on the belief that the need for additional loan data to ensure fair lending must be weighed against the costs and burdens to the lender of gathering and reporting the additional information. Federal agencies have worked together to investigate and pursue some cases involving predatory lending. For example, FTC, DOJ, and HUD coordinated to take enforcement action against Delta Funding Corporation, with each agency investigating and bringing actions for violations of the laws under its jurisdiction. DOJ conducted its enforcement action against Long Beach Mortgage Company in coordination with OTS, which investigated the initial complaint in 1993 when the company was a thrift. Federal agencies have also coordinated with state authorities and private entities in enforcement actions. For example, in 2002, FTC joined six states, AARP, and private attorneys to settle a complaint against First Alliance Mortgage Company alleging that the company used deception and manipulation in its lending practices. Federal regulators have also coordinated their efforts to address fair lending and predatory lending through working groups. For example In the fall of 1999 the Interagency Fair Lending Task Force, which coordinates federal efforts to address discriminatory lending, established a working group to examine the laws related to predatory lending and determine how enforcement and consumer education could be strengthened. Because of differing views on how to define and combat predatory lending, the group was unable to agree on a federal interagency policy statement related to predatory lending in 2001. The Task Force then continued its efforts related to consumer education and published a brochure in 2003 to educate consumers about predatory lending practices. The five banking regulators have conducted additional coordination activities through the Federal Financial Institutions Examination Council’s Task Force on Consumer Compliance. The task force coordinates policies and procedures for ensuring compliance with fair lending laws and the Community Reinvestment Act, both of which have been identified as tools that can be used to address predatory lending. The council publishes a document that responds to frequently asked questions about community reinvestment, including how examiners should consider illegal credit practices, which may be abusive, in determining an institution’s Community Reinvestment Act rating. In 2000, HUD and the Department of the Treasury created the National Task Force on Predatory Lending, which convened forums around the country to examine the issue and released a report later in the year. The report made specific recommendations to Congress, federal agencies, and other stakeholders that were aimed at (1) improving consumer literacy and disclosure, (2) reducing harmful sales practices, (3) reducing abusive or deceptive loan terms and conditions, and (4) changing structural aspects of the lending market. Some of the recommendations made in the HUD-Treasury task force report have been implemented. For example, as recommended in the report, the Board has adopted changes to HOEPA regulations that have increased the number of loans covered and added additional restrictions. In addition, as the report recommended, FTC and some states have devoted more resources in the past few years to actively pursuing high-profile enforcement cases. As discussed in chapter 5, federal and state agencies have also worked to improve one of the areas highlighted in the report: public awareness about predatory lending issues. Other recommendations made in the report have not been implemented, however. For example, Congress has not enacted legislation to expand penalties for violations of TILA, HOEPA, and RESPA or to increase the damages available to borrowers harmed by such violations. HUD and the Department of the Treasury told us that they have not formally tracked the status of the recommendations made in the report, although HUD officials said they are informally monitoring the recommendations in the report that relate to their agency. Officials at both agencies also noted that the report and its recommendations were the product of a previous administration and may or may not reflect the views of the current administration. In addition to participating in interagency groups, agencies share information related to fair lending violations under statutory requirements and formal agreements. For example, since 1992 HUD and the banking regulators have had a memorandum of understanding stating that HUD will refer allegations of fair lending violations to banking regulators and a 1994 executive order requires that executive branch agencies notify HUD of complaints and violations of the Fair Housing Act. In addition, whenever the banking regulatory agencies or HUD have reason to believe that an institution has engaged in a “pattern or practice” of illegal discrimination, they are required to refer these cases to DOJ for possible civil action. Jurisdictional issues related to the regulation of certain nonbank mortgage lenders may challenge efforts to combat predatory lending. Many federally and state-chartered banks and thrifts, as well as their subsidiaries, are part of larger financial holding companies or bank holding companies. These holding companies may also include nonbank financial companies, such as finance and mortgage companies, that are subsidiaries of the holding companies themselves. These holding company subsidiaries are frequently referred to as affiliates of the banks and thrifts because of their common ownership by the holding company. As shown in figure 2, the federal regulators of federally and state-chartered banks and thrifts also regulate the subsidiaries of those institutions. For example, as the primary regulator for national banks, OCC also examines operating subsidiaries of those banks. On the other hand, federal regulators generally do not perform routine examinations of independent mortgage lenders and affiliated nonbank subsidiaries of financial and bank holding companies engaged in mortgage lending. Some disagreement exists between states and some federal banking regulators over states’ authority to regulate and supervise the operating subsidiaries of federally chartered depository institutions. For example, OCC issued an advisory letter in 2002 noting that federal law provides the agency with exclusive authority to supervise and examine operating subsidiaries of national banks and that the states have no authority to regulate or supervise these subsidiaries. Some representatives of state banking regulators expressed concerns to us about this because of the subsidiaries’ potential involvement in predatory lending practices. OCC has stated that the subsidiaries of the institutions it regulates do not play a large role in subprime lending and that little evidence exists to show that these subsidiaries are involved in predatory lending. But some state enforcement authorities and consumer advocates argue otherwise, citing some allegations of abuses at national bank subsidiaries. However, several state attorneys general have written that predatory lending abuses are “largely confined” to the subprime lending market and to non-depository institutions, not banks or direct bank subsidiaries. OCC officials stated that the agency has strong monitoring and enforcement systems in place and can and will respond vigorously to any abuses among institutions it supervises. For example, OCC officials pointed to an enforcement action taken in November 2003 that required restitution of more than $100,000 to be paid to 30 or more borrowers for fees and interest charged in a series of abusive loans involving small “tax-lien loans.” A second issue relates to the monitoring and supervision of certain nonbank subsidiaries of holding companies. As noted previously, many federally and state-chartered banks and thrifts, as well as their subsidiaries, are part of larger financial or bank holding companies. These holding companies may also include nonbank subsidiaries, such as finance and mortgage companies, that are affiliates but not subsidiaries of the federally regulated bank or thrift. Although these affiliates engage in financial activities that may be subject to federal consumer protection and fair lending laws, unlike depository institutions they are not subject to routine supervisory examinations for compliance with those laws. While the Board has jurisdiction over these entities for purposes of the Bank Holding Company Act, it lacks authority to ensure and enforce their compliance with federal consumer protection and fair lending laws in the same way that the federal regulators monitor their depository institutions. One reason for the concern about these entities is that nonbank subsidiaries of holding companies conduct a significant amount of subprime mortgage lending. Of the total subprime loan originations made by the top 25 subprime lenders in the first 6 months of 2003, 24 percent were originated by nonbank subsidiaries of holding companies. In addition, of the 178 lenders on HUD’s 2001 subprime lender list, 20 percent were nonbank subsidiaries of holding companies. These types of subsidiaries have also been targets of some of the most notable federal and state enforcement actions involving abusive lending. For example, The Associates and Fleet Finance, which were both nonbank subsidiaries of bank holding companies, were defendants in two of the three largest cases involving subprime lending that FTC has brought. The Associates case illustrates an important aspect of the current federal regulatory oversight structure pertinent to predatory lending. The Board has authority under the Bank Holding Company Act to condition its approval of holding company acquisitions. The Board used this authority in connection with Citigroup’s acquisition of European American Bank because of concerns about the subprime lending activities of The Associates, which Citigroup had acquired and merged into its CitiFinancial subsidiary. As a condition of approving the acquisition of European American Bank, the Board directed that an examination of certain subprime lending subsidiaries of Citigroup be carried out to determine whether Citigroup was effectively implementing policies and procedures designed to ensure compliance with fair lending laws and prevent abusive lending practices. However, the Board does not have clear authority to conduct the same type of monitoring outside of the Bank Holding Company Act approval process. Although the Board has the authority to monitor and perform routine inspections or examinations of a bank holding company, this authority apparently does not extend to routine examinations of nonbank subsidiaries of bank holding companies with regard to compliance with consumer protection laws. The Bank Holding Company Act, as amended by the Gramm-Leach-Bliley Act, authorizes the Board to examine a nonbank subsidiary for specific purposes, including “to monitor compliance with the provisions of (the Bank Holding Company Act) or any other Federal law that the Board has specific jurisdiction to enforce against such company or subsidiary.” Federal consumer protection laws do not give the Board specific enforcement jurisdiction over nonbank subsidiaries. For this reason, FTC is the primary federal agency monitoring nonbank subsidiaries’ compliance with consumer protection laws. FTC is the primary federal enforcer of consumer protection laws for these nonbank subsidiaries, but it is a law enforcement rather than supervisory agency. Thus, FTC’s mission and resource allocations are focused on conducting investigations in response to consumer complaints and other information rather than on routine monitoring and examination responsibilities. Moreover, as discussed elsewhere in this report, states vary widely in the extent to which they regulate practices that can constitute predatory lending. The HUD-Treasury report on predatory lending argued that the Board should take more responsibility for monitoring nonbank subsidiaries of bank holding companies, in part to ensure that consumer protection laws are adequately enforced for these institutions. Similarly, in 1999, GAO recommended that the Board monitor the lending activities of nonbank mortgage lending subsidiaries of bank holding companies and consider examining these entities if patterns in lending performance, growth, or operating relationships with other holding company entities indicated the need to do so. In its written response to GAO’s recommendation, the Board said that while it has the general legal authority to examine these entities, it has neither the clear enforcement jurisdiction nor the legal responsibility for engaging in such activities, as Congress has directly charged FTC with primary responsibility over enforcement with regard to these entities. Among federal agencies, the Board is uniquely situated to monitor the activities of the nonbank mortgage lending subsidiaries of financial and bank holding companies by virtue of its role as the regulator of holding companies and its corresponding access to data (such as internal operating procedures, loan level data, and current involvement in subprime lending) that are not readily available to the public. In addition, the Board has extensive experience monitoring and analyzing HMDA data. The recent changes in HMDA reporting requirements will increase the Board’s ability to effectively monitor nonbank mortgage lending subsidiaries of holding companies for lending abuses. In contrast to the specific limits on the Board’s examination authority, its authority to enforce the federal consumer protection laws against nonbank subsidiaries is somewhat less clear. The laws themselves specify the institutions subject to enforcement by the Board, but those institutions generally do not include nonbank subsidiaries. The Board has concluded that it must defer enforcement action at least where, as here, a statute specifically prescribes its enforcement jurisdiction to cover only certain entities and specifically grants enforcement authority for other entities to another agency. Under a number of laws, federal agencies have taken action to protect consumers from abusive lending practices. While FTC has taken a number of significant enforcement actions to battle abuses in the industry, its resources are finite and, as a law enforcement agency, it does not routinely monitor or examine lenders, including the mortgage lending subsidiaries of financial and bank holding companies. Congress provided banking regulators with the authority to ensure compliance with consumer protection laws by the institutions they regulate, in part because it recognized the efficiencies of having banking regulators monitor for compliance with these laws while examining their institutions for safety and soundness. The Board is in a position to help ensure compliance with federal consumer protection laws by certain subsidiaries of financial and bank holding companies if it were clearly authorized to do so. While concerns about predatory lending extend well beyond the activities of the nonbank subsidiaries of holding companies, these entities represent a significant portion of the subprime mortgage market. Monitoring the mortgage lending activities of the nonbank subsidiaries would help the Board determine when it would be beneficial to conduct examinations of specific nonbank subsidiaries. The Board could then refer its findings to DOJ, HUD, or FTC or take its own enforcement action if a problem exists. Granting the Board concurrent enforcement authority—with the FTC—for these nonbank subsidiaries of holding companies would not diminish FTC’s authority under federal laws used to combat predatory lending. The significant amount of subprime lending among holding company subsidiaries, combined with recent large settlements in cases involving allegations against such subsidiaries, suggests a need for additional scrutiny and monitoring of these entities. The Board is in an optimal position to play a larger role in such monitoring but does not have clear legal authority and responsibility to do so for these entities with regard to monitoring compliance of consumer protection laws. To enable greater oversight of and potentially deter predatory lending from occurring at certain nonbank lenders, Congress should consider making appropriate statutory changes to grant the Board of Governors of the Federal Reserve System the authority to routinely monitor and, as necessary, examine the nonbank mortgage lending subsidiaries of financial and bank holding companies for compliance with federal consumer protection laws applicable to predatory lending practices. Also, Congress should consider giving the Board specific authority to initiate enforcement actions under those laws against these nonbank mortgage lending subsidiaries. GAO provided a draft of this report to the Board, DOJ, FDIC, FTC, HUD, NCUA, OCC, OTS, and the Department of the Treasury for review and comment. The agencies provided technical comments that have been incorporated, as appropriate. In addition, the Board, DOJ, FDIC, FTC, HUD, and NCUA provided general comments, which are discussed below. The written comments of the Board, DOJ, HUD, and NCUA are printed in appendixes II through V. The Board commented that, while the existing structure has not been a barrier to Federal Reserve oversight, the approach recommended in our Matter for Congressional Consideration would likely be beneficial by catching some abusive practices that might not be caught otherwise. The Board also noted that the approach would pose tradeoffs, such as different supervisory schemes being applied to nonbank mortgage lenders based on whether or not they are part of a holding company. Because nonbank mortgage lenders that are part of a financial or bank holding company are already subject to being examined by the Board in some circumstances, they are already subject to a different supervisory scheme than other such lenders. For example, in its comments the Board noted that it may on occasion direct an examination of a nonbank lending subsidiary of a holding company when necessary in the context of applications that raise serious fair lending or compliance issues. Accordingly, we do not believe that clarifying jurisdiction as contemplated in the Matter would result in a significant departure from the current supervisory scheme for nonbank mortgage lenders. The Board also noted that that there could be some additional cost to the nonbank mortgage lending subsidiaries of financial or bank holding companies, as well as to the Board, if the Board were to exercise additional authority. We agree and believe that Congress should consider both the potential costs as well as the benefits of clarifying the Board’s authorities. The FTC expressed concern that our report could give the impression that we are suggesting that Congress consider giving the Board sole jurisdiction—rather than concurrent jurisdiction with FTC—over nonbank subsidiaries of holding companies. Our report did not intend to suggest that the Congress make any change that would necessarily affect FTC’s existing authority for these entities and we modified our report to clarify this point. To illustrate the difference in regulatory and enforcement approaches, our draft report contrasted the Board’s routine examination authority with the FTC’s role as a law enforcement agency. In its comments, FTC noted that it uses a number of tools to monitor nonbank mortgage lenders, of which consumer complaints is only one. The agency also commented that a key difference between the FTC and the Board is that the Board has access to routine information to aid in its oversight as part of the supervisory process. Our report did not intend to suggest that the FTC’s actions are based solely on consumer complaints, and we revised the report to avoid this impression. DOJ commented that the report will be helpful in assessing the department’s role in the federal government’s efforts to develop strategies to combat predatory lending. DOJ disagreed with our inclusion in the report of “property or loan flips,” which it characterized as a traditional fraud scheme rather than an example of predatory lending. As our report states, there is no precise definition of predatory lending. We included a discussion of efforts to combat “property flipping” because HUD officials told us that these schemes sometimes involve predatory practices that can harm borrowers. As we note in the report, while HUD categorizes property flipping as a predatory lending practice, not all federal agencies concur with this categorization. Distinct from property flipping is “loan flipping”— the rapid and repeated refinancing of a loan without benefit to the borrower. This practice is widely noted in literature and by federal, state, industry, and nonprofit officials as constituting predatory lending. FDIC noted that our Matter for Congressional Consideration focuses on nonbank subsidiaries of financial and bank holding companies even though these entities comprise, according to HUD, only about 20 percent of all subprime lenders. We acknowledge that our Matter does not address all subprime lenders or institutions that may be engaging in predatory lending, but believe it represents a step in addressing predatory lending among a significant category of mortgage lenders. NCUA said that the report provides a useful discussion of the issues and that the agency concurs with our Matter for Congressional Consideration. HUD, in its comment letter, described a variety of actions it has taken that it characterized as combating predatory lending, particularly with regard to FHA-insured loans. In part because of concerns about the growth of predatory lending and the limitations of existing state and federal laws, 25 states, the District of Columbia, and 11 localities had passed their own laws addressing predatory lending practices as of January 9, 2004. Most of the state laws restrict the terms or provisions of certain high-cost loans, while others apply to a broader range of loans. In addition, some states have taken measures to strengthen the regulation and licensing of mortgage lenders and brokers, and some have used existing state consumer protection and banking laws to take enforcement actions related to abusive lending. However, regulators of federally chartered financial institutions have issued opinions stating that federal laws may preempt some state predatory lending laws and that nationally chartered lending institutions should have to comply only with a single uniform set of national standards. Many state officials and consumer advocates have opposed federal preemption of state predatory lending laws on the grounds that it interferes with the states’ ability to protect consumers. Since 1999, many states and localities have passed laws designed to address abusive mortgage lending by restricting the terms or provisions of certain loans. In addition, states have increased the registration or licensing requirements of mortgage brokers and mortgage lenders and have undertaken enforcement activities under existing consumer protection laws and regulations to combat abusive lending. According to the database of state laws, as of January 9, 2004, 25 states and the District of Columbia had passed laws that were specifically designed to address abusive lending practices. (See fig. 3.) These laws were motivated, at least in part, by growing evidence of abusive lending and by concerns that existing laws were not sufficient to protect consumers against abusive lending practices. Based on our review of the database of state laws, the predatory lending statutes in 20 of the 25 states regulate and restrict the terms and characteristics of certain kinds of “high-cost” or “covered” mortgage loans that exceed certain interest rate or fee triggers. Some state laws, such as those in Florida, Ohio, and Pennsylvania, use triggers that are identical to those in the federal HOEPA statute but add provisions or requirements, such as restrictions on refinancing a loan under certain conditions. Other state laws, such as those of Georgia, New Jersey and North Carolina, use triggers that are lower than those in HOEPA and therefore cover more loans than the federal legislation. Some states design their triggers to vary depending on the amount of the loan. For example, in New Mexico and North Carolina, covered loans greater than $20,000 are considered high cost if the points and fees on the loan exceed 5 percent of the total loan amount (North Carolina) or equal or exceed it (New Mexico). In these states, loans for less than $20,000 are considered high cost if the points and fees exceed either 8 percent of the total or $1,000. In the remaining 5 states, the predatory lending laws apply to most mortgage loans; there is no designation of loans as high cost. For example, West Virginia’s law in effect generally prohibits lenders from charging prepayment penalties on any loans and restricts points and fees to either 5 or 6 percent, depending on whether the loan includes a yield spread premium. Michigan’s law prohibits the financing of single-premium credit insurance into loans. According to the database, common provisions in state laws are designed to address the following: Lending without regard to the ability to repay. Restrictions on the making of loans without regard to the borrower’s ability to repay the loan, sometimes referred to as asset-based lending. Prepayment penalties. Limitations on the amount of a prepayment penalty, terms under which a penalty can be assessed, or both. Balloon payments. Prohibitions on loans with balloon payments or restrictions on their timing. Negative amortization. Prohibitions on loans where regularly scheduled payments do not cover the interest due. Loan flipping. Restrictions or prohibitions on the repeated refinancing of certain loans within a short period of time if the refinancing will not benefit the borrower. Credit counseling. Requirements that borrowers either receive or are notified of the availability of loan counseling. Arbitration clauses. Restrictions on mandatory arbitration clauses, which limit a borrower’s right to seek redress in court. Some laws prohibit mandatory arbitration clauses altogether, while others require compliance with certain standards, such as those set by a nationally recognized arbitration organization. Assignee liability. Provisions that expressly hold purchasers or securitizers of loans liable for violations of the law committed by the originator, under certain conditions. (See ch. 4 for more information on assignee liability.) In addition, according to the database we reviewed, 11 cities and counties have passed laws of their own designed to address predatory lending since 2000. Some local laws are similar to state laws in that they define high- cost loans and restrict their provisions, such as in Los Angeles, California. Other localities, such as Oakland, California, have passed resolutions prohibiting lenders that engage in predatory lending practices from doing business with the locality. In general, states have regulated mortgage lenders and brokers, although to varying degrees. Some state officials told us that because of concerns that unscrupulous mortgage lenders and brokers were not adequately regulated and were responsible for lending abuses, some states have increased their regulation or licensing requirements of lenders and brokers. As part of their licensing requirements, states sometimes require that these companies establish a bond to help compensate victims of predatory lenders or brokers that go out of business, and some states also require that individuals working for or as mortgage lenders and brokers meet certain educational requirements. Some states have also reorganized their agencies’ operations to better address abuses by lenders and brokers. For example, an official with the Kansas Office of the State Banking Commissioner told us that in 1999 the Kansas legislature created the Division of Consumer and Mortgage Lending, which provides additional staff for examination and enforcement activities. Similarly, an official from the Idaho Department of Finance told us that the state created the Consumer Finance Bureau in 2000 to oversee and conduct routine examinations of mortgage brokers and mortgage lenders. State law enforcement agencies and banking regulators have also taken a number of actions in recent years to enforce existing state consumer protection and banking laws in cases involving predatory lending. For example, an official from the Washington Department of Financial Institutions reported that it has taken several enforcement actions in recent years to address predatory lending. In one such action, a California mortgage company that allegedly deceived borrowers and made prohibited charges was ordered to return more than $700,000 to 120 Washington State borrowers. According to officials of the Conference of State Bank Supervisors, states reported that in addressing predatory lending they have usually relied on general state consumer protection laws in areas such as fair lending, licensing, and unfair and deceptive practices. In some states, consumer protection statutes do not apply to financial institutions, so state banking regulators, rather than the attorneys general, typically initiate enforcement activities. Because allegations of predatory practices often involve lending activities in multiple states, states have sometimes cooperated in investigating alleged abuses and negotiating settlements. For example, in 2002 a settlement of up to $484 million with Household Finance Corporation resulted from a joint investigation begun by the attorneys general and financial regulatory agencies of 19 states and the District of Columbia. State agencies have also conducted investigations in conjunction with the federal government. States have varied in their approaches to addressing predatory lending issues. We reviewed legislative and enforcement activities related to predatory lending in two states, North Carolina and Ohio, to illustrate two different approaches. North Carolina has enacted two separate laws to address concerns about predatory lending. In 1999, the legislature passed a law that attempted to curb predatory lending by prohibiting specific lending practices and restricting the terms of high-cost loans. In 2001, North Carolina supplemented its predatory lending law by adopting legislation that required the licensing of mortgage professionals (mortgage lenders, brokers, and loan officers), defined a number of prohibited activities related to the making of residential mortgages, and enhanced the enforcement powers of the banking commissioner. According to the North Carolina Commissioner of Banks, the North Carolina laws applicable to predatory lending were the product of a consensus of banks, mortgage bankers and brokers, nonprofit organizations, and other stakeholders and were intended to address lending abuses that were not prohibited by federal statutes and regulations. Among other things, the 1999 legislation, known as the North Carolina Anti- Predatory Lending Law, imposes limitations specific to both “high-cost” loans and other “consumer home loans.” North Carolina’s predatory lending law did not restrict initial interest rates but instead focused on prohibiting specific lending practices and restricting the terms of high-cost loans. In conjunction with other North Carolina laws, the 1999 legislation contains four key features. First, it bans prepayment penalties for all home loans with a principal amount of $150,000 or less. Second, it prohibits loan flipping—refinancings of consumer home loans that do not provide a reasonable, net tangible benefit to the borrower. Third, it prohibits the financing of single-premium credit life insurance. Finally, it sets a number of restrictions on high-cost loans, including making loans without regard to borrowers’ ability to repay; financing points, fees, and any other charges payable to third parties; or setting up loans with balloon payments. Further, the law prohibits home improvement contract loans under which the proceeds go directly to the contractor, and requires that borrowers receive financial counseling prior to closing. Although the North Carolina predatory lending law governs the practices of lenders and mortgage brokers, some groups questioned whether it provided for effective enforcement. Specifically, concerns were focused on the lack of state licensing and oversight of all segments of the mortgage lending profession, including mortgage brokers and bankers. Additionally, some critics asserted that the statute provided the state banking commissioner with limited and uncertain authority to enforce the predatory lending provisions. As a result, even before the predatory lending legislation passed, stakeholders worked on a measure to fill the gaps left by the state’s predatory lending law. North Carolina’s second statute, the Mortgage Lending Act, was signed into law on August 29, 2001. Prior to the act, some mortgage banking firms and all mortgage brokerages domiciled in the state had been required to register with the state’s banking regulator, but individual loan originators were not. The Mortgage Lending Act imposed licensing requirements on all mortgage bankers and brokers, including individuals who originate loans, and added continuing education and testing requirements for mortgage loan officers. The provisions of the act mean that individuals as well as firms are now subject to regulatory discipline. According to the North Carolina Commissioner of Banks, the act has been effective in reducing the number of abusive brokers and individual loan originators. The commissioner noted that a large number of applications for licenses have been denied because the applicants did not meet basic requirements or did not pass the required background check. Studies on the impact of North Carolina’s Anti-Predatory Lending Law have offered conflicting conclusions. For example, one study found an overall decline in subprime mortgages and concluded that any reductions in predatory lending had been attained at the expense of many legitimate loans. Some have pointed to this evidence as suggesting that the law has reduced legitimate credit to those who most need it. Another study found a reduction in subprime originations but attributed the decline to a reduction in loans with abusive or predatory terms. Consumer advocates and state officials have cited this study as evidence that the law has worked as intended. Our review of the five studies available on the impact of the North Carolina predatory lending law suggested that data limitations and the lack of an accepted definition of predatory lending make determining the law’s impact difficult. For example, information about borrowers’ risk profiles, the pricing and production costs of the loans, and the lenders’ and borrowers’ behaviors was not available to the study researchers. In addition, the extent to which any potential reductions in predatory loans can be attributed to the Mortgage Lending Act as opposed to the Anti- Predatory Lending Law is unclear. Additional experience with the North Carolina laws may be needed in order to properly assess them. In February 2002, the Ohio legislature enacted a law with the purpose of bringing Ohio law into conformance with HOEPA. Among other things, the legislation preempted certain local predatory lending ordinances. The law was passed in response to an ordinance enacted in the city of Dayton, which was designed to fight predatory lending by regulating mortgage loans originated in that city. Proponents of the state law argued that regulating lenders is a state rather than municipal function and that lending rules should be uniform throughout the state. Some advocates argued that the state law prevents cities from protecting their citizens from abusive lending practices. The Ohio law imposes certain restrictions on high-cost loans as defined by HOEPA. These include additional restrictions on credit life or disability insurance beyond those imposed by HOEPA. The law also prohibits the replacement or consolidation of a zero- interest rate or other low-rate loan made by a governmental or nonprofit lender with a high-cost loan within the first 10 years of the low-rate loan unless the current holder of the loan consents in writing to the refinancing. Because the purpose of this law was to bring Ohio’s law into conformance with HOEPA, the law applies only to loans that qualify as mortgage loans subject to HOEPA. Thus, like predatory lending laws in some other states, the Ohio law applies to relatively few loans. In May 2002, the Ohio legislature passed another piece of legislation, designed in part to address abusive lending—the Ohio Mortgage Broker Act—that imposed requirements on the state’s mortgage brokers and loan officers. Among other things, this law required state examination, education, and licensing of loan officers, and prohibited brokers from engaging in certain deceptive or fraudulent practices. It also required that mortgage brokers and loan officers receive continuing education and take prelicensing competency tests. In the act adopting HOEPA standards, the Ohio legislature also established a Predatory Lending Study Committee, which was charged with investigating the impact of predatory lending practices on the citizens and communities of Ohio. The study committee consisted of 15 members, including representatives from state agencies, consumer groups, and the lending industry. The act required the committee to submit a report to the governor and legislators by the end of June 2003. The committee reached consensus on two major issues. First, it recommended that all appraisers in the state be licensed and subject to criminal background checks, and second, it recommended increased enforcement of the Ohio Mortgage Broker Act. The Division of Financial Institutions, which is responsible for enforcing the Ohio Mortgage Broker Act, has hired additional staff to ensure compliance with the law. The report and recommendations have been forwarded to the governor and the committee suggested that the Ohio General Assembly consider all recommendations. Other local ordinances have been passed in Ohio to address predatory lending. One of these ordinances, passed in November 2002 by the Toledo City Council to regulate mortgage lending practices, was challenged, and its enforcement stayed, because of the state HOEPA law passed in February 2002. One provision of that ordinance prohibited making an abusive loan by “taking advantage of a borrower’s physical or mental infirmities, ignorance or inability to understand the terms of the loan.” This provision drew criticism from the mortgage industry, which said the language was vague and difficult to comply with. For example, one secondary market participant noted that it would be nearly impossible to assess borrowers’ mental capabilities for loans they did not originate in the first place. Violating the law was made a criminal offense, and convicted offenders could not receive city contracts or conduct other business with the city. Significant debate has taken place as to the advantages and disadvantages of state and local predatory lending laws. In several cases, regulators of federally supervised financial institutions have determined that federal laws preempt state predatory lending laws for the institutions they regulate. In making these determinations, two regulators—OCC and OTS—have cited federal law that provides for uniform regulation of federally chartered institutions and have noted the potential harm that state predatory lending laws can have on legitimate lending. Representatives of the lending industry and some researchers agree with the federal banking regulators, arguing that restrictive state predatory lending laws may ultimately hurt many borrowers by reducing the supply of lenders willing to make subprime loans, creating undue legal risks for legitimate lenders, and increasing the costs of underwriting mortgage loans. Moreover, industry representatives have said that most predatory lending practices are already illegal under federal and state civil and criminal laws and that these laws should simply be more stringently enforced. In contrast, many state officials and consumer advocates are opposed to federal preemption of state predatory lending laws. They maintain that federal laws related to predatory lending are insufficient, and thus preemption interferes with their ability to protect consumers in their states, particularly from any potential abuses by the subsidiaries of federally chartered institutions. Because both the federal and state governments have roles in chartering and regulating financial institutions, questions can arise as to whether a federal statute preempts particular state laws. Affected parties may seek guidance from federal agencies requesting their views on whether a particular federal statute preempts a particular state law; in these instances, the agency may issue an advisory opinion or order on the issue. Because the courts are ultimately responsible for resolving conflicts between federal and state laws, these advisory opinions and orders are subject to court challenge and review. As of November 2003, one or more federal regulators had determined that federal laws preempted the predatory mortgage lending laws of the District of Columbia and five states—Georgia, New Jersey, New Mexico, New York, and North Carolina. (See table 1.) Preemption of state law is rooted in the U.S. Constitution’s Supremacy Clause, which provides for the supremacy of federal law. Over the years, the courts have developed a substantial body of precedent that has guided the analysis of whether any particular federal law or regulation overrides or preempts state law. The courts’ analysis of whether federal law preempts state law has fundamentally centered on whether Congress intended for the federal law or regulation to override state law, either from the face of the statute itself (express preemption) or from the structure and purpose of the statute (implied preemption.) In their preemption opinions, OCC, OTS, and NCUA have cited a variety of legislation and legal precedents. Since 1996, OTS has had regulations in place that describe its preemption of state lending laws. In January 2004, OCC issued a rule amending its regulations in a similar manner, clarifying what types of state laws federal law preempts in the context of national bank lending. OCC stated that it issued the rule in response to the number and significance of the questions that have arisen with respect to the preemption of state laws and to reduce uncertainty for national banks that operate in multiple states. In its rulemaking, OCC stated that it was seeking to provide more comprehensive standards regarding the applicability of state laws to lending, deposit taking, and other authorized activities of national banks. The regulations list examples of the types of state statutes that are preempted (such as laws regulating credit terms, interest rates, and disclosure requirements) and examples of the types of state laws that would not be preempted (such as laws pertaining to zoning, debt collection, and taxation). When OCC first proposed these rules, one news article stated that it “triggered a flood of letters and strong reactions from all corners of the predatory lending debate.” States and consumer groups were critical of the proposal. In contrast, the Mortgage Bankers Association of America and some large national banking companies wrote comment letters in support of OCC’s proposed rules. Federal banking regulators point out that preemption of states’ antipredatory lending laws applies only to institutions chartered by the agency issuing the preemption order. For example, OTS’s preemption opinion served to preempt New Jersey’s predatory lending statute for federally chartered thrifts but did not affect the statute’s applicability to independent mortgage companies, national banks, and state-chartered banks and thrifts. In preempting the New Jersey Home Ownership Security Act of 2002, OTS’s Chief Counsel noted that requiring federally chartered thrifts to comply with a hodgepodge of conflicting and overlapping state lending requirements would undermine Congress’s intent that federal savings institutions operate under a single set of uniform laws and regulations that would facilitate efficiency and effectiveness. Federal banking regulators have said that they have found little to no evidence of predatory lending by the institutions they regulate, pointing out that federally supervised institutions are highly regulated and subject to comprehensive supervision. They have also noted that they have issued guidance and taken numerous other steps to ensure that their institutions do not engage in predatory lending. Further, OCC has stated that state predatory lending laws, rather than reducing predatory lending among federally supervised institutions, can actually restrict and inhibit legitimate lending activity. The lending industry has generally supported preemption. For example, the Mortgage Bankers Association of America has argued that uniformity in lending regulations is central to an efficient and effective credit market. In contrast, many state officials and consumer advocates have opposed federal preemption of state predatory lending laws, for several reasons. First, they contend that state predatory lending laws are necessary to address gaps in relevant federal consumer protection laws. For example, one state official said that the predatory lending legislation adopted by his state was more focused and effective than the provisions of the Federal Trade Commission Act. In addition, opponents of preemption claim that federal regulators may not devote the necessary resources or have the willingness to enforce federal consumer protection laws relevant to predatory lending by federally chartered institutions and their subsidiaries. In response to OCC’s and OTS’s statements that there is no evidence of predatory lending among subsidiaries of federally regulated depository institutions, opponents of preemption noted that there are several cases in which allegations of abusive lending practices involving some of these subsidiaries have been raised. By providing lenders with an additional source of liquidity, the secondary market can benefit borrowers by increasing the availability of credit and, in general, lowering interest rates. While a secondary market for prime mortgage loans has existed for decades, a relatively recent secondary market for subprime loans now offers these potential benefits to subprime borrowers as well. However, the secondary market may also serve to facilitate predatory lending, as it can provide a source of funds for unscrupulous originators that quickly sell off loans with predatory terms. Secondary market participants may use varying degrees of due diligence to avoid purchasing loans with abusive terms. In addition, some states have enacted legislation with assignee liability—potentially holding purchasers liable for violations of abusive lending laws that occurred in the loan origination. However, extending liability to secondary market purchasers may cause lenders and other secondary market participants, such as credit rating agencies, to withdraw from the market, as occurred in Georgia. Originators of mortgage loans—which can include banks, other depository institutions, and mortgage lenders that are not depository institutions— may keep the loans or sell them in the secondary market. Secondary market purchasers may then hold the loans in their own portfolio or may pool together a group of loans and issue a mortgage-backed security that is backed by a pool of such loans. The securitization of mortgage loans became common during the 1980s and, by the 1990s, had become a major source of funding in the prime mortgage market. According to the Office of Federal Housing Enterprise Oversight, by the end of 2002 more than 58 percent of outstanding U.S. single-family residential mortgage debt was financed through securitization. Two government-sponsored enterprises— Fannie Mae and Freddie Mac—represented nearly 40 percent of the amount securitized. The securitization of subprime mortgage loans did not become common until the mid-1990s. The development of a secondary market for these loans has been an important factor in the growth of subprime lending, expanding subprime lenders’ access to funds and thus increasing the availability of subprime credit. The trade journal Inside B&C Lending estimated that in 2002 approximately 63 percent of new subprime mortgages, representing $134 billion, were securitized. The originators of subprime loans are often nonbank mortgage and finance companies. As secondary market participants—such as the Wall Street investment firms that have been the major underwriters for subprime securities—have grown more willing to purchase these instruments, subprime originators have gained access to an important source of liquidity that has allowed them to make more subprime loans. As shown in figure 4, the process of securitization starts with borrowers obtaining mortgages either directly from a lender or through a broker. The lender then creates a pool—a separate legal entity that purchases the mortgages and issues securities based on them. The lender hires a credit rating agency, which has no direct financial interest in the deal, to confirm the value of the securities based on the expected return and risks of the underlying mortgages. At the same time, the lender hires an underwriter to sell the securities to investors. The value of the securities is based exclusively on the mortgages themselves and is separate from the financial condition of the original lender. Finally, a servicer is hired to collect mortgage payments from the borrowers and disburse interest and principal payments to the investors. The process described above is for securitizations performed via private conduits—that is, without the participation of government-sponsored enterprises. Freddie Mac and Fannie Mae are relatively recent entrants into the subprime market; Freddie Mac began purchasing subprime loans in 1997 and Fannie Mae in 1999. Both companies have moved slowly and have limited their purchases to the segment of the subprime market with the most creditworthy of subprime loans. At present, the companies are believed to represent a relatively small portion of the overall secondary market for subprime loans. The exact portion they represent is not clear, but a study conducted for HUD estimated that the companies purchased about 14 percent of the subprime loans originated in 2002. Both Fannie Mae and Freddie Mac have stated publicly that they plan on expanding their role in the subprime market in the future. In part, this may be a result of the affordable housing goals that HUD set for the GSEs in October 2000, which increased the goals for loans made to low- and moderate-income borrowers. HUD recommended that the GSEs consider enhancing their roles in the subprime market—which often serves low- and moderate- income borrowers—to help standardize mortgage terms in that market and potentially reduce interest rates for subprime borrowers. While the GSEs are currently believed to represent a small portion of the secondary market for subprime lending, some market observers believe their share will grow. The growth of the secondary market for subprime loans has potentially benefited some consumers. By providing subprime lenders with a new source of liquidity, these lenders face lower funding costs and reduced interest rate risk, in part because the supply of lenders willing to make loans to borrowers with impaired credit has increased. Many analysts say that, as a result, mortgage loans are now available to a whole new population of consumers and interest rates on subprime loans made by reputable lenders have fallen. In addition, increased securitization of subprime lending may lead to more uniform underwriting of subprime loans, which could further reduce origination costs and interest rates to consumers. While the development of a secondary market for subprime loans may have benefits for borrowers, it can also provide a source of funds for unscrupulous originators that quickly sell off loans with predatory terms. The secondary market can complicate efforts to eliminate predatory lending by separating ownership of a loan from its originator. This separation can undermine incentives to reduce risk in lending and create incentives that may increase the attractiveness of making loans with predatory terms. As noted earlier, some originators of subprime mortgage loans make their profits from high origination fees. The existence of a market that allows originating lenders to quickly resell subprime loans may reduce the incentive these lenders have to ensure that borrowers can repay. Further, lenders often market their products through brokers that do not bear the risks associated with default, as brokers are compensated in up- front fees for the loans they help originate. Some lenders and state officials told us that unscrupulous brokers sometimes deceive originating lenders regarding borrowers’ ability to repay. Even if deceived, lenders who originate the loans and then sell them in the secondary market ultimately may not bear the risk of a loan default. Taken together, these circumstances can undermine efforts to combat predatory lending practices. Market forces provide some incentives to deter secondary market purchasers from purchasing predatory loans because these loans create both credit and reputation risk. However, predatory loans do not in all cases create unusual financial risks or losses for secondary market purchasers. For example, in most states loan purchasers are generally not liable for damages that may have resulted from the origination of abusive loans that they purchased, mitigating much of the legal risk of buying loans that may have violated laws addressing predatory lending. Moreover, loans with predatory features may carry very high interest rates and have barriers to prepayment, which may more than compensate for the increased credit risks associated with subprime loans. However, investors’ insistence on the use of credit enhancements in the securitization process may offset or mitigate the incentives to engage in predatory lending of originators who sell loans to the secondary market. Credit enhancements, which refer to a variety of approaches used to reduce the credit risk of an obligation, are common in securitization transactions, in part because of concerns that originators may try to pass on lower-quality loans. Because the price investors will pay for securities is based on risk as well as return, sellers use the enhancements to lower the risk and thus raise the price of securities. For example, the securities may be overcollateralized by ensuring that the value of the collateral backing the securities—in the case of mortgage backed securities, the face value of the loans—exceeds the value of the securities being offered for sale. The difference provides a “cushion” or reserve against possible credit losses and permits a higher loss rate on the total mortgage pool without endangering payments to the owners of the securities. Securitizers can also include recourse provisions in their loan purchases that require sellers to take back loans in the event of borrower default. As a result of these factors, the degree to which originators of loans sold in the secondary market—including loans with abusive terms—are insulated from credit risks associated with those loans varies, and the profits from selling the loans may vary with the costs of credit enhancement. Secondary market purchasers of residential mortgage loans undertake a process of due diligence designed to minimize legal, financial, and reputation risk associated with the purchase of those loans. Due diligence can play an important role in avoiding the purchase of abusive loans, but cannot necessarily identify all potentially abusive loans. Officials of Fannie Mae and Freddie Mac—which, as noted previously, are relatively recent entrants in the subprime market—are also concerned about risks but say that their due diligence processes are also designed to avoid purchasing loans that may have been harmful to consumers. Other firms’ due diligence is not necessarily specifically intended to avoid loans that may have harmed consumers but rather to avoid purchasing loans that are not in compliance with applicable law or that present undue financial or reputation risks. Loans purchased in the secondary market are usually not purchased individually but rather as a pool of many loans. Purchasers or securitizers of residential mortgage loans try to ensure that the loans in a particular pool are creditworthy and in compliance with law. Purchasers perform a general background and financial review of the institutions from which they purchase loans. In addition, secondary market purchasers of loans nearly always conduct due diligence, or a review and appraisal of confidential legal and financial information related to the loans themselves. Before or after the sale, purchasers may review electronic data containing information on the loans, such as the loan amount, interest rate, and borrower’s credit score. Purchasers also may physically review a sample of individual loans, including items such as the loan applications and settlement forms. Some industry representatives and federal agencies say that appropriate due diligence can play an important role in deterring predatory lending. Participants in the secondary market have an interest in not purchasing loans that may be considered predatory because such loans can create unwarranted legal, financial, and reputation risk. For example, if such loans violate relevant municipal, state, or federal laws, purchasing them could, in some cases, expose the buyers to legal risks such as lawsuits, fines, and penalties. Moreover, predatory loans may be more likely to go into default, increasing financial risk without a commensurate increase in expected returns. In addition, many industry officials told us that reputation risk is a major reason why they want to avoid purchasing predatory loans. Firms involved in the securitization process do not want to be associated with predatory lending activity that could affect their relationships with other firms, community groups, and government agencies. Due diligence reviews for residential mortgage loans are designed to determine the financial characteristics of the loans and to ensure compliance with applicable federal, state, and municipal laws, including those designed to prohibit predatory lending. The reviews also can be designed to detect loans that have potentially abusive terms but are not necessarily violating any law. For example, an electronic review of loan data can flag characteristics such as interest rates that appear excessive but are nonetheless legal. A loan-level file review, in which a purchaser reviews the physical loan origination documents, offers access to more information and can highlight items such as points and fees and the borrower’s capacity to repay. While nearly all purchasers of loans use due diligence to check for legal compliance, purchasers set their own guidelines for what other loan characteristics meet their standards. While due diligence in the secondary market is important, the role that it can play in deterring predatory lending by performing due diligence is limited. For one thing, more than one-third of all new subprime loans are not securitized in the first place but are held in the portfolio of the originating lender and thus do not face securitizers’ due diligence reviews. In addition, even the most thorough due diligence will not necessarily catch all abusive loans or abusive lending practices. For example: Due diligence may not detect fraud in the underwriting or approving of a mortgage. For instance, if a mortgage broker includes false information in a loan application to ensure that a borrower meets an originator’s income requirements, the process of due diligence may not detect it. The data tapes used for loan reviews do not include point and fee information. Thus, securitizers typically cannot detect excessive or unwarranted fees prior to purchasing a loan without a loan-level review. Loan flipping (repeated refinancings) can be difficult to detect because loan files do not necessarily include information on previous refinancings. Fannie Mae and Freddie Mac have relatively strict criteria for the loans they purchase, particularly subprime loans. As noted, both companies limit their purchases to the most creditworthy subprime loans. In April 2000, Fannie Mae issued guidelines to sellers of subprime loans that set criteria designed to help the GSE avoid purchasing loans with abusive features. For example, the guidelines state that Fannie Mae’s approved lenders may not “steer” a borrower who qualifies for a standard loan to a higher cost product, may not make loans without regard to the borrower’s ability to repay, and may not in most instances charge more than 5 percent of the loan amount in points and fees. Freddie Mac issued similar guidelines to its sellers and servicers in December 2000. Further, both companies, like other secondary market purchasers, rely on a system of representations and warranties, under which sellers contractually agree to buy back loans they sell that turn out not to meet the terms of the contract. Fannie Mae and Freddie Mac officials told us that they undertake a series of measures aimed at avoiding the purchase of loans with predatory characteristics. Approved sellers and servicers undergo a background check and operational review and assessment that seeks, in part, to determine whether lenders are able to comply with their guidelines. Fannie Mae and Freddie Mac also require that special steps, such as additional due diligence measures, be taken in purchasing subprime loans. For example, Fannie Mae requires that subprime loans be originated using the company’s automated desktop underwriting system, which helps ensure that borrowers are not being steered to a more expensive loan than they qualify for. Fannie Mae officials say that the automated desktop underwriting system also facilitates traditional lenders that serve subprime borrowers. In addition, both companies said that they undertake extensive and costly due diligence that goes well beyond simple legal compliance and is aimed at avoiding loans that may potentially be considered abusive or detrimental to the borrower. Both companies use an outside contractor to conduct their loan-level due diligence reviews on subprime loans. The contractor has a standard “script” that reviews a large number of data elements related to legal compliance and creditworthiness. However, the contractor told us that Fannie Mae and Freddie Mac add elements to the script to make the review more stringent with regard to identifying potentially abusive practices. For example, Freddie Mac requires the contractor to check whether the lender has gathered evidence of a borrower’s income information directly or relied on self-verification, which can raise uncertainty about a borrower’s capacity to repay. In addition, the contractor told us that Fannie Mae and Freddie Mac are more likely than other firms to reject or require a repurchase if evidence exists that the loan may involve a predatory practice—even if the loan is otherwise legally compliant. According to industry representatives, all purchasers of mortgage loans undertake a process of due diligence, but the process can vary in its degree of stringency and comprehensiveness. For example, while most firms typically pull a sample of loans for a loan-level file review, companies may review anywhere between a few percent and 100 percent of the loans. In addition, companies vary in terms of the data elements they choose to review. Some firms review prior loans made to the borrower in an effort to detect loan flipping, while others do not. Further, some companies may be more willing than others to purchase loans that are considered questionable in terms of legal compliance, creditworthiness, or other factors. As noted earlier, loans that have harmed consumers and that may be deemed “predatory” by some observers are not necessarily against the law, nor do they necessarily increase the risk of the loan. Industry officials told us that while securities firms are concerned with the reputation risk that may come with purchasing abusive loans, the primary function of their due diligence is to ensure compliance with the law and to protect investors by ensuring that loans are creditworthy. Some states have enacted predatory lending laws that have assignee liability provisions under which purchasers of secondary market loans may be liable for violations committed by the originators or subject to a defense by the borrower against collecting the loan. Assignee liability is intended to discourage secondary market participants from purchasing loans that may have predatory features and to provide an additional source of redress for victims of abusive lenders. However, depending on the specific nature of the provision, assignee liability may also have unintended consequences, including reducing access to or increasing the cost of secondary market capital for legitimate loans. For example, assignee liability provisions of a predatory lending law in Georgia have been blamed for causing several participants in the mortgage lending industry to withdraw from the market, and the provisions were subsequently repealed. Antipredatory lending laws in several states have included some form of assignee liability. Typically, with assignee liability, little or no distinction is made between the broker or lender originating a loan that violates predatory lending provisions and the person who purchases or securitizes the loans. Under these provisions, secondary market participants that acquire loans may be liable for violations of the law committed by the original lenders or brokers whether or not the purchasers were aware of the violations at the time they bought the loans. Further, borrowers can assert the same defenses to foreclosure against both originating lenders and entities in the secondary market that hold the loans (the assignees). Depending on the specific provisions of the law, assignees may have to pay monetary damages to aggrieved borrowers. As of December 2003, at least nine states and the District of Columbia had enacted predatory lending laws that expressly included assignee liability provisions, though the nature of these provisions varies greatly, according to the database of state and local legislation we reviewed. Other states have passed predatory lending laws that do not explicitly provide for assignee liability, but debate has occurred in some of these states about whether assignee liability can be asserted anyway under existing laws or legal principles. The federal HOEPA statute includes an assignee liability provision, but, as noted in chapter 2, only a limited number of subprime loans are covered under HOEPA. Assignee liability can take a variety of forms. For example, an assignee can be held liable only in defensive claims (defense to foreclosure actions and to claims regarding monies owed on a loan) or can also be assessed for damages directly, including punitive damages. Similarly, some laws include “safe harbor provisions,” under which assignee liability may not arise if the assignee has taken certain measures to avoid obtaining a high- cost loan. For example, under New Jersey law, no assignee liability arises if the assignee demonstrates, by a preponderance of evidence, that a person exercising reasonable due diligence could not determine that the mortgage was a high-cost home loan. However, many secondary market participants told us that the value of these safe harbor provisions is limited, in part because of difficulties in demonstrating compliance with safe harbor standards. For example, some secondary market participants say that the New Jersey law does not adequately define what constitutes “reasonable” due diligence. The issue of whether to include assignee liability provisions in state and local predatory lending laws has been highly controversial, because such provisions can potentially both confer benefits and cause problems. Assignee liability has two possible primary benefits. First, holding purchasers and securitizers of loans liable for abusive lending violations provides them with an incentive not to purchase predatory loans in the first place. If secondary market participants took greater action—through policy decisions or stricter due diligence—to avoid purchasing potentially abusive loans, originators of predatory loans would likely see a steep decline in their access to secondary market capital. Second, under some forms of assignee liability, consumers who have been victimized by such lenders may have an additional source of redress. In some cases, originators of abusive loans that have been sold in the secondary market are insolvent or cannot be located, leaving victims dependent on assignees for relief from foreclosure or other redress. However, assignee liability provisions may also have the serious if unintended consequence of discouraging legitimate secondary market activity. Secondary market participants say that because they do not originate the loans they purchase, even the most stringent due diligence process cannot ensure that all loans comply with applicable law. In addition, some secondary market participants state that assignee liability provisions require them to make subjective determinations about whether the loans are in compliance with law, and this ambiguity can create legal and financial risk. These factors, industry participants say, can actually end up harming consumers by raising the costs of ensuring compliance with the law and thus increasing the cost of loans to borrowers. Further, if secondary market participants are not willing to risk having to assume liability for violations committed by originators, they may pull out of the market altogether, reducing the availability and increasing the costs of legitimate subprime credit. Finally, if states’ predatory lending laws have different terms and provisions regarding assignee responsibilities, the secondary market as a whole could become less efficient and liquid, further increasing rates on legitimate subprime mortgages. Credit rating agencies have been among the secondary market players that have expressed concern about assignee liability provisions in state predatory lending laws. When a residential mortgage-backed security is created from a pool of loans, an independent credit rating agency examines the security’s underlying loans and assigns it with a credit rating, which represents an opinion of its general creditworthiness. Credit rating agencies need to monetize (measure) the risk associated with the loans underlying a security in order to assign a credit rating. Because assignee liability can create additional legal and financial risks, the major credit rating agencies typically review new predatory lending legislation to assess whether they will be able to measure that risk adequately to rate securities backed by loans covered under the law. We talked with representatives of two major credit rating agencies, firms that issue mortgage-backed securities, and the GSEs Fannie Mae and Freddie Mac to better understand how specific assignee liability provisions might affect their ability to conduct secondary market transactions. In general, the representatives told us that the most problematic assignee liability provisions for secondary market participants are those with two characteristics: Ambiguous language. Credit rating agencies and other secondary market players seek clear and objective descriptions of the loans covered by the statutes and the specific actions or omissions that constitute a violation. For example, some participants cited concerns about an ordinance enacted in Toledo, Ohio, that prohibited taking advantage of a borrower’s “physical or mental infirmities” but did not define what constituted such infirmities. Secondary market participants noted that without objective criteria, there is no way to ensure that an originator has complied adequately with the law. Punitive Damages. Under some assignee liability provisions, the potential damages a borrower can receive are restricted to the value of the loan, while other provisions allow for punitive damages, which are not necessarily capped. Secondary market participants say that the potential for punitive damages can make it very difficult to quantify the risk associated with a security. According to officials of industry and consumer advocacy organizations, the Georgia Fair Lending Act, which became effective on October 1, 2002, was one of the strictest antipredatory lending laws in the nation. It banned single-premium credit insurance and set restrictions on late fees for all mortgage loans originated in the state and, for a special category of “covered loans,” prohibited refinancing within 5 years after consummation of an existing home loan unless the new loan provided a “tangible net benefit” to the borrower. The act also created a category of “high-cost loans” that were subject to certain restrictions, including limitations on prepayment penalties, prohibitions on balloon payments, and prohibitions on loans that were made without regard to the borrower’s ability to repay. The act also included fairly strict assignee liability. Secondary market participants that purchased high-cost loans were liable for violations of the law committed by the originator of the loans they purchased, while purchasers of covered loans were subject to borrower defenses and counterclaims based on violations of the act. The act also expressly made mortgage brokers and loan servicers liable for violations. Remedies available to borrowers included actual damages, rescission of high-cost loans, attorney fees, and punitive damages. Most of the violations were civil offenses, but knowing violations constituted criminal offenses. Shortly after the Georgia Fair Lending Act took effect, several mortgage lenders announced that they would stop doing business in the state due to the increased risk they would incur. In addition, several secondary market participants stated their intention to cease doing business in Georgia. In January 2003, the credit rating agency Standard & Poor’s announced it would stop rating mortgage-backed securities in Georgia because of the uncertainty surrounding potential liability under the act. Standard & Poor’s decision extended to securitizations of virtually all loans in the state, not just those of covered or high-cost loans. The company said that because the act did not provide an unambiguous definition of which loans were covered (and therefore subject to assignee liability), it could not adequately assess the potential risk to securitizers. In addition, the company said that it was concerned about an antiflipping provision that did not adequately define what constituted the “net tangible benefit” to borrowers that certain refinancings had to provide. The two other major credit rating agencies, Moody’s and Fitch, also said that the law would limit their ability to rate mortgage-backed securities in Georgia. In response to these events, the Georgia legislature amended the Georgia Fair Lending Act on March 7, 2003. The amendments eliminated the category of “covered home loans” and the restrictions that had existed for that category of loans. In addition, the amendments greatly reduced the scope of assignee liability under the law, restricting such liability to “high- cost” loans, and then only when the assignee is unable to show that it has exercised reasonable due diligence to avoid purchasing them. In addition, the amendments capped the amount of damages an assignee can face and prohibited assignee liability in class-action lawsuits. Once these amendments were passed, credit rating agencies announced that they would once again rate securities backed by mortgage loans originated in Georgia, and lenders said they would continue to do business in the state. Advocates of the original Georgia law argued that the legislature overreacted to actions by some members of the lending industry, and many activists said that Standard & Poor’s and others had engaged in an orchestrated effort to roll back the Georgia Fair Lending Act. Industry representatives said that the response by lenders and others was a reasonable response to a statute that created unacceptable risks of legal liability for lenders and assignees. Policymakers and industry representatives have frequently cited the events in Georgia as a lesson in what can happen when secondary market participants are held liable for violations by the original lender. Industry representatives assert that assignee liability creates undue risks to the secondary market, or makes assessing risks difficult, and ultimately reduces borrowers’ access to credit. In the case of Georgia, however, it is unclear whether the problem was assignee liability itself or the scope and characteristics of the specific assignee liability provisions contained in the original law. Georgia’s original law created concern in large part because of perceived ambiguities in defining which loans were subject to assignee liability and because assignees’ liability was subject to unlimited punitive damages. Not all states with antipredatory lending statutes that include assignee liability provisions have had lenders and credit agencies threaten to withdraw from the market to the same extent, largely because these laws generally cap an assignee’s liability, create a safe harbor, or contain less ambiguous language. The challenge to states that choose to impose assignee liability is to craft provisions that may serve their purpose of deterring predatory lending and providing redress to affected borrowers without creating an undue adverse effect on the legitimate lending market. A number of federal, state, nonprofit, and industry-sponsored organizations offer consumer education initiatives designed to deter predatory lending by, among other things, providing information about predatory practices and working to improve consumers’ overall financial literacy. While consumer education efforts have been shown to have some success in increasing consumers’ financial literacy, the ability of these efforts to deter predatory lending practices may be limited by several factors, including the complexity of mortgage transactions and the difficulty of reaching the target audience. Similarly, unreceptive consumers and counselors’ lack of access to relevant loan documents can hamper the effectiveness of mortgage counseling efforts, while the sheer volume of mortgage originations each year makes universal counseling difficult. While efforts are under way to improve the federally required disclosures associated with mortgage loans, their potential success in deterring predatory lending is likewise hindered by the complexity of mortgage transactions and by the lack of financial sophistication among many borrowers who are the targets of predatory lenders. In response to widespread concern about low levels of financial literacy among consumers, federal agencies such as FDIC, HUD, and OTS have conducted and funded initiatives designed in part to raise consumers’ awareness of predatory lending practices. In addition, a number of states, nonprofits, and trade organizations have undertaken consumer education initiatives. Prepurchase mortgage counseling—which can include a third party review of a prospective mortgage loan—may also help borrowers avoid predatory loans, in part by alerting them to the characteristics of predatory loans. In some circumstances, such counseling is required. However, a variety of factors limit the potential of these tools to deter predatory lending practices. A number of federal agencies and industry trade groups have advocated financial education for consumers as a means of improving consumers’ financial literacy and addressing predatory lending. The Department of the Treasury, as well as consumer and industry groups, have identified the lack of financial literacy in the United States as a serious, widespread problem. Studies have shown that many Americans lack a basic knowledge and understanding of how to manage money, use debt responsibly, and make wise financial decisions. As a result, some federal agencies have conducted or funded programs and initiatives that serve to educate and inform consumers about personal financial matters. For example: FDIC sponsors MoneySmart, a financial literacy program for adults with little or no banking experience and low to moderate incomes. FDIC officials told us that the program, in effect, serves as one line of defense against predatory lending. The MoneySmart curriculum addresses such topics as bank services, credit, budgeting, saving, credit cards, loans, and homeownership. MoneySmart is offered free to banks and others interested in sponsoring financial education workshops. The Federal Reserve System’s Community Affairs Offices issue media releases and distribute consumer education publications to financial institutions, community organizations, and to consumers directly. These offices also have hosted conferences and forums on financial education and predatory lending and have conducted direct outreach to communities targeted by predatory lenders. OTS and NCUA have worked with community groups on financial literacy issues and have disseminated financial education materials, including literature on predatory lending issues, to their respective regulated institutions. HUD has developed and distributed a brochure titled Don’t Be a Victim of Loan Fraud: Protect Yourself from Predatory Lenders, which seeks to educate consumers who may be vulnerable to predatory lending, especially the elderly, minorities, and low-income homeowners. Federal banking regulators give positive consideration in Community Reinvestment Act performance reviews to institutions for providing financial education to consumers in low- and moderate-income communities. OCC issued an advisory letter in 2001 providing detailed guidance for national banks, encouraging them to participate in financial literacy initiatives and specifying a range of activities that banks can provide to enhance their customers’ financial skills, including support for educational campaigns that help borrowers avoid abusive lending situations. FTC and DOJ disseminate information designed to raise consumers’ awareness of predatory lending practices, particularly those involving fraudulent acts. Brochures and other consumer materials are distributed on the agencies’ Web sites, as well as through conferences and seminars, local consumer protection agencies, consumer credit counselors, state offices, and schools. FTC has also supported public service announcements on radio and television, including Spanish-speaking media. Some of these initiatives are general financial education programs that do not specifically address predatory home mortgage lending, some address predatory lending practices as one of a number of topics, and a few focus specifically on predatory lending. Some of these initiatives are directed to a general audience of consumers, while others are directed toward low- income or other communities that are often the targets of predatory lenders. A number of different media have been used to deliver the messages, including print and online materials, speeches and spot announcements, and materials for the hearing- and visually impaired. In some cases, consumer financial education materials have been produced in a variety of languages, including Arabic, Chinese, Korean, and Spanish. Federal agencies’ consumer education campaigns typically take place in partnership with other entities, including community and nonprofit groups and state and local agencies. Federal agencies have taken some actions to coordinate their efforts related to educating consumers about predatory lending. For example, in October 2003, the Interagency Task Force on Fair Lending, which consists of 10 federal agencies, published a brochure that alerts consumers to potential pitfalls of home equity loans, particularly high-cost loans. The brochure Putting Your Home on the Loan Line is Risky Business describes common predatory lending practices and makes recommendations to help borrowers avoid them. Some state agencies have also sponsored consumer education initiatives that address predatory lending. For example, the Connecticut Department of Banking offers an educational program in both English and Spanish that partners with neighborhood assistance groups and others to promote financial literacy and educate consumers on the state’s antipredatory lending statute. The Massachusetts Division of Banks maintains a toll-free mortgage hotline to assist homeowners about potentially unethical and unlawful lending practices. The hotline helps consumers determine whether loan terms may be predatory and directs them to other sources of information and assistance. The New York State Banking Department distributes educational materials, including a video, that describe predatory lending practices. The department has also conducted educational outreach programs to community groups on the issue. Nonprofits provide a significant portion of consumer financial education on predatory lending, sometimes with support from federal, state, or local agencies. These efforts include both general financial literacy programs with a predatory lending component and initiatives that focus specifically on predatory lending issues. For example, the National Community Reinvestment Coalition, with funding support from HUD, distributes a training module to help communities across the country educate consumers about predatory lending. Some industry trade organizations and companies also have consumer education initiatives related to predatory lending: Freddie Mac has developed the CreditSmart program in partnership with universities and colleges. CreditSmart is a curriculum on credit education that is available online and has been used in academic programs and in community workshops, seminars, and credit education campaigns. Freddie Mac also helps fund and promote the “Don’t Borrow Trouble” campaign, a comprehensive public education campaign with counseling services that is designed to help homeowners avoid falling victim to predatory lenders. The campaign uses brochures, mailings, posters, public service announcements, transit ads, and television commercials. Its media toolkit and marketing consultant services have been provided to the U.S. Conference of Mayors for use in local communities. Fannie Mae supports financial literacy programs through its Fannie Mae Foundation, which sponsors homeownership education programs that focus on improving financial skills and literacy for adult students and at- risk populations, such as new Americans and Native Americans. Fannie Mae also offers a Web-based tool that allows home-buyers to compare loan products and prices. The Jump$tart Program for Personal Financial Literacy, sponsored by a coalition of corporations, industry associations—such as the Insurance Education Foundation and the American Bankers Association Education Foundation—and several government and nonprofit agencies, includes a series of modules covering topics such as managing debt and shopping for credit that are designed to improve the personal financial literacy of young adults. The Mortgage Bankers Association of America, a trade association representing mortgage companies and brokers and the real estate finance industry, disseminates a package of information describing some common warning signs of mortgage fraud and predatory lending, a consumer’s bill of rights, and appropriate contacts for consumers who believe they have been victimized by predatory lenders. The National Association of Mortgage Brokers makes presentations to first-time homebuyers to educate them on the mortgage process and credit reports, among other topics. The American Financial Services Association’s Education Foundation develops educational materials designed to improve consumers’ use of credit and overall financial literacy. Mortgage counseling can be part of general “homeownership counseling” for new homeowners but may also be offered prior to a refinancing. It gives borrowers an opportunity to receive personalized advice from a disinterested third party about a proposed mortgage or other loan. In addition to providing general advice about the mortgage process and loan products, counselors typically review the terms of proposed loans for potentially predatory characteristics. Studies evaluating the impact of homeownership counseling have found that it helps homeowners maintain ownership of their homes and avoid delinquencies, particularly when the counseling is provided one on one. HUD supports a network of approximately 1,700 approved counseling agencies across the country. The agencies provide a wide variety of education and counseling services, including homebuyer education and prepurchase counseling. HUD makes grant funds available to some of these agencies, and a portion of these funds has been earmarked exclusively for counseling for victims of predatory lending. A number of state antipredatory lending laws, such as those in New Jersey and North Carolina, require some lenders to document that a borrower has received counseling before taking out certain types of high-cost loans. In a few cases, however, borrowers may waive their right to receive such counseling. Several states, including Colorado, New York, and Pennsylvania, require lenders to provide notice to borrowers of certain loans that mortgage counseling is available and encourage them to seek it. In testimony before Congress and elsewhere, representatives of the Mortgage Bankers Association, the Consumer Mortgage Coalition, and other industry organizations have promoted the view that educated borrowers are more likely to shop around for beneficial loan terms and avoid abusive lending practices. In searching the literature for studies on the effectiveness of consumer financial education programs, we found evidence that financial literacy programs may produce positive changes in consumers’ financial behavior. However, none of the studies measured the effectiveness of consumer information campaigns specifically on deterring predatory lending practices. The majority of federal officials and consumer advocates we contacted said that while consumer education can be very useful, it is unlikely to play a substantial role in reducing the incidence of predatory lending practices, for several reasons: First, mortgage loans are complex financial transactions, and many different factors—including the interest rate, fees, specific loan terms, and borrower’s situation—determine whether the loan is in a borrower’s best interests. Mortgage loans can involve dozens of different documents that are written in highly technical language. Even an excellent campaign of consumer education is unlikely to provide less sophisticated consumers with enough information to properly assess whether a proffered loan contains abusive terms. Second, abusive lenders and brokers may use high-pressure or “push marketing” tactics—such as direct mail, telemarketing, and door-to-door contacts—that are unfair, deceptive, or designed to confuse the consumer. Broad-based campaigns to make consumers aware of predatory lending may not be sufficient to prevent many consumers— particularly those who may be uneducated or unsophisticated in financial matters—from succumbing to aggressive sales tactics. Third, the consumers who are often the targets of predatory lenders are also some of the hardest to reach with educational information. Victims of predatory lending are often not highly educated or literate and may not read or speak English. Further, they may lack access to information conveyed through the Internet or traditional banking sources, or they may have hearing or visual impairments or mobility problems. Consumer education campaigns have encouraged borrowers to seek counseling before entering into a mortgage loan, particularly a subprime refinancing loan. However, unreceptive consumers, lack of access to loan documents, fraudulent lending practices, and the uneven quality of counseling services can affect the success of these counseling efforts. For instance, some consumers may simply not respond to counseling. Officials at HUD have noted that not all first-time homebuyers avail themselves of prepurchase counseling, and that some consumers who do attend counseling sessions ignore the advice and information given to them. Further, counselors may not have access to loan documents containing the final terms of the mortgage loan. Although lenders are required to provide a good-faith estimate of the mortgage terms, they are not required to provide consumers with the final and fixed terms and provisions of a mortgage loan until closing. Moreover, predatory lenders have been known to manipulate the terms of a mortgage loan (sometimes called “bait and switch”) so that the terms of the actual loan vary substantially from that contained in the good faith estimate. In addition, counseling may be ineffective against lenders and brokers that engage in fraudulent practices, such as falsifying applications or loan documents, that cannot be detected during a prepurchase review of mortgage loan documents. Finally, the quality of mortgage counseling can vary because of a number of factors. For example, one federal official cited an instance of a mortgage company conducting only cursory telephone counseling in order to comply with mandatory counseling requirements. Although some states have mandated counseling for certain types of loans, serious practical barriers would exist to instituting mandatory prepurchase mortgage counseling nationally. HUD officials have noted that instituting a mandatory counseling program for most regular mortgage transactions nationwide would be an enormous and difficult undertaking that might not be cost-effective. Lenders originated about 10 million mortgage loans in 2002 in the United States. The cost of providing counseling for all or many of these loans would be high, and it is unclear who would or should be responsible for paying it. In addition, there is a need for trained, qualified counselors, according to federal officials and representatives of consumer and advocacy groups, and currently no system exists for effectively training large numbers of counselors while maintaining quality control. HUD requires counseling for its reverse mortgages. These mortgages allow homeowners to access the equity in their home through a lender, who makes payments to the owner. Borrowers who receive a home equity conversion mortgage insured through FHA must attend a consumer information session given by a HUD-approved housing counselor. Mandatory counseling for reverse mortgages may be reasonable because these products are complex and subject to abuse. However, reverse mortgages are also relatively uncommon; only approximately 17,610 HUD- insured reverse mortgages were originated in fiscal year 2003. Federally mandated mortgage disclosures, while helpful to some borrowers, may be of limited usefulness in reducing the incidence of predatory lending practices. TILA and RESPA have requirements concerning the content, form, and timing of information that must be disclosed to borrowers. The goal of these laws is to ensure that consumers obtain timely and standardized information about the terms and cost of their loans. Federal agencies, advocacy groups, and the mortgage industry have said that mortgage disclosures are an important source of information for borrowers, providing key information on loan terms and conditions and enabling borrowers to compare mortgage loan products and costs. Representatives of the lending industry in particular have said that disclosures can play an important role in fighting predatory lending, noting that clear, understandable, and uniform disclosures allow borrowers to understand the terms of their mortgage loans and thus make more informed choices when shopping for a loan. However, industry and advocacy groups have publicly expressed dissatisfaction with the current scheme of disclosures as mandated by TILA and RESPA. A 1998 report by the Board and HUD concluded that consumers cannot easily understand current disclosures, that disclosures are often provided too late in the lending process to be meaningful, that the information in disclosures may differ significantly from the actual final loan terms, and that the protections and remedies for violations of disclosure rules are inadequate. Improving the disclosure of pertinent information has been part of efforts under way over the last few years to streamline and improve the real estate settlement process. HUD issued proposed rules in July 2002 to simplify and improve the process of obtaining home mortgages and reduce settlement costs for consumers. HUD stated that the proposed changes to its RESPA regulations would, among other things, “make the good faith estimate firmer and more usable, facilitate shopping for mortgages, make mortgage transactions more transparent, and prevent unexpected charges to consumers at settlement.” Debate over the proposed rules, which as of December 2003 were still under review, has been contentious. Industry groups claim that the proposal would help fight predatory lending by helping consumers understand loan costs up front and thus enable consumers to compare products, or comparison shop. Several advocacy organizations and an industry group say the proposed rules would still allow unscrupulous mortgage originators to hide illegal or unjustified fees. Although streamlining and improving mortgage loan disclosures could help some borrowers better understand the costs and terms of their loans, such efforts may play only a limited role in decreasing the incidence of predatory lending practices. As noted above, mortgage loans are inherently complex, and assessing their terms requires knowing and understanding many variables, including interest rates, points, fees, and prepayment penalties. Brokers and lenders that engage in abusive practices may target vulnerable individuals who are not financially sophisticated and are therefore more susceptible to being deceived or defrauded into entering into a loan that is clearly not in their interests. Even a relatively clear and transparent system of disclosures may be of limited use to borrowers who lack sophistication about financial matters, are not highly educated, or suffer physical or mental infirmities. Moreover, as with prepurchase counseling, revised disclosure requirements would not necessarily help protect consumers against lenders and brokers that engage in outright fraud or that mislead borrowers about the terms of a loan in the disclosure documents themselves. Although little data is available on the incidence of predatory lending among the elderly, government officials and consumer advocacy organizations have reported consistent observational evidence that elderly consumers have been disproportionately victimized by predatory lenders. Abusive lenders are likely to target older consumers for a number of reasons, including the fact that older homeowners are more likely to have substantial equity in their homes and may be more likely to have diminished cognitive function or physical impairments that an unscrupulous lender may try to exploit. Most educational material and legal activity related to predatory lending targets the general population rather than elderly borrowers in particular. Some federal agencies and nonprofit organizations provide consumer education materials on predatory lending that specifically target the elderly. Nearly all federal, state, and consumer advocacy officials with whom we spoke offered consistent observational and anecdotal information that elderly consumers have disproportionately been victims of predatory lending. Little hard data exist on the ages of victims of predatory lending or on the proportion of victims who are elderly. Nonetheless, several factors explain why unscrupulous lenders may target older consumers and why some elderly homeowners may be more vulnerable to abusive lenders, including higher home equity, a greater need for cash to supplement limited incomes, and a greater likelihood of physical impairments, diminished cognitive abilities, and social isolation. On average, older homeowners have more equity in their homes than younger homeowners, and abusive lenders could be expected to target consumers who have substantial home equity. By targeting these owners, unscrupulous lenders are more easily able to “strip” the equity from a borrower’s home by including unjustified and excessive fees into the cost of the home equity loan. Federal officials and consumer groups say that abusive lenders often try to convince elderly borrowers to repeatedly refinance their loans, adding more costs each time. “Flipping” loans in this way can over time literally wipe out owners’ equity in their homes. In addition, some brokers and lenders aggressively market home equity loans as a source of cash, particularly for older homeowners who have limited cash flows and can use money from a home equity loan for major home repairs or medical expenses. In the overall marketplace it is common, and can be advantageous, to tap into one’s home equity when refinancing. However, unscrupulous brokers and lenders can take advantage of an elderly person’s need for cash to steer borrowers to loans with highly unfavorable terms. Further, diseases and physical impairments associated with aging can make elderly borrowers more susceptible to abusive lending. For example, declining vision, hearing, or mobility can restrict elderly consumers’ ability to access financial information and compare credit terms. In such situations potential borrowers may be susceptible to the first lender to offer what seems to be a good deal, especially if the lender is willing to visit them at home or provide transportation to the closing. Physical impairments like poor hearing and vision can also make it difficult for older borrowers to fully understand loan documents and disclosures. Similarly, while many older persons enjoy excellent mental and cognitive capacity, others experience the diminished cognitive capacity and judgment that sometimes occurs with advanced age. Age-related dementias or mental impairments can limit the capacity of some older persons to comprehend and make informed judgments on financial issues, according to an expert in behavioral medicine at the National Institute on Aging. Furthermore, a report sponsored by the National Academy of Sciences on the mistreatment of elderly persons reported that they may be more likely to have conditions or disabilities that make them easy targets for financial abuse and they may have diminished capacity to evaluate proposed courses of action. The report noted that these impairments can make older persons more vulnerable to financial abuse and exploitation. Representatives of legal aid organizations have said that they frequently represent elderly clients in predatory lending cases involving lenders that have taken advantage of a borrower’s confusion and, in some cases, dementia. Finally, both the National Academy of Sciences report and representatives of advocacy groups we spoke with noted that elderly people—particularly those who live alone—may feel isolated and lonely, and may lack support systems of family and friends who could provide them with advice and assistance in obtaining credit. Such individuals may simply be more willing to discuss an offer for a home equity loan made by someone who telephones or knocks on their door, makes personal contact, or makes an effort to gain their confidence. These personalized marketing techniques are common among lenders and brokers that target vulnerable individuals for loans with abusive terms. Federal officials, legal aid services, and consumer groups have reported that home repair scams targeting elderly homeowners are particularly common. Elderly homeowners often live in older homes and are more likely to need someone to do repairs for them. The HUD-Treasury report noted that predatory brokers and home improvement contractors have collaborated to swindle older consumers. A contractor may come to a homeowner’s door, pressure the homeowner into accepting a home improvement contract, and arrange for financing of the work with a high- cost loan. The contractor then does shoddy work or does not finish the agreed-on repairs, leaving the borrower to pay off the expensive loan. The result of lending abuses, such as losing a home through foreclosure, can be especially severe for the elderly. The National Academy of Sciences report noted that losing financial assets accumulated over a lifetime can be devastating to an elderly person, and that replacing them is generally not viable for those who are retired or have physical or mental disabilities. The financial losses older people can suffer as a result of abusive loans can result in the loss of independence and security and a significant decline in quality of life. Moreover, older victims of financial exploitation may be more likely to become dependent on social welfare services because they lack the funds to help compensate them for their financial losses. Elderly consumers represent just one of several classes of people that predatory lenders appear to target. The HUD-Treasury task force report noted that many predatory lenders also specifically target minority communities. Consumer advocacy and legal aid organizations have reported that elderly African American women appear to be a particular target for predatory lenders. This population may be targeted by predatory lenders at least in part because of their relatively low literacy levels—the result of historical inequalities in educational opportunities—which, as discussed earlier, may increase vulnerability to abusive lending. Because elderly people appear to be more susceptible to predatory lending, government agencies and consumer advocacy organizations have focused some educational efforts and legal assistance on this population. Several booklets, pamphlets, and seminars are aimed at helping inform elderly borrowers about predatory lending. In addition, while most legal activities related to predatory lending practices are designed to assist the general population of consumers, some have focused on elderly consumers in particular. Consumer financial education efforts of government and nonprofit agencies and industry associations generally seek to serve the general consumer population rather than target specific subpopulations. However, some federal and nonprofit agencies have made efforts to increase awareness about predatory lending specifically among older consumers. For example: DOJ has published a guide entitled Financial Crimes Against the Elderly, which includes references to predatory lending. In 2000, the agency cosponsored a symposium that addressed, among other topics, financial exploitation of the elderly. OTS has produced an educational training video addressing financial abuse of the elderly. The U.S. Department of Health and Human Services’ Administration on Aging provides grants to state and nonprofit agencies for programs aimed at preventing elder abuse, including predatory or abusive lending practices against older consumers. Supported activities include senior legal aid programs, projects to improve financial literacy among older consumers, and financial educational materials directed at senior citizens. FTC publishes a number of consumer information products related to predatory lending and home equity scams that discuss abusive practices targeted at the elderly. AARP, which represents more than 35 million Americans age 50 and over, offers a borrowers’ kit containing consumer tips for avoiding predatory lenders, supports a toll-free number to call for assistance regarding lending issues, and distributes fact sheets on predatory lending. Some of these materials are provided in Spanish and in formats accessible to the hearing- and visually impaired. AARP also provides information on its Web site that is designed to educate older Americans on predatory lending issues. In addition, the organization has conducted focus groups of older Americans to gather data on their borrowing and shopping habits in order to better develop strategies for preventing older people from becoming the victims of predatory lending. The National Consumer Law Center has developed a number of consumer materials aimed in part at helping elderly consumers recover from abusive loans, including a brochure titled Helping Elderly Homeowners Victimized by Predatory Mortgage Loans. Federal consumer protection and fair lending laws that have been used to address predatory lending do not generally have provisions specific to elderly persons. For example, age is not a protected class under the Fair Housing Act, which prohibits discrimination in housing-related transactions. In addition, HMDA—which requires certain financial institutions to collect, report, and disclose data on loan applications and originations—does not require lenders to report information about the age of the applicant or borrower. However, ECOA does specifically prohibit unlawful discrimination on the basis of age in connection with any aspect of a credit transaction. In the case against Long Beach Mortgage Company noted earlier, the lender was accused of violating ECOA by charging elderly borrowers, among other protected classes, higher loan rates than it charged other similarly situated borrowers. Federal and state enforcement actions and private class-action lawsuits involving predatory lending generally seek to provide redress to large groups of consumers. Little hard data exist on the age of consumers involved in these actions, but a few cases have involved allegations of predatory lending targeting elderly borrowers. For example, FTC, six states, AARP, and private plaintiffs settled a case with First Alliance Mortgage Company in March 2002 for more than $60 million. According to AARP, an estimated 28 percent of the 8,712 borrowers represented in the class-action suit were elderly. The company was accused of using misrepresentation and unfair and deceptive practices to lure senior citizens and those with poor credit histories into entering into abusive loans. The company used a sophisticated campaign of telemarketing and direct mail solicitations, as well as a lengthy sales presentation that FTC said was designed to mislead consumers in general and elderly consumers in particular about the terms of its loans. Some nonprofit groups provide legal services focused on helping elderly victims of predatory lending: The AARP Foundation Litigation, which conducts litigation to benefit Americans 50 years and older, has been party to 7 lawsuits since 1998 involving allegations of predatory lending against more than 50,000 elderly borrowers. Six of these suits have been settled, and the other is pending. The National Consumer Law Center has a “Seniors Initiative” that seeks to improve the quality and accessibility of legal assistance with consumer issues for vulnerable older Americans. One focus of the initiative is preventing abusive lending and foreclosure. The center publishes a guide for legal advocates to help them pursue predatory lending cases, and has been involved in litigation related to cases of predatory lending against senior citizens. Some local legal aid organizations that help victims of predatory lending have traditionally served older clients. For example, the majority of clients assisted by South Brooklyn Legal Services’ Foreclosure Prevention Project are senior citizens. The limited number of education and enforcement efforts related to predatory lending that specifically target older consumers—as opposed to the general population—is not necessarily problematic. Given limited resources, the most efficient and effective way to reach various subpopulations, including the elderly, is often through general education and information campaigns that reach broad audiences. Similarly, enforcement actions and private lawsuits that seek to curb the activities of the worst predatory lenders in general are likely to aid the elderly borrowers that these lenders may be targeting. | While there is no universally accepted definition, the term "predatory lending" is used to characterize a range of practices, including deception, fraud, or manipulation, that a mortgage broker or lender may use to make a loan with terms that are disadvantageous to the borrower. No comprehensive data are available on the extent of these practices, but they appear most likely to occur among subprime mortgages--those made to borrowers with impaired credit or limited incomes. GAO was asked to examine actions taken by federal agencies and states to combat predatory lending; the roles played by the secondary market and by consumer education, mortgage counseling, and loan disclosure requirements; and the impact of predatory lending on the elderly. While only one federal law--the Home Ownership and Equity Protection Act--is specifically designed to combat predatory lending, federal agencies have taken actions, sometimes jointly, under various federal consumer protection laws. The Federal Trade Commission (FTC) has played the most prominent enforcement role, filing 19 complaints and reaching multimillion dollar settlements. The Departments of Justice and Housing and Urban Development have also entered into predatory lending-related settlements, using laws such as the Fair Housing Act and the Real Estate Settlement Procedures Act. Federal banking regulators, including the Federal Reserve Board, report little evidence of predatory lending by the institutions they supervise. However, the nonbank subsidiaries of financial and bank holding companies--financial institutions which account for a significant portion of subprime mortgages--are subject to less federal supervision. While FTC is the primary federal enforcer of consumer protection laws for these entities, it is a law enforcement agency that conducts targeted investigations. In contrast, the Board is well equipped to routinely monitor and examine these entities and, thus, potentially deter predatory lending activities, but has not done so because its authority in this regard is less clear. As of January 2004, 25 states, as well as several localities, had passed laws to address predatory lending, often by restricting the terms or provisions of certain high-cost loans; however, federal banking regulators have preempted some state laws for the institutions they supervise. Also, some states have strengthened their regulation and licensing of mortgage lenders and brokers. The secondary market--where mortgage loans and mortgage-backed securities are bought and sold--benefits borrowers by expanding credit, but may facilitate predatory lending by allowing unscrupulous lenders to quickly sell off loans with predatory terms. In part to avoid certain risks, secondary market participants perform varying degrees of "due diligence" to screen out loans with predatory terms, but may be unable to identify all such loans. GAO's review of literature and interviews with consumer and federal officials suggest that consumer education, mortgage counseling, and loan disclosure requirements are useful, but may be of limited effectiveness in reducing predatory lending. A variety of factors limit their effectiveness, including the complexity of mortgage transactions, difficulties in reaching target audiences, and counselors' inability to review loan documents. While there are no comprehensive data, federal, state, and consumer advocacy officials report that the elderly have disproportionately been victims of predatory lending. According to these officials and relevant studies, older consumers may be targeted by predatory lenders because, among other things, they are more likely to have substantial home equity and may have physical or cognitive impairments that make them more vulnerable to an unscrupulous mortgage lender or broker. |
During the last decade of U.S. military operations, servicemembers have experienced numerous deployments, which increase the risk for posttraumatic stress disorder (PTSD) and traumatic brain injury (TBI), two common conditions that many post-9/11 servicemembers and veterans Additionally, more seriously wounded servicemembers survive suffer.their injuries—injuries that in previous wars would have been fatal—given improvements to body armor and military medicine, but may be left with significant disabilities. Less than 1 percent of the American population has served on active duty in an all-volunteer, professional military—an historic low—resulting in a so-called “military-civilian” gap. While Americans generally hold the military in high regard, there is a reported lack of awareness and understanding of the difficult challenges many post-9/11 servicemembers have faced while transitioning from the military to civilian life. DOD and VA play key roles in offering assistance to servicemembers, veterans, and their families. In particular, DOD has a role in preparing servicemembers, including those who have served from 9/11 onward, for careers beyond the military and helping them transition from active duty to veteran status. After servicemembers separate from the military, VA’s role is generally to help veterans readjust to civilian life. VA provides health care and other benefits to veterans who have served in all conflicts and wars, such as World War II; Vietnam; and Operation Enduring Freedom, Operation Iraqi Freedom, and Operation New Dawn or OEF/OIF/OND. DOD and VA have coordinated in assisting servicemembers and veterans and have jointly developed and implemented policies for the care, management, and transition of recovering servicemembers. These policies address certain issues such as care coordination and the disability evaluation process. In a subsequent but related effort, in May 2012, a joint entity known as the DOD/VA Warrior Care & Coordination Task Force began an inventory of DOD and VA programs and established the Interagency Care Coordination Committee (IC3) to guide the development of shared care coordination policies and practices. Additionally, DOD, VA and other agency partners administer the Transition Assistance Program (TAP), which provides counseling to departing servicemembers, and offers employment assistance and information on federal veteran benefits, among other things.to the revised TAP as Transition, Goals, Plans, Success (Transition GPS). Our past reports, as well as reports by others, have highlighted issues surrounding DOD and VA programs, including issues concerning fragmentation, overlap, and duplication; lack of coordination; and challenges in providing some benefits and services.have recommended in two GAO reports that DOD and VA need to better integrate care coordination and case management programs to reduce duplication and better assist recovering servicemembers, veterans, and their families by helping to ensure the continuity of their care. In response, a joint DOD-VA council approved the implementation of specific initiatives that are intended to improve care coordination procedures by facilitating communication between departments and eliminating duplicative efforts. As of September 2014, the departments had not fully implemented these initiatives, according to a senior DOD official. As previously noted, this report does not address fragmentation, overlap, and duplication in benefits or services. Other federal agencies also offer assistance to servicemembers and veterans and bring to bear a variety of policy tools. For example, as we have previously reported, the Department of Labor administers four employment programs targeted to veterans. In addition, the Department of Housing and Urban Development provides permanent housing and case management for eligible homeless veterans; and the Internal Revenue Service administers tax expenditures, such as tax credits for businesses hiring veterans, as well as other special tax benefits. With various federal programs spread across multiple federal agencies, concerns have been raised that no full accounting of the breadth and effectiveness of these programs exists. Among its aims, GPRAMA seeks to instill a more coordinated and crosscutting perspective to federal performance; that is, improving connections across organizations and policy tools. As we have noted in our past work and OMB states in its guidance, effective implementation of GPRAMA could play an important role in clarifying desired outcomes, addressing program performance spanning multiple organizations, and facilitating future actions to reduce duplication, overlap, and fragmentation.requirements and related OMB guidance that emphasize collaboration include: Federal government priority goals: GPRAMA requires OMB to coordinate with agencies to establish federal government priority goals that include outcome-oriented goals covering a limited number of policy areas, as well as goals for needed management improvements across the government. Agency priority goals: Certain agencies are required by GPRAMA to identify from among their performance goals a limited number of priority goals every 2 years. Each agency’s priority goals are to reflect the agency’s highest priorities, as identified by the head of the agency, and be informed by the federal government priority goals, as well as input from relevant congressional committees. Agency performance plans: Agencies’ performance plans are required to describe how the performance goals (including priority goals) are to be achieved, including a description of how the agency is working with other agencies to achieve its performance goals. Strategic reviews: In its 2012 guidance (and subsequent updates) for implementing GPRAMA, OMB guidance directs agencies to conduct annual strategic reviews of progress toward strategic objectives to inform their decision making, beginning in 2014. Agency leaders are responsible for assessing progress on each strategic objective established in the agency strategic plan, including mission, as well as management or crosscutting objectives. Among other things, the reviews are intended to strengthen collaboration on crosscutting issues by identifying and addressing crosscutting challenges or fragmentation. Federal program inventory: As previously noted, GPRAMA requires OMB to make publicly available a list of all federal programs identified by agencies, and to include the purposes of each program, how it contributes to the agency’s mission and goals, and recent funding information. GPRAMA also requires OMB to issue guidance to ensure that this information presents a coherent picture of all federal programs. OMB is taking a phased approach to implement this provision and published the inventories developed by 24 agencies in May 2013. Using our definition of “program,” we identified 99 healthcare and benefit programs administered by DOD and the military services that address the effects of combat on servicemembers, their families, or both. Some of these 99 programs we identified share a common name, but are independently implemented by each branch of the military service. For example, each military service administers wounded warrior programs. These programs provide care coordination for recovering servicemembers and their families as they transition to and readjust to civilian life. This population includes servicemembers and veterans who suffer from TBI, amputations, burns, spinal cord injuries, visual impairment, and PTSD. Over a third of the 99 programs that we identified offer multiple types of services. A sample of programs we identified is contained in table 1, which we categorize by type of service to illustrate the range of services provided. The full array of programs is listed in appendix II. In addition, a detailed, interactive list of programs is available at http://www.gao.gov/products/GAO-15-24. The three services most common in the 99 programs are support for mental health and substance abuse (50), information and referral (37), and case management or care coordination (15). The number and types of services in the DOD programs are presented in figure 1. In addition, for 73 of the 99 programs (about 75 percent), a servicemember’s or veteran’s family is also eligible for the services or benefits provided. Also, one of these 99 programs—the Federal Recovery Coordination Program—is jointly administered by DOD and VA. Using our definition of “program,” we identified 87 programs administered by DOD and VA that help servicemembers transition and veterans readjust to civilian life. Some of these programs share a common name, but are independently implemented through their respective military service branch, such as the Yellow Ribbon Reintegration Program. As a result, we separately counted each military service’s program. A sample of the programs we identified is contained in Table 2, which we categorize by type of service. The full array of programs is listed in appendix III. In addition, a detailed, interactive list of programs is available at http://www.gao.gov/products/GAO-15-24. The three services most common in the 87 programs are disability benefits or services (19); employment assistance (18); and, case management/care coordination, counseling, information and referral, as well as physical health (the frequency for these types of services is 16). The frequency and types of service offered across these 87 programs are portrayed in Figure 2. We also present the number of programs by type of service provided by each agency in table 3. Nine of the programs are jointly administered by DOD and VA, such as the Pre-Discharge Program for active duty servicemembers or activated National Guard or Reserve members. This program affords these servicemembers the opportunity to file claims for disability compensation up to 180 days prior to separation or retirement from active duty. Many of the 87 programs we identified not only support servicemembers and veterans but also their families. Of the 87 programs, 35 offer services to the families of servicemembers and veterans, and 5 provide support to the caregivers of wounded, injured, or disabled veterans. These caregivers generally include family members and friends, according to a RAND study. Using our definition of “program,” we identified 12 programs administered by DOD, the military services, and VA that raise awareness and understanding of servicemembers’ and veterans’ experiences in combat and coming home. DOD and the military services administer 9 of 12 programs, which are listed in table 4. A detailed, interactive list of programs is also available at http://www.gao.gov/products/GAO-15-24. The lists of programs that we developed are generally not comparable with DOD’s and VA’s 2013 GPRAMA program inventories. As we reported in October 2014, incomparability is due, in large measure, to differences in how agencies defined their programs. OMB’s guidance for developing the inventories allowed agencies to define their programs using different approaches, but within a broad definition of what constitutes a “program.”by outcomes, customers, products/services, organizational structure, or budget structure—and notes that agencies could use a mix of these approaches. The guidance also notes that agencies and their stakeholders use the term “program” in different ways, and that because agencies have varying missions and achieve their missions through different programmatic approaches, such differences are legitimate and meaningful. The guidance presents possible approaches— However, as we concluded in October 2014, the flexibility afforded to agencies limits the usefulness of the resulting inventories as a tool for addressing crosscutting issues because the various approaches agencies used to define their programs prevent meaningful comparisons and connections both within and across agencies. As a result, we recommended that OMB take several actions to improve the inventories, such as revising its program inventory guidance to direct federal agencies to collaborate in defining and identifying programs that contribute to common outcomes. OMB staff agreed with this recommendation and said that they will consider how to address it as they move forward with implementation of the program inventory. Once addressed, this recommendation could help facilitate the creation of a more coherent picture of all federal programs that could be used for promoting collaboration and for identifying potential fragmentation, overlap, or duplication, or gaps in services among federal programs or activities. Within this report, we defined “programs” at a more detailed level than the definition used by DOD and VA for their GPRAMA inventories; that is, we aggregate fewer activities into a program than what is used in DOD’s and VA’s inventories. DOD and VA described their approaches to define a program as follows: DOD uses its budget structures and areas related to each strategic goal, such as Land Forces and Strategic Defense. DOD’s program inventory is grouped and aligned to the five DOD strategic goals. The programs are aligned to the strategic goals that they support. VA designed its approach to closely mirror the budget structure, which aligns to the way VA manages. The list of programs in the inventory is intended to be recognizable to key external stakeholders, including but not limited to Congress and veterans service organizations. None of the programs that we identified on our three lists matches any of the 91 programs that DOD identified on its GPRAMA inventory. DOD’s inventory is organized by its budget and the strategic goals contained in its 2010 strategic plan. For instance, one goal is “preserving and enhancing the all-volunteer force,” and as part of this goal, the strategic plan states that “wounded warrior care” is one of DOD’s highest priorities. Under this goal, DOD cites “hospitals and other medical activities”— including “medical care for active-duty personnel in regional defense and non-defense facilities”—as programs. However, DOD’s list does not contain any of the programs that we included on our lists, such as the Army Wounded Warrior Program, the Federal Recovery Coordination Program, or Warrior Transition Units. With regard to programs that may raise public awareness and understanding, DOD’s inventory cites, “the American Forces Information Service, other personnel support activities dedicated to enhancing morale and improving community relations— including bands and choruses and ceremonial and public relations activities.” In contrast, our list includes, for example, the Statement of Support Program and Army National Guard Funeral and Honors program, as noted previously in table 4. Twenty of 49 VA (or joint DOD-VA) programs we identified that help veterans readjust to civilian life are also listed in VA’s GPRAMA inventory. VA’s inventory contains 93 programs. Some of the programs on both lists include the Readjustment Counseling at Vet Centers, the Post-9/11 GI Bill, and Vocational Rehabilitation and Employment programs. However, VA’s inventory does not include other programs on our lists, such as the Operation Enduring Freedom, Operation Iraqi Freedom, and Operation New Dawn (OEF/OIF/OND) Care Management program and the Transition Assistance Program (a joint DOD-VA program). Only one of the programs on our list of VA programs that raise public awareness and understanding of veterans’ readjustment experiences is listed in VA’s GPRAMA inventory. As noted above, such differences may be due to differing contexts in which the respective lists were compiled. Such differences in how federal agencies define programs go beyond DOD and VA, as we recently reported in our review of government-wide efforts to implement the federal program inventory. VA’s OEF/OIF/OND Care Management program provides case management and care coordination to recovering servicemembers and veterans, aimed at helping them access resources within VA and the local community. This program is available at all VA Medical Centers. We are not making recommendations in this report. We provided a draft of this product to the Departments of Defense (DOD) and Veterans Affairs (VA) for comment. DOD and VA provided written comments, which are reproduced in appendix IV and V. DOD and VA also provided technical comments that were incorporated, as appropriate. DOD and VA officials suggested that we include some additional programs. We reviewed these programs and revised the report to include nine additional programs. The following provides more details. In its comments submitted on October 29, 2014, DOD neither agreed nor disagreed with our findings. In DOD’s technical comments, DOD officials suggested that we delete the Directorate of Mental Health under the first objective. We revised the report by removing this program because it is an office, not a program. DOD officials also suggested that we consider including nearly a dozen additional programs under the first or second objectives. After reviewing these programs, we decided not to include several of them because they did not meet the program definitions we had developed for the objectives. However, we revised the report to include six programs under the first or second objectives: Under the first objective, we revised the report to include (1) the Comprehensive Soldier Family Fitness (CSF2) program, (2) pre- deployment health assessment, (3) post-deployment health assessment, and the (4) post-deployment health reassessment. Under the second objective, we revised the report to include (5) the Army Retirement Services Program and (6) the Army Soldier for Life Program. In its comments, VA generally concurred with our findings. VA officials suggested additional programs for inclusion under the second objective and provided additional information and examples of its efforts related to employment and raising awareness of benefits available to children and spouses of veterans. Several of these efforts do not focus primarily on helping active duty servicemembers transition or veterans readjust to civilian life. However, we revised the report to include (1) the Automobile and Adaptive Equipment program, (2) Veterans Employment Center, and (3) the VA Liaison for Healthcare Program. We subsequently reviewed whether any of the nine additional programs that we added to our report were included in the DOD or VA inventories. Only one of the nine programs was included. Specifically, the Automobile and Adaptive Equipment program was included in VA’s GPRAMA inventory. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, the Secretary of Veterans Affairs, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. This appendix summarizes our work to identify Department of Defense (DOD) and Department of Veterans Affairs (VA) programs as well as to compare the lists of programs that we generated under objectives 1-3 with DOD and VA’s 2013 program inventories that were included in the Office of Management and Budget’s (OMB) program inventory compiled in response to a requirement in the GPRA Modernization Act of 2010 (GPRAMA). To address the first three objectives, we identified DOD and VA programs through the following four-step process: 1. We established a definition for “programs” to clarify the types of DOD and VA programs and activities to be included on our lists because no standard definition of “program” exists. Past GAO work and OMB have defined “program” in very broad terms. For this report, our definitions reflect the specific area of interest specified in the mandate; therefore, we did not attempt to develop a definitive definition. We established a definition for program by reviewing our prior work and other relevant studies on related programs for servicemembers and veterans who have served in recent conflicts. We also obtained input from internal GAO experts on research methods and federal programs for servicemembers and veterans, as well as officials from DOD and VA. In general, we defined “programs or activities” as a federally funded, organized set of activities directed toward a specific purpose or goal that an agency undertakes and is being administered in fiscal year 2014. We further scoped our definition for each of our objectives as follows: Objective 1: DOD or military services’ programs or activities that address the effects of combat—including physical, mental, or social heath—on post-9/11 active-duty servicemembers or their spouses or dependents. Objective 2: DOD, military services, or VA programs that focus primarily on helping active duty servicemembers transition or veterans readjust to civilian life. Objective 3: DOD, military services, or VA programs that focus primarily on raising civilian public awareness of the combat experiences of servicemembers and the readjustment experiences of veterans. For the first objective, we scoped our definition of programs differently than for the second and third objectives. Specifically, for the first objective, although servicemembers and their spouses or dependents must benefit from a program or activity that addresses the effects of combat as we have defined that term, a program or activity does not have to only benefit servicemembers that directly experience combat. For example, the Joint Family Support Assistance Program supports military families who are geographically dispersed from a military installation. This program could support military families in which one or more servicemembers are serving in a combat zone or deployed to Germany (or other noncombat zone) while the family is living stateside. For the second and third objectives, we defined programs as focusing primarily on servicemember transition and veteran readjustment to civilian life as well as efforts to raise public awareness and understanding of servicemembers’ and veterans’ experiences in combat, coming home, and transitioning to civilian life. An example of such a program includes VA outreach and readjustment counseling services through Vet Centers. VA administers other programs that provide interventions or treatments to help certain veterans, such as the homeless and those contemplating suicide. However, we did not include those types of programs or activities because helping veterans readjust to civilian life is not their primary focus. For all three objectives we excluded the following types of programs: Programs conducting research. Programs in which post-9/11 Iraq and Afghanistan servicemembers or veterans are not eligible, such as efforts aimed only at veterans of conflicts or wars prior to Operation Enduring Freedom/Operation Iraqi Freedom/Operation New Dawn (OEF/OIF/OND). Programs developed and administered by individual military installations or VA hospitals specifically for the populations they serve at those locations. For example, for the second objective we excluded the Road to Reintegration, a program designed to serve Michigan veterans with a network of resource providers as they return to civilian life. Thus, our findings are limited to the national perspective. Programs providing a one-way, passive transmission of information (for example, a directory that lists services available). Programs that may have been created or revised to meet our inclusion criteria after fiscal year 2014. The following further elaborates on these definitions. General Definition of Terms for Objectives 1–3 DOD or military services: DOD, Office of the Secretary of Defense (OSD) and all subordinate agencies, offices, and programs under DOD; departments of the Army; Air Force, and Navy (including the Marine Corps); the reserve components for each of the military services, including the National Guard. (We exclude U.S. Coast Guard programs because they are administered by the Department of Homeland Security.) VA: All VA administrations, centers, offices, and programs. Program or activities: Federally funded, organized set of activities directed toward a specific purpose or goal that an agency undertakes and are being administered in fiscal year 2014. These activities may include assistance for health, housing, employment, and family support, as well as various program types (e.g., direct federal programs, direct federal benefits programs, and grants). In addition, our definition included tax expenditures (credits, deductions, deferrals, or preferential tax rates) that are managed or administered by DOD or VA (and related offices and departments as defined above); however, we did not identify any such programs. Active-duty servicemembers: Those who are currently serving on active duty in the United States armed forces. This includes activated members of the National Guard and Reserve under Title 10 (full-time duty in the armed forces) or Title 32 (duty performed for which National Guard receives pay from federal government). Veterans: A person who served in the active military, naval, or air service and who was discharged or released under conditions other than dishonorable. This also includes Title 10 or Title 32 active Guard and Reserve components that have deployed but are still serving in the Reserve Component. Public: The broader civilian community in the United States, including citizens, public and private employers, police, and court systems. Specific Definition of Terms for Objective 1 I. Definition: DOD or military services’ programs or activities that address the effects of combat—including physical, mental, or social heath—on post-9/11 active-duty servicemembers or their spouses or dependents. Specific definitions for this objective: IA. Effects of combat - One or more of the following that results from combat, warfare, or armed conflict: 1. Physical health - care for extremity, hearing, vision, burns, or other physical injuries and pain, as well as clinical case management and coordination support. 2. Mental / emotional health - care for psychological and brain injuries— such as posttraumatic stress disorder (PTSD) psychotherapies and traumatic brain injury (TBI) treatments—substance abuse, suicide prevention, as well as clinical case management and coordination support. 3. Social domains - support for family and caregivers, legal support, non- medical case management, support for reserve components, post- deployment reintegration support for servicemembers and their families, and spiritual support, and other related effects. 4. While servicemembers and their spouses or dependents must benefit from a program or activity that addresses the effects of combat, a program or activity does not have to only benefit servicemembers that directly experience combat. For example, the Joint Family Support Assistance Program supports military families who are geographically dispersed from a military installation. This program could support military families in which one or more servicemembers are serving in a combat zone or deployed to Germany (or other noncombat zone) while the family is living stateside. IB. Criteria for excluding programs 1. Exclude programs that exclusively provide services to post-9/11 active-duty servicemembers who are transitioning to VA or civilian employment or civilian life (these programs are included in objective 2). Specific Definition of Terms for Objective 2 II. Definition: DOD, military services, or VA programs or activities whose primary focus is to help post-9/11 servicemembers transition or veterans or deactivated members of the reserve components readjust to civilian life, including their spouses or dependents. Specific definitions for this objective: IIA. Primary focus: Key reasons for which the program or activity was designed or created (or one of its main missions or objectives) as stated in the agency’s description of the program or activity. IIB. Help: Assist transition or readjustment through services and efforts, such as: providing physical and mental health services; counseling and outreach; training, job placement and support, employment benefits, and career guidance, education benefits; campaigns designed to raise awareness of DOD or VA resources available to post-9/11 servicemembers or veterans or their spouses or dependents; providing technology like assistive technology, equipment; case management, legal support; housing benefits/support; and, support for family or caregivers, benefits counseling, or other related efforts. IIC. Civilian Life: Time after separating from the military, including VA care, services, or benefits; nonmilitary employment; or higher education. IID. Criteria for excluding programs 1. Exclude programs that provide services to post-9/11 servicemembers who remain in the military or transition back to active-duty. (These types of programs are covered in objective 1.) 2. Exclude programs to enhance overall coordination between DOD and VA (e.g., Joint Executive Council). Specific Definition of Terms for Objective 3 III. Definition: DOD, military services, or VA programs whose primary focus is to raise civilian public awareness of the combat experiences of post-9/11 active-duty servicemembers and the readjustment experiences of veterans. Specific definitions for this objective: IIIA. Primary focus: Key reasons for which the program or activity was designed or created (or one of its main missions or objectives) as stated in the agency’s description of the program or activity. IIIB. Raise public awareness and understanding 1. Welcome home and reintegration events in communities and college campuses as well as parades and appreciation events aimed at informing the nonservicemember population. 2. Awareness and appreciation campaigns and events as well as public service announcements aimed at civilians, and efforts to educate business leaders about the skills veterans can provide employers, and other related efforts. IIIC. Criteria for excluding programs 1. Excludes programs and public awareness campaigns aimed specifically at providing assistance, service, or awareness to servicemembers, veterans or their families. (These types of programs are covered in objective 2.) 2. Excludes DOD and VA efforts to provide stakeholder assistance to nonfederal entities, such as nonprofits, that provide support or assistance to servicemembers, veterans, and their families. 2. We identified publicly available sources that contain lists of relevant federal programs. We identified these sources based on discussions with DOD and VA officials and internal GAO experts on research methods and federal programs for servicemembers and veterans, as well as through online searches. Table 5 provides the name and description of each source we used by objective. 3. We used the definitions and sources from steps 1 and 2 to identify the relevant programs for our lists. For the programs included on our lists, we used the sources identified in step 2 to collect information about the (1) program/activity’s name, (2) purpose/objectives, (3) the agency and/or office responsible for its administration, and (4) the population served. For a subset of the programs identified in the searches, we conducted tests to determine the degree to which analysts agreed on the same programs for inclusion. Once we compiled preliminary lists of programs, we provided the lists to internal GAO experts on research methods and federal programs for servicemembers and veterans for review and comment. We modified the lists accordingly. Next, a GAO analyst reviewed all of the sources and documented a judgment about whether the programs identified conformed to the definitions we developed in step 1. A second GAO analyst then reviewed separately the assessment and documented an agreement or disagreement with the initial decision. If any differences emerged, the two analysts discussed the differences and made changes based on a verbal resolution of those differences. For any instances in which the two analysts did not resolve differences, a third GAO analyst adjudicated and a final decision was reached. 4. We sent our preliminary list of programs to officials at DOD and VA for comment and verification. Agencies either confirmed that programs on our preliminary lists should be included, identified those that should not be on our lists, or added programs that were not included on our preliminary lists. We modified the lists accordingly. This four-step process identified 170 separate programs, although some of them are relevant to more than one objective. Specifically, 26 programs are included in more than one objective, such as the Air Force Wounded Warrior Program (AFW2) that addresses the effects of combat and helps wounded and injured servicemembers and veterans transition to civilian life. In addition, some programs share a common name but are independently implemented by each military service branch. For example, the Yellow Ribbon Reintegration Program provides similar services but is independently administered by each service branch. With such programs, we separately counted each military service’s program. In carrying out this four step process, we did not conduct an independent legal analysis of the statutory or regulatory basis or requirements for any of the programs we identified. We used the various documentary and data sources to corroborate one another and determined that the documentary and data sources used together were sufficiently reliable for our descriptive purposes. To help convey our findings, we developed categories to group the types of service provided by the programs. The categories include (1) caregiver support, (2) case management/care coordination, (3) counseling, (4) disability, (5) education assistance, (6) employment assistance, (7) information and referral, (8) mental health and substance abuse, (9) physical health, (10) spiritual health, and (11) other. Because some programs offer more than one type of service, programs can fall into more than one category or service type. Although a service may be included in many programs or activities, the service may not or may be commonly used by servicemembers or veterans. For example, the Transition Assistance Program (TAP) is one program, but the services provided through the program are widespread because all eligible, transitioning servicemembers are generally required to participate in this program. Finally, our scope for the first three objectives was limited to identifying DOD and VA programs based on the types of service provided; we did not analyze these programs to identify instances of fragmentation, overlap, duplication, or gaps in benefits or services. In addition, the programs included in our review were accurate and up-to-date when we issued the report. However, some may change over time. To address the fourth objective, we compared the lists of programs that we generated under objectives 1-3 with DOD and VA’s 2013 program inventories—part of OMB’s federal program inventory compiled in response to a GPRAMA requirement—to identify similarities and differences between the agencies’ inventories and our lists. To help make this comparison, we drew upon prior GAO work on agencies’ GPRAMA program inventories. Although this objective was not included in the mandate, we added it because of the parallels between the mandate and the GPRAMA requirement for developing program inventories. We conducted our work from March 2014 to November 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. Appendix II: Programs Addressing the Effects of Combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of Combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Appendix II: Programs Addressing the Effects of combat (Objective 1) Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Service- member, Veteran, and Family Marine Forces Reserve (MARFORR ES) Psycholog- ical Health Outreach Program (P- HOP) Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix II: Programs Addressing the Effects of Combat (Objective 1) Appendix II: Programs Addressing the Effects of combat (Objective 1) Mental health and substance abuse description of “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” X Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” X Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse description of “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse description of “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse description of “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse description of “Other” Appendix III: Programs for Transitioning and Readjusting to Civilian Life (Objective 2) Mental health and substance abuse description of “Other” In addition to the contact named above, individuals making key contributions to this report were Brett Fallavollita, Assistant Director; James Whitcomb, Analyst-in-Charge, Deitra Lee, and Joel Marus. In addition, key support was provided by Bonnie Anderson, James Bennett, David Chrisinger, Debra Draper, Alex Galuten, Kathy Leslie, Ben Licht, Sheila McCoy, Paul Schearf, Stacy-Ann Spence, Walter Vance, and Amber Yancey-Carroll. | DOD and VA play key roles in offering post-combat support to servicemembers and veterans through various programs and activities. Congress mandated that GAO identify DOD and VA programs designed to address the effects of combat on servicemembers who have served during recent conflicts, assist servicemembers and veterans with the transition to civilian life, and raise public awareness of these issues. In this report GAO identified the number of programs, including the types of services offered that: 1) address the effects of combat on post-9/11 active-duty servicemembers and their families, 2) help post-9/11 servicemembers and veterans transition to civilian life, and 3) help raise public awareness and understanding of servicemembers' and veterans' combat and transition experiences. Also, GAO examined how the lists of programs identified compare with program inventories prepared by DOD and VA pursuant to law. To address these objectives, GAO established and applied its definition of “program.” In general, GAO defined programs as federally funded, organized sets of activities agencies undertake that are directed toward specific purposes or goals and are being administered in fiscal year 2014. GAO also searched publicly available sources that contain lists of programs; sent preliminary lists of programs to DOD and VA for verification; and reviewed relevant reports and 2013 program inventories for DOD and VA. This report contains no recommendations. GAO identified 99 programs provided by the Department of Defense (DOD) to help address the effects of combat on post-9/11 servicemembers, their families, or both. These programs often offer multiple types of services. The services most common are mental health and substance abuse (50), information and referral (37), and case management or care coordination (15). GAO identified 87 programs administered either by DOD or the Department of Veterans Affairs (VA) to help post-9/11 servicemembers and veterans transition to civilian life. Some of the 87 programs offer more than one type of service, such as the Transition Assistance Program, which offers employment, education, and information on veterans' benefits, among other services (see figure). Note: The numbers of programs by type of service do not equal 87 because some programs provide more than one service. The frequency of a type of service does not necessarily indicate its utilization. GAO identified 12 programs administered by either DOD or VA to raise public awareness and understanding of servicemembers' and veterans' experiences in combat, coming home, and transitioning to civilian life. For example, among the nine DOD programs identified, the Briefings with the Boss program convenes employers and National Guard and Reserve members to discuss issues linked to military service and civilian employment. The lists of programs that GAO developed using its definition are not comparable with those in DOD's 2013 program inventory and have only limited comparability with VA's 2013 program inventory. This limited comparability is primarily due to differing contexts in which the lists were compiled. While GAO's lists address specific mandated questions, DOD's and VA's lists were developed following Office of Management and Budget guidance, which generally provides flexibility in how agencies define their programs. Both DOD and VA chose to identify programs at a broad level. For example, DOD's inventory is partially organized by its strategic goals. One goal is “preserving and enhancing the all-volunteer force,” for which wounded warrior care is cited as a high priority. Under this goal, DOD lists “hospitals” and “regional defense facilities” as programs. In contrast, GAO identified individual programs, such as the Army Wounded Warrior Program and Warrior Transition Units, which were not listed in DOD's inventory. |
As the federal government’s landlord, GSA is responsible for, among other things, designing, building, and maintaining its portfolio of approximately 9,000 federally owned or leased buildings and courthouses. According to the AOUSC, 424 of these buildings have a judicial presence ranging from small court spaces that provide judicial services on a part-time basis to large courthouse buildings in major urban areas. To address the Recovery Act’s obligation deadlines, environmental requirements, and large influx of funding, GSA adapted its capital investment process to include a newly created national program management office (PMO) in April 2009 to oversee its Recovery Act program. GSA established the PMO, which included construction and acquisition subject-matter experts, to help regional teams deliver Recovery Act projects on time and in accordance with GSA’s policies and Recovery Act requirements. The PMO provided additional support and oversight to GSA’s capital investment process. The PMO grouped GSA’s 11 regions into three Recovery Act zones. GSA officials stated that the objectives of the zone structure were to create and foster the sharing of ideas and resources and to provide project oversight. GSA zone and regional recovery executive officials were responsible for, among other things, monitoring and reviewing the performance of Recovery Act projects and managing risks at the regional level. GSA selected 259 federal buildings and U.S. courthouses for its Recovery Act program, in addition to a number of small projects. As shown in table 1, these Recovery Act projects fall into two main categories: (1) conversions to green buildings, and (2) new construction or renovations. The Recovery Act directed GSA to use the majority of its funding—$4.5 billion—to convert its federal buildings and courthouses to green buildings, as defined in section 401 of EISA. Among other things, a green building must, throughout the life cycle of the building, as compared with similar buildings, accomplish the following: reduce energy, water, and material resource use; improve indoor environmental quality, including reducing indoor pollution, improving heating and cooling, and improving lighting and acoustic environments that affect occupant health and productivity; reduce negative impacts on the environment, including air and water pollution and waste generation; and consider indoor and outdoor effects of the building on human health and the environment, including improvements in worker productivity, and other factors, considered appropriate by specified green-building officials. GSA’s portfolio of buildings is also subject to federal energy and water conservation requirements and goals established in federal statutes and executive orders. For example, the National Energy Conservation Policy Act, as amended by EISA and the Energy Policy Act of 2005, established energy-efficiency performance standards. EISA amendments require, for example, that agencies—including GSA—apply conservation measures that annually reduce energy consumption resulting in a 30 percent reduction by fiscal year 2015 compared to a fiscal year 2003 baseline to applicable facilities across an agency’s entire portfolio. Similarly, Executive Order 13423 requires federal agencies to reduce their water consumption by 16 percent by the end of fiscal year 2015 compared to a fiscal year 2007 baseline. According to GSA officials, the agency obligated its $4.5 billion in Recovery Act funds to green projects that would help convert federal buildings and courthouses into green buildings and that could be obligated quickly. To reflect these priorities, GSA developed selection criteria for full and partial modernization projects (for both federal The first three criteria buildings and courthouses) presented in table 2.were unique to Recovery Act projects and given the highest priority. The remaining five criteria are those GSA typically uses to select capital investment projects. GSA convened an interdisciplinary team of approximately 20 GSA subject matter experts, including some who would eventually sit on the newly created PMO, to select Recovery Act projects according to the criteria. According to agency officials, GSA’s criteria served as a reference for initial project rankings, and the PMO made some modifications to those rankings to arrive at a final project list, to ensure, for example, that each of GSA’s 11 regions received funding. Once the PMO and initial list of selected projects were created, officials from the PMO would recommend new projects as funds became available due to, for example, cost savings on other projects. In total, GSA used about $800 million of its $4.5 billion green building funds toward 15 full or partial courthouse modernization projects (an average of about $53 million each). EISA’s broad definition of green building attributes provided GSA flexibility in carrying out its first selection criteria, targeting projects that would help transform buildings into green buildings. For example, each of the full or partial modernization courthouse projects we reviewed contained green infrastructure components aimed at reducing energy and water use, such as energy-efficient lighting and upgraded mechanical systems or water-efficient bathroom fixtures. In our review of eight full or partial modernization courthouses, we also found instances at each courthouse where GSA utilized EISA’s broad definition of a green building to incorporate other goals, such as improving indoor environmental quality, fire protection and life safety systems, or building layout. According to GSA officials, each of these projects—which were designed under the supervision of GSA regional officials—were reviewed by GSA’s PMO and legal department to make sure projects supported the goals of EISA. The following examples illustrate how GSA used a portion of its green Recovery Act funds for green infrastructure and other broader uses: At the Hipolito F. Garcia Federal Building and U.S. Courthouse in San Antonio, Texas, GSA installed solar panels and a solar water heater on the roof (fig. 1), a green roof on the interior courtyard, energy- efficient lighting, water-efficient plumbing throughout the building, and a new heating, ventilation, and air conditioning system, among other upgrades. At the Thurgood Marshall U.S. Courthouse in New York City, New York, GSA used $64 million to pay for construction cost increases of the full modernization project. According to GSA officials, costs increased due to unforeseen building conditions that required additional work, funding to remediate asbestos from the historic building, and the higher-than-expected cost of construction in Manhattan at the time. At the Birch Bayh Federal Building and U.S. Courthouse in Indianapolis, Indiana, GSA used a portion of its green funds to complete structural renovations in bathrooms to increase accessibility for people with disabilities. The project also included lead paint and asbestos removal, new carbon monoxide sensors, and fire alarm sprinkler systems. At the George C. Young Federal Building and U.S. Courthouse in Orlando, Florida, GSA regional officials told us they requested and received $12.5 million in additional Recovery Act green project funds to move an elevator pavilion to the building’s exterior and improve the building’s layout (fig. 1). To minimize the execution risk and expedite the execution timing of Recovery Act projects, GSA generally selected projects that had already completed design work. GSA officials said that they used Recovery Act funding to quickly begin or expand construction on these projects, while also identifying ways to incorporate energy savings or environmental improvements into their design. To guide the design process and ensure that these projects contained green elements, GSA established minimum performance criteria (MPC), which we will discuss in greater detail later. Additionally, GSA funded cost escalation for some ongoing modernization projects—that is, projects that needed additional funding to start or complete construction. GSA estimated the return on investment or cost effectiveness of its Recovery Act investments based on a calculation of each investment’s simple payback period. Pursuant to Department of Energy regulations, as a rough measure of cost effectiveness, federal agencies may calculate a simple payback period for projects that demonstrate payback periods significantly shorter than the useful life of such projects. The simple payback period estimates the amount of time it takes to recover the cost of an initial investment, through future energy and water cost savings. An energy or water conservation technology is likely to be cost-effective if its estimated payback period is less than the useful life of that system. In accordance with the National Institute of Building Sciences’ Whole Building Design Guide, GSA can calculate cost effectiveness for all project components within a building as a whole, rather than individually. This process allows the benefits of some technologies to exceed the cost recovery time frames if they are offset by technologies with shorter cost- recovery time frames, up to an average of 40 years. Table 3 shows simple payback period estimates for selected energy- and water-saving technologies installed at the Hipolito F. Garcia Federal Building and U.S. Courthouse in San Antonio. According to GSA’s analysis shown below, project components that recover costs quickly, such as high-efficiency chillers and low-flow plumbing fixtures have been combined with components that take longer to recover costs, such as solar water heaters, for a simple payback period below 40 years. In addition to $4.5 billion in green funds, the Recovery Act provided GSA with $750 million for federal buildings and U.S. courthouses. While GSA generally selected projects that helped it build or acquire new courthouses, other eligible uses included repairs and alternations to existing buildings, building security enhancements, and building operations and maintenance. As of May 2014, GSA had used $257 million of its $750 million-general- purpose funds for seven courthouses and the remainder on federal buildings that did not have a judiciary presence. As shown in table 4, this included construction of a new courthouse, escalation funds for three new courthouses, and the acquisition of three new courthouses GSA originally planned to lease. GSA funded the new courthouse in Austin because it was a high-priority project for the judiciary; funded the escalation costs for three projects that needed additional funding to start or complete construction; and purchased three new courthouses that it had intended to lease because it considered ownership more cost efficient in the long term. We found that GSA management incorporated the seven successful practices for managing large-scale investments to varying degrees at 10 courthouse projects that we reviewed in greater detail. These seven practices, which we identified in our prior work, are listed in table 5. We found that GSA adhered to two practices by demonstrating support from top leadership and generally providing sufficient funding, but GSA experienced mixed results implementing the remaining five practices. Of the 10 courthouses we reviewed, we found that, in general, Recovery Act projects were more likely to be completed on time, on budget, or receive support from judicial tenants when GSA effectively incorporated the management practices. By contrast, when these practices were not fully incorporated, projects were more likely to experience problems and did not always meet tenants’ needs. For example, in a few instances, GSA had to modify projects or replace technologies—actions that can increase costs, delay projects, or increase tenant disruptions. By not incorporating these seven successful practices at each of the 10 courthouses we reviewed, GSA increased the risks that Recovery Act projects were not planned and constructed in the most efficient manner and that impacts to tenants were not minimized. Since GSA’s process for other construction projects is similar to how the agency managed the Recovery Act process, these successful practices may have application beyond managing Recovery Act projects. We found that GSA management did not consistently involve the judiciary in the planning stages of Recovery Act projects and, consequently, found instances where projects did not meet judicial tenants’ needs. Judicial tenants at 2 of the 8 courthouses that responded to our structured questionnaire on this issue said they were involved in scoping Recovery Act projects. Alternatively, 5 respondents that provided a definitive response to our question told us GSA did not involve them in scoping projects or identifying how new building technologies or modifications funded under the Recovery Act would affect them. GSA officials noted that they established protocols to ensure that tenants were included as active members of the project team, however, according to GSA officials, they did not always solicit input when developing the scope of projects— which happened prior to construction—because these were building upgrades that were expected to minimally affect tenants. We found, however, instances where projects did affect judiciary tenants. For example, judicial tenants at the Richard H. Poff Federal Building in Roanoke, Virginia, told us they were not asked about upgrades to lighting and the installation of glass for the windows that later presented safety and operational concerns. Judicial tenants at the building said that the new energy efficient lighting—which automatically turned off when occupancy sensors could not detect movement—turned off in the probation area of the operating courthouse that was accessible to the public, causing safety concerns for those who entered the area. However, according to GSA officials, there was an onsite example of the window treatment for more than a year that tenants were encouraged to review. At the Federal Building and U.S. Custom House in Denver, Colorado, judiciary tenants told us they were not included in scoping the project and identifying new building technologies, and as a result, they told us that the contractors installed energy efficient lights bulbs in historical fixtures that were above the allotted wattage and that the bulbs had to be replaced. GSA management developed mechanisms to actively engage judiciary tenants on Recovery Act projects throughout the construction process, but judiciary tenants at some of the selected buildings reported significant challenges. According to GSA officials, GSA developed a communication template for Recovery Act projects—outlining each project’s scope, schedule, budget, and point of contact—that it shared with judiciary tenants. GSA and Judiciary tenants at all of the 10 courthouses we reviewed also said that GSA held regular meetings with the tenants or provided them with project updates. However, judiciary tenants at 3 of the 10 courthouses told us that GSA did not solicit their input. For example, at the Federico Degetau Federal Building and Clemente Ruiz Nazario U.S. Courthouse in San Juan, Puerto Rico, judiciary tenants said that GSA limited their involvement during construction, and as a result, their input was not obtained on the project’s phased schedule approach that required the closure of all public restrooms in the operating courthouse for a year, except for one restroom on the seventh floor of the adjoining federal building. According to a district judge who sits at the courthouse, trials were delayed from resuming after recesses because it took attendees so long to return. GSA provided training to help ensure that Recovery Act staff had the necessary knowledge and skills, but some projects still encountered legal or operational challenges. GSA also created the PMO—which included additional regional oversight, subject matter experts, and advisors—to reinforce the knowledge and skills of project staff. Judiciary tenants at 4 of the 9 courthouses that responded reported that GSA staff was knowledgeable on Recovery Act projects, but 5 expressed concerns about the knowledge and skills of GSA project staff. In addition, the GSA Office of Inspector General (OIG) reported that GSA project management violated a number of contracting requirements applicable to Recovery Act projects. For example, the GSA OIG reported in 2010 that GSA project staff incorrectly executed a procurement approach, referred to as the construction manager as contractor, for a federal courthouse in Austin, Texas. The GSA OIG concluded that the Recovery Act award was not competitive, as required under the Federal Acquisition Regulation. In addition, in April 2011, the GSA OIG testified before the House Committee on Transportation and Infrastructure that as a result of GSA’s oversight, a construction contract for the Richard H. Poff Federal Building lacked adequate price competition and cost benefit analysis prior to awarding the construction contract.agency used a new contracting method that staff were unfamiliar with, and as a result, project staff did not always follow federal protocols. Since the OIG reported its Recovery Act findings, GSA has increased training for staff on these methods and project managers cannot use contracting methods for which they have not received training, according to GSA officials. According to GSA officials, the Judiciary officials also reported instances where GSA’s project managers lacked the knowledge and skills, including the knowledge to effectively operate the newly installed building systems, inconveniencing judiciary tenants at 3 of the 10 courthouse projects we reviewed. For example, judiciary officials at 2 courthouses reported that GSA had difficulty with new automation systems and, as a result, temperatures varied drastically across rooms. GSA officials told us that building managers receive training on systems; however, the officials acknowledged that it may take building managers about a year to become proficient on new systems. We found that GSA’s project managers were not consistently able to prioritize requirements on Recovery Act projects due, in part, to GSA management’s effort to ensure compliance with relevant laws and overlapping responsibility for Recovery Act projects. As a result, project managers might have had limited opportunities to set priorities, and projects could have been delayed due to additional review. Prior to the Recovery Act, changes to projects were typically performed by project staff in conjunction with regional managers and GSA’s legal department. However, in 2012, during the Recovery Act, the GSA OIG reported that project managers had, in some cases, approved invalid change orders.As a result, GSA subsequently required project managers to submit change orders to the PMO and regional executives for approval and review, in addition to the legal department. When asked, four project managers said they did not find the additional oversight burdensome. However, two project managers told us the additional review had led to some project delays and restricted a project manager’s autonomy and expertise. GSA officials told us that this change was a necessary safeguard against invalid change orders. For some Recovery Act projects, GSA management encountered challenges ensuring that project staff were stable and consistent throughout Recovery Act projects leading to instances of tenant confusion and project delays. Judiciary tenants we interviewed at 5 of the 10 courthouses reported that they consistently dealt with the same GSA staff during the project. At these projects, judiciary tenants generally stated that they were more satisfied with GSA’s project management. These projects were also more likely than other selected projects to be completed on time or early. In anticipation that staff turnover may occur, GSA created a guide for project managers that outlined, among other things, project managers responsibilities in the event that they moved from one project to another. In practice, GSA PMO officials told us that the regions were responsible for managing attrition within their projects. Five of the 10 Recovery Act projects we reviewed experienced turnover with the project manager; judiciary tenants at four of these courthouses told us that the turnover either delayed the project or resulted in additional coordination challenges. In some cases, staff turnover occurred multiple times throughout the project. For example, at the Richard H. Poff Federal Building, judiciary officials reported having three project managers over the course of a 3-year project, and judiciary tenants reported being dissatisfied with GSA’s management. GSA officials told us that they have since developed continuity and succession plans to reduce the impact of staff turnover on construction projects. GSA consistently demonstrated support from top leadership for Recovery Act projects. In the early stages of the Recovery Act program, GSA hired a consulting firm to identify the best governance structure for GSA to manage Recovery Act projects. According to GSA officials, they sought out a system that would identify and elevate problems early. Based on the consulting firm’s recommendation, GSA created the PMO, which included the zone structure and oversight. According to GSA officials, given the success of the PMO (including the zone structure), GSA has retained its Recovery Act management structure since 2010 and has applied it to other capital investment projects, which are currently managed, with the exception of the PMO and zone structure, similar to Recovery Act projects. GSA officials said that keeping the three zones with additional oversight improves the agency’s efficiency managing all capital investment projects. In the spend plan submitted to Congress , GSA generally allocated enough Recovery Act funding to complete 9 of the 10 Recovery Act projects we reviewed, though 5 required some additional funds beyond the Recovery Act. We could not assess the sufficiency of funding at the Federico Degetau Federal Building and Clemente Ruiz Nazario U.S. Courthouse in Puerto Rico because the project has not been completed. However, GSA officials said that it is unlikely that the project’s original scope can be completed with the project’s remaining Recovery Act funds. Of the 5 projects that required additional funds, GSA supplemented its Recovery Act funding with a total of $11 million from its repair and alteration funds; this accounted for less than 2 percent of the these project’s total costs. For example, according to GSA data, the full modernization project at the Prince Jonah Kuhio Kalanianaole Federal Building and U.S. Courthouse in Honolulu, Hawaii cost more than $123 million including about $5 million in non-Recovery Act funds. We also found instances where Recovery Act funds were reallocated among projects to ensure adequate funding. For example, GSA officials told us they requested and received an additional $12.5 million to fund a new entry pavilion tower at the George C. Federal Building and U.S. Courthouse in Orlando, a plan that included moving the entrance of the Courthouse to the back of the building and adding a stairwell compliant with today’s fire safety code. However, we also found that GSA reduced the scope of 3 projects we reviewed. Specifically, GSA project managers at 3 projects told us that they were required to remove items from the project’s scope to address unforeseen building conditions while keeping project costs within budget. In each case, judicial tenants expressed frustration about the elements GSA chose to remove. For example, judiciary officials at Federico Degetau Federal Building and Clemente Ruiz Nazario U.S. Courthouse in Puerto Rico said that unforeseen building conditions forced GSA to cut improvements to the building’s entryway, which was one of the few elements of the almost $85 million project that the public would see. GSA officials said that they hope to complete the entry improvements in the future as part of a separate project. According to GSA cost and schedule data for new construction and full or partial modernization courthouse projects, GSA completed 8 of the 22 Recovery Act projects on time and on budget. One of the on-time, on- budget projects was the Birch Bayh Federal Building and U.S Courthouse in Indianapolis. GSA project managers and judiciary tenants attributed the timely completion to, among other things, good working relationships between GSA and the judiciary. However, 14 of the 22 projects experienced schedule delays or cost overruns. For example, according to GSA officials, the Prince Jonah Kuhio Kalanianaole Federal Building and U.S. Courthouse’s full modernization in Honolulu was completed more than 6 months after originally planned. GSA officials attributed the delay to unforeseen conditions in a federally owned building that had been held by GSA since it was built, including the need for asbestos removal, new electrical wiring, and plumbing issues. GSA also requested an additional $10 million in Recovery Act funds for the Federal Building and U.S. Custom House in Denver to, among other things, increase the project’s scope and address unforeseen building conditions (e.g., asbestos removal). As a result, the project was delayed about 6 months. For one project in San Juan, Puerto Rico, GSA has encountered substantial ongoing management challenges leading to both cost overruns and schedule delays from the original planned completion date of December 25, 2014. According to GSA officials, the project will likely require additional funding beyond its Recovery Act funds, and GSA has yet to determine a new completion date. However, GSA’s data on costs and schedules do not always provide a complete picture about improvements that were or were not made. In at least one instance, advantageous economic conditions allowed GSA to increase a project’s scope while staying within budget. According to GSA officials, in these instances GSA project managers could request to use extra funds for additional green upgrades or GSA could obligate the funds to other projects. For example, GSA officials expected the Hipolito F. Garcia Federal Building and U.S. Courthouse in San Antonio to cost about $50 million. When the awarded bid came in at $31 million, GSA officials commissioned a green-performance study to identify additional environmental improvements that could be made. As a result of the study, the project included $16 million in green upgrades and was GSA’s first LEED (Leadership in Energy and Environmental Design) Platinum project.the project to stay within costs. As previously discussed, GSA reduced the scope at three projects we reviewed because of unexpected courthouse conditions. For example, solar panels were removed from the original project plans for the Richard H. Poff Federal Building in Roanoke. According to GSA officials, they excluded the solar panels in the final project to use the funds instead for asbestos abatement and electrical work. Similarly, at the Prince Jonah Kuhio Kalanianaole Federal Building and U.S. Courthouse in Hawaii, GSA eliminated outdoor building improvements, including landscaping and exterior façade work, among Nonetheless, 3 of our 10 selected projects removed items from other building upgrades to keep projects within budget. According to GSA officials, over the course of the Recovery Act, savings and project needs fluctuated and GSA needed to account for that in its spend plan. As a result, if there were savings, GSA would look for additional opportunities to fund projects, and if there were a shortage of funds, project’s scope would have to be cut. Judiciary tenants at 6 of 10 of the courthouses we studied said that Recovery Act projects did not disrupt court operations. The judiciary tenants attributed this, in part, to good working relationships between GSA and the judiciary. For example, judiciary tenants at 2 courthouses, where tenants remained in the building, told us that although scheduling could be challenging, judicial staff and GSA coordinated in a manner that did not negatively affect operations throughout the entire project. Conversely, judiciary tenants at 4 courthouses reported disruptions and told us that the impacts ranged from moderate to significant. Judiciary tenants described moderate disruptions to include such things as requiring judges to move offices and modify schedules; significant disruptions were said to be such things as unexpected trial delays resulting from the Recovery Act projects. For example, the Richard H. Poff Federal Building was closed for about a week when contractors had to unexpectedly remove the brick façade on the west side of the building for structural and safety reasons. The need to remove the façade—which may have been caused by construction on the building—happened suddenly and, as a result, operations were shut down before employees had time to make alternative work arrangements. While few Recovery Act projects we reviewed affected court operations, judiciary officials at 8 of 10 courthouses cited challenges coordinating with GSA to complete Recovery Act projects and judicial tenants at 4 of these courthouses described working with GSA as very or extremely challenging. Judicial tenants attributed difficult working relationships to factors mentioned previously including GSA’s project management turnover and judiciary tenants’ not having provided input on the scope of projects, as well as remote management, tenants remaining in the building during construction, or changes to contractor schedules, among other things. For example, judicial tenants at the Federal Building and U.S. Custom House in Denver told us that while GSA originally planned to complete work in the evening and on weekends, once project delays occurred, work was performed during the day contrary to the judiciary’s understanding of how the construction would occur and, according to judicial stakeholders, was more disruptive. While coordination challenges existed at selected projects, judiciary tenants at 7 of the 9 courthouses we reviewed where the Recovery Act projects were completed told us they were pleased with GSA’s new construction or modernizations. Judicial tenants highlighted improvements to, among other things, the look and operation of bathrooms, attractiveness of green roofs, temperature regulation, lighting, security, and overall aesthetic appearances. For example, as shown in figure 2, GSA performed a full modernization at the Birch Bayh Federal Building and U.S. Courthouse in Indianapolis including a new heating, ventilation, and air conditioning system; a green roof on the interior courtyard; an improved lobby appearance; lighting and plumbing upgrades; window replacements; and updated juror bathrooms that were accessible to people with disabilities. According to one of the judges, since the renovations, two disabled jurors have served who would have been dismissed from jury duty because of the non-accessible bathrooms prior to the Recovery Act project. Similarly, judicial tenants in Orlando highlighted the improvements to the George C. Young Federal Building and U.S. Courthouse stating that the project, among other things, improved security and air quality. Conversely, judicial tenants at 2 of the 9 completed courthouses were dissatisfied with the completed projects, attributing part of their dissatisfaction to additional safety or security needs, project delays, and the overall inconvenience of the projects compared to the benefits achieved. As previously mentioned, GSA established minimum performance criteria (MPC) to guide Recovery Act investments in green buildings and to measure outcomes. While the MPC are specific to projects funded by the Recovery Act, GSA designed them to address federal environmental requirements that GSA must achieve collectively across its portfolio of buildings. Further, according to GSA officials, the MPC are now applied to all new capital projects. We previously reported that the MPC generally support key federal energy and water conservation requirements and goals, and align with most of the elements of a green building, as established by EISA. The following are examples of the MPC that GSA established for its Recovery Act projects (app. II provides a complete listing of the MPC): Install advanced meters to more accurately measure a building’s real- time electricity, natural gas, steam, and water use. Install on-site renewable energy systems (e.g., solar panels, wind, geothermal, and solar thermal/hot water systems to meet at least 30 percent of the hot water demand). Use occupancy sensors on lighting to conserve energy in areas of the building that are unoccupied. Reduce energy usage by 30 percent based on GSA’s modeled results of expected performance. Reduce indoor potable water use by at least 20 percent based on GSA’s model results for expected performance. Recycle or reuse at least 50 percent of construction and demolition waste generated on a project. While the MPC guided the scoping decisions for Recovery Act projects, GSA did not require all projects to meet all the MPC. Specifically, GSA regional officials were required to consider the MPC relevant to each project’s scope. For example, meeting the MPC for reducing water consumption by 20 percent would only apply to projects with significant plumbing upgrades. Design standards identified in the Energy Policy Act of 1992 (Pub. L. No. 102-486, 106 Stat. 2776, Uniform Plumbing Code (2006), and International Plumbing Code (2006). and the storm-water collection tanks capture up to 10,000 gallons of excess rainwater to be used later for flushing toilets. GSA officials said that not all the MPC could be addressed in some projects. For example, although the MPC directed GSA project managers to include on-site renewable energy systems—including solar panels, solar water heaters, or both—when scoping projects, project managers did not incorporate this MPC at 4 of the 10 courthouses in our review. According to GSA officials, renewable energy systems were not installed because they were not cost-effective, were not feasible, or were not within the scope of the original project. For example, GSA determined that solar renewable-energy systems would not be cost-effective at the Thurgood Marshall U.S. Courthouse because the building’s orientation provided insufficient exposure to sunlight. Although solar panels might have been cost-effective at the George C. Young Federal Building and U.S. Courthouse, GSA provided a waiver for structural reasons, including minimal surface area on the roof for solar panels and insufficient ability of the roof to support the additional weight in hurricane wind conditions. GSA has reported the environmental performance of some technologies and buildings that received funding under the Recovery Act. For example, GSA created the Green Proving Ground program to evaluate how specific technologies, including some installed at Recovery Act projects, have contributed to energy savings. As of the end of fiscal year 2014, GSA had completed and reported results for 15 technologies and plans to report results for 9 more technologies in fiscal year 2016. GSA also analyzed energy usage data for 59 federal buildings—all of which received Recovery Act funds—and reported that collectively the buildings, on average, were using 5.5 percent less energy during the winter of fiscal year 2014 compared to the winter of fiscal year 2008 (the year prior to the Recovery Act). According to GSA, the results were particularly notable because GSA performed this analysis for buildings located in states that had harsh winters in fiscal year 2014. GSA also created the Green Building Upgrade Information Life-cycle Database (gBUILD) to capture Recovery Act project information, including each building’s baseline performance, expected performance, and actual performance achieved from some green building conversions. GSA plans to use the database to analyze and report building performance results. Since the Recovery Act, gBUILD has been expanded to include all of GSA’s buildings with large green infrastructure projects. GSA has not yet evaluated the environmental performance of its Recovery Act projects against the MPC. According to GSA officials, while the agency is currently considering how it might measure building performance against the MPC, the agency has not developed a schedule or plan to analyze results. GSA officials told us they continually monitor building performance, but need at least one year of operational data to accurately compare completed projects against the MPC. However, according to our analysis of GSA’s cost and schedule data, 18 of GSA’s 22 new construction or modernization courthouses have been operational for at least a year and 5 projects have been operational for more than 3 years. GSA officials cited further limitations to their ability to report outcomes of Recovery Act projects. For example, GSA officials said that establishing a representative baseline year against which to measure the MPC is challenging because a number of factors outside of the Recovery Act project—including, for example, building occupancy rates and variability in weather patterns—can influence energy and water consumption. In 2013, a GSA OIG report said that the agency also faces challenges collecting accurate and relevant data to report building performance outcomes—including energy and water use, among other variables. Without evaluating building performance against the MPC, GSA is limited in its knowledge of whether projects have achieved expected outcomes. We have previously reported that agencies need to understand outcomes of their investments to determine which investments provide the greatest value. investing in government facilities would improve a buildings’ environmental performance and provide a significant return on investment. Understanding projects’ outcomes should help inform GSA’s efforts to prioritize future infrastructure investments and could help educate building tenants about improved building performance and demonstrate to the taxpayers that GSA’s investments have provided value. For example, see GAO, RESULTS-ORIENTED GOVERNMENT: GPRA Has Established a Solid Foundation for Achieving Greater Results, GAO-04-38 (Washington, D.C.: Mar. 10, 2004). Since GSA has not measured the progress of its Recovery Act projects toward meeting the MPC, we analyzed GSA’s energy and water usage data for the full or partial courthouse- modernization projects we reviewed against federal portfolio-wide goals upon which some of the MPC were based. We limited our analysis to the 5 full or partial courthouse modernization projects that had completed construction and were operational for at least 1 year. We excluded 2 new courthouses from our analysis because there is no baseline or historical data against which we could compare their performance. We also did not include 3 courthouses that were still under construction during fiscal year 2014, the most recent year for which we have utilities’ data. In its Recovery Act-program plan, GSA stated that its full and partial building- modernization and new- construction Recovery Act projects would be designed to achieve select federal goals. Although the federal goals apply to agency-wide energy and water reductions, GSA tracks individual buildings against the federally mandated baseline. While energy use has declined at 4 of the 5 full or partial modernization courthouses projects we reviewed, only two projects reduced energy enough to meet federal targets. In addition, it is unclear whether these projects meet GSA’s energy reduction goals as outlined in the MPC. Federal agencies were required to reduce their energy use per gross square foot of their building portfolio space by at least 27 percent by fiscal year 2014 and 30 percent by fiscal year 2015, compared with a fiscal year 2003 baseline. We evaluated whether the five courthouses were contributing toward the federal goal by either meeting or exceeding the 27 percent reduction that was expected by fiscal year 2014. Energy usage at the Thurgood Marshall U.S. Courthouse, however, increased in fiscal year 2014 as compared to fiscal year 2003. According to GSA officials, the increased energy usage at the Thurgood Marshall U.S. Courthouse may be attributed to newly installed systems—including air conditioning and ventilation, lighting, elevator systems, and fire alarm and sprinkler systems—that were previously either dormant, non-existent, or partially functioning. Officials also said that changes in occupancy rates and weather from year to year could explain some variability in each building’s energy use. See Table 6 for a comparison of results from fiscal year 2003 to fiscal year 2014. For water usage, we reviewed four full or partial modernization projects and found that, in 2014, all of them contributed toward federal water conservation goals, as shown in table 7. Across their building portfolio, federal agencies were required to achieve at least a 14 percent reduction in water use by fiscal year 2014 and a 16 percent reduction by fiscal year 2015 compared with a fiscal year 2007 baseline.exceeded the fiscal year 2014 and 2015 goals. The Recovery Act provided GSA with an unprecedented opportunity to enhance the energy and environmental performance of aging federal buildings. With this opportunity comes a responsibility to manage projects effectively and demonstrate positive outcomes from these targeted infrastructure investments. GSA’s management of the 10 Recovery Act courthouse projects we reviewed generally aligned with two successful practices for large-scale investments, but did not always align with five other practices. As a result of lessons learned from the Recovery Act projects, GSA reformed some aspects of its project management that did not fully align with those practices but has not addressed other areas. By not fully aligning management of federal buildings with successful practices, GSA may have missed opportunities to more effectively manage projects and develop successful working relationships with building tenants—including better meeting cost and schedule estimates and minimizing inconveniences to tenants. Furthermore, since GSA’s management of other construction projects is similar to how the agency managed Recovery Act projects, going forward, GSA would be better positioned to manage those projects more efficiently and with minimal disruption to tenants if it ensured that the successful practices for large- scale investments were incorporated to the fullest extent appropriate. While GSA used the vast majority of its $4.5 billion in Recovery Act funds to modernize buildings and install green technologies, building performance and outcomes remain unclear. GSA’s limited understanding of building performance and outcomes is particularly a concern regarding its full and partial modernization projects, which have each received an investment of more than $70 million dollars, on average. As GSA continues to invest in large-scale projects to convert federal facilities to high-performance green buildings and improve the overall condition of its portfolio, it is important that the agency improve how it manages future construction projects and make investment decisions based on a strategy that is informed by observed and measurable outcomes from its Recovery Act projects. We recommend that the GSA Administrator take the following two actions: 1. GSA should examine incorporating successful management practices—such as consistently involving tenants at various stages of the project—into its capital investment process to ensure that projects are managed efficiently and that tenant disruptions are minimized. 2. To ensure that GSA’s green Recovery Act projects meet relevant requirements, GSA should analyze environmental outcomes against relevant requirements for each of its full and partial-modernization Recovery Act projects and apply any lessons to future projects. We provided a draft of this report to the General Services Administration (GSA) and the Administrative Office of the U.S. Courts (AOUSC) for review and comment. GSA agreed with our recommendations and said that it has policies and procedures in place to address them. GSA also provided technical comments that were incorporated as appropriate. GSA’s comments are reprinted in appendix III. Judiciary officials from the Prince Jonah Kuhio Kalanianaole Federal Building and U.S. Courthouse in Hawaii reiterated the importance of GSA’s actively engaging stakeholders and having an on-site project manager throughout large construction projects. The judiciary also provided technical comments that were incorporated, as appropriate. As agreed with our offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days. At that time, we will send copies to the Administrator of GSA and the Director of the AOUSC. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. This report examines how the General Services Administration (GSA) used funds from the American Recovery and Reinvestment Act of 2009 (Recovery Act) in buildings that included a judicial presence. We used the term courthouses throughout the report to refer to GSA-operated buildings with a federal judicial presence. This report examines (1) how GSA determined which courthouse projects to fund under the Recovery Act; (2) how GSA’s management of selected Recovery Act courthouse projects aligned with successful practices and whether these projects disrupted judiciary operations, and (3) how, if at all, GSA established environmental performance goals for courthouses funded by the Recovery Act and whether the selected projects met those goals. To identify how GSA determined which courthouses would receive Recovery Act funds, we reviewed GSA’s Recovery Act-planning documents; project selection criteria; prior GAO reports; and relevant legislation and guidance, including the Energy Independence and Security Act of 2007 (EISA), related federal statutes, and executive orders related to GSA’s $4.5 billion in high-performance green (green) Recovery Act funds and its $750 million in funds for federal buildings and U.S. courthouses. We excluded border stations and land ports of entry from our analysis, for which GSA was appropriated $300 million, because none of these facilities have a court presence. To understand how GSA identified allowable technologies within green Recovery Act projects, we summarized portions of EISA that provided information on how to determine if environmental technologies are cost-effective and include environmental characteristics of a green building, respectively. GSA categorized green buildings as full or partial modernizations, limited scope projects, or small projects. We worked with GSA and the Administrative Office of the U.S. Courts (AOUSC) to identify and summarize which Recovery Act projects had any judicial presence and how much funding each project received. We provided examples of specific Recovery Act projects from the ten courthouses we reviewed (see below for more information). To understand how GSA’s management of Recovery Act projects aligned with successful practices and whether projects disrupted judiciary operations, we identified seven successful management practices for large scale investments developed in prior GAO work. While the successful practices were developed for Information Technology (IT) investments, IT stakeholders agreed that these practices have broader applicability, including construction management. We also shared these leading practices with GSA officials who oversaw the Recovery Act program to ask how GSA addressed each practice and incorporated any comments as appropriate; GSA officials did not identify any concerns with applying these successful practices to Recovery Act projects. These practices are also consistent with the leading practices we set forth in our capital decision-making guide.omitted two practices from our analysis. Specifically, we omitted two practices: (1) end users participated in testing of system functionality prior to formal end user acceptance testing and (2) program officials maintained regular communication with the prime contractor. We excluded testing system functionality because, for the majority of Recovery Act work, judiciary tenants would not have expertise to test building systems such as mechanical or plumbing upgrades. We eliminated the practice that calls on officials to maintain regular communication with the prime contractor because this practice was outside the scope of our audit. The GSA OIG has performed a vast body of work looking at contracting issues for Recovery Act projects and, to avoid duplication, we omitted contracting issues from the scope of our audit. Of the nine practices we identified, we We interviewed GSA project staff and judicial tenants—who resided in buildings during construction or would reside once construction was completed—at 10 selected courthouses that received Recovery Act funds to see how their experiences aligned with the successful practices mentioned above and whether projects affected court operations. In addition to interviewing judicial tenants, after interviews, we sent a structured questionnaire to tenants at each courthouse to verify responses captured during initial interviews and collect additional information specific to the seven successful practices. For example, while we asked interviewees in meetings whether projects affected judiciary operations, in the follow-up questionnaire, we ask tenants to rate the impact on 4-point scale–response options included no impact, minimal impact, moderate impact, and severe impact. All judiciary tenants returned the questionnaire, although not every tenant responded to every question. We selected 10 courthouses from among GSA’s 22 large courthouse projects (including 7 new construction projects and 15 full or partial modernization projects). We selected these 10 courthouses—listed in table 1 below—based on the following criteria: (1) project type (new construction or full or partial modernization); (2) project cost (generally selecting among the most expensive projects); (3) project substantial completion date (selecting both completed and ongoing projects); (4) geographic location (selecting projects across GSA’s regions and zones); (5) percentage occupancy by judicial tenants (selecting projects where the judiciary ranged from minor to major tenant); (6) Leadership in Energy and Environmental Design (LEED) certification level (selecting projects that ranged with respect to the number of factors incorporated into the project); and (7) relevant GSA Office of Inspector General (OIG) findings (selecting both projects that had and had not been reviewed by the OIG). We limited our selection from among the large courthouse projects because there was greater risk in spending large amounts of funds under the tight timeframes of the Recovery Act (compared to smaller projects) and because the larger projects would likely be more visible to the tenants and under construction for a longer period of time, resulting in potential obvious benefits or inconveniences to courthouse tenants. Of the 10 courthouse projects we selected, 2 were new construction projects, 6 were full modernization projects, and 2 were partial modernization projects. We conducted semi-structured interviews with GSA and judiciary tenants at 6 courthouses in-person. We interviewed stakeholders from the remaining 4 courthouses over the phone. During the interviews we asked about experiences working together (i.e., GSA and judiciary tenants), whether projects affected court operations, and projects’ goals. We followed-up with judiciary tenants to make sure we had accurately captured their assessments of GSA’s management. Observations with GSA and judiciary tenants at these selected courthouses cannot be used to make generalizations about the views of all GSA project managers or tenants of Recovery Act projects. To identify how, if at all, costs and schedules changed for selected Recovery Act projects, we collected GSA’s data on costs and schedules for all 22 courthouses that were either new construction or full and partial modernizations for years 2009 through 2014. To assess changes in project costs, we compared GSA’s original request to Congress against the final project cost. To assess changes in project schedules, we compared GSA’s planned completion date with the contractor when the project was awarded to GSA’s substantial completion date. We also interviewed GSA project managers to identify how costs or schedules changed and any mitigating factors. We did not evaluate GSA’s cost- estimating process for this report. GSA provided us data as of May 2014. To assess the reliability of GSA’s data we reviewed documentation related to this data source from our prior reports, and agencies’ websites, and asked knowledgeable government officials to provide written responses to our questions about the quality of the data. We determined that the data were sufficiently reliable to provide general trends on GSA’s costs and schedules for Recovery Act projects. Since we only evaluated 22 Recovery Act projects, generalizations should not be made to all projects. Rather, we provide illustrative examples for why costs and scheduled may have changed. To determine how GSA set environmental performance goals for the projects it funded and the extent to which selected projects met their goals, we reviewed agency and regulatory documents and summarized GSA’s minimum performance criteria (MPC) for Recovery Act projects and identified outcomes for select projects. We described how GSA developed building-specific MPC that would also help the agency achieve broader federal environmental goals and requirements, including energy and water reduction requirements, as outlined in various statutes. While GSA is required to meet federal-energy and water-reduction requirements across its entire portfolio of buildings, it also tracks individual buildings against this baseline. To evaluate whether the selection of buildings we reviewed are contributing toward meeting federal energy and water reduction goals, we analyzed GSA’s data on energy usage for 5 of the 10 courthouses we reviewed, and we analyzed GSA’s data on water usage for 4 of the 10 courthouses we reviewed. We did not assess results for the 2 new courthouses because the buildings were not yet constructed in the federally-required baseline comparison years. We also did not assess results for 3 courthouse modernizations that were under construction for part of fiscal year 2014 because we wanted to compare a full year of operational utilities data. We omitted the Hipolito F. Garcia Federal Building and U.S. Courthouse from our analysis of water reductions because of concerns we had regarding the reliability of its water use data. GSA’s MPC for energy and water reductions are developed with a performance-based approach requiring, for example, that buildings achieve a percentage reduction compared to a baseline. We compared building-specific energy and water-use data from fiscal year 2014 to each building’s energy and water use data during the baseline comparison years specified in the agency-wide federal energy and water reduction goals GSA must achieve. Specifically, with respect to energy and water usage, EISA amendments to the National Energy Conservation Policy Act of 2007 require GSA to reduce energy consumption per gross square foot of the buildings it manages by 30 percent by fiscal year 2015 compared with fiscal year 2003, and must reduce water consumption per gross square foot of the buildings it manages by 16 percent by fiscal year 2015 compared with fiscal year 2007, pursuant to Executive Order 13423. To evaluate project outcomes, we calculated energy and water use reductions based on historic utility use data for electric, steam, gas, and oil (none of the courthouses in our selection used coal), and water utilities, provided by GSA. We converted all energy utilities to British Thermal Units and calculated the energy use intensity—British Thermal Units per gross square foot—to compare across our selection of courthouses. Similarly, we calculated the water use intensity—gallons per gross square foot— to compare across our selection of courthouses that had been in operation for the full fiscal year 2014. Our analysis has some limitations, however. Comparing energy or water reductions based on two endpoints can produce misleading results if the baseline or final years do not represent a typical year of the assessed building. For example, many variables can affect the results, making it difficult to attribute results to installed building systems or technologies. Some of the reductions can be attributed to the many green infrastructure enhancements made on the building; other reductions could be explained by a change in building occupancy rates or abnormal seasonal effects in the baseline or final years of measurement that would influence demand for energy. We assessed the reliability of the program data we used by reviewing GSA documentation on GSA’s Energy Usage Analysis System (EUAS), and questioning knowledgeable GSA officials about the quality of the data and controls in place to ensure data accuracy. We determined the data were sufficiently reliable for our purposes. We conducted this performance audit from February 2014 to February 2015, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Mark Goldstein, (202) 512-2834, or goldsteinm@gao.gov. In addition to the contact named above, Keith Cunningham, Assistant Director; Allie Cleaver, Geoffrey Hamilton; John Healey; Delwen Jones; Terence Lam; Joshua Ormond; Melissa Swearingen; and Elizabeth Wood made key contributions to this report. | The Recovery Act provided GSA with $5.55 billion—over three times the agency's 2009 funding for new construction and renovations—to invest in federal buildings and U.S. courthouses. This amount included $4.5 billion to convert federal buildings and U.S. courthouses into green buildings that would reduce energy and water use, among other goals. GAO was asked to review GSA's use of Recovery Act funds as they related to courthouses. This report examines (1) how GSA determined which courthouse projects to fund under the Recovery Act, (2) how GSA's management of selected Recovery Act projects aligned with successful practices and whether these projects disrupted judiciary operations, and (3) how GSA set environmental goals for courthouses and whether selected projects met those goals. GAO reviewed relevant laws and agency documents, collected cost and schedule data on courthouse projects, and analyzed environmental outcomes for 10 projects. GAO selected these 10 Recovery Act courthouse projects, based on project size, type, and location, and interviewed GSA officials and judiciary tenants about GSA's management and coordination. The General Services Administration (GSA) developed eight selection criteria for utilizing its $4.5 billion in high-performing green (green) building funds—or more than 80 percent of its total $5.5-billion budget—under the American Recovery and Reinvestment Act of 2009 (Recovery Act). GSA used almost $800 million of its $4.5-billion green building funds on 15 full or partial modernization projects and the remaining funds were used on federal buildings or limited scope projects. For example, at the Hipolito F. Garcia Federal Building and U.S. Courthouse in San Antonio, Texas, GSA installed solar panels and a solar water heater on the roof, installed a green roof on the interior courtyard, and replaced the building's lighting. In addition, as of May 2014, GSA used $257 million of the $750 million in Recovery Act funds dedicated to federal buildings and U.S. courthouses to construct or acquire seven courthouses. GSA management of selected Recovery Act courthouse projects did not always align with seven successful practices that GAO developed for managing large-scale investments. GAO's more in-depth review of 10 courthouses showed that while GSA generally provided top leadership support and sufficient funding, its management of these Recovery Act projects did not always align with the remaining five practices. For example, judiciary tenants at 3 of the 10 courthouses said that GSA management did not actively engage with judiciary stakeholders during construction. In one case, judiciary officials at the Federico Degetau Federal Building and Clemente Ruiz Nazario Courthouse in Puerto Rico said they were not consulted on the project's phased schedule approach that required the closure of all public restrooms in the operating courthouse for a year, except for one restroom on the seventh floor of the adjoining federal building. For the projects GAO reviewed, when GSA did not incorporate the successful practices, GAO found that projects were more likely to experience schedule delays, cost increases, or lack of tenant support. GAO found that most judiciary tenants were satisfied with the completed projects, although tenants at 4 courthouses said the projects disrupted court operations. GSA set environmental goals by establishing minimum performance criteria (MPC) to guide how it designed green courthouse Recovery Act projects; however, environmental outcomes are not yet known. The MPC included dozens of environmental requirements for projects in areas such as energy, water, and material use. While some Recovery Act projects have been completed for several years and GSA has the necessary data to evaluate projects, GSA officials have not developed a schedule for analyzing building performance against the MPC. GAO evaluated the extent to which the selected courthouses with a year or more of operational data contributed toward the energy and water- reduction goals that GSA used to develop the MPC. GAO found that as of fiscal year 2014, 2 of the 5 courthouses with available data are contributing toward energy reduction goals, and all 4 courthouses with available data are contributing toward water reduction goals. Without evaluating the performance of courthouse projects against the MPC, GSA lacks important information that could guide the agency's future investments in green infrastructure. GAO recommends that GSA (1) examine incorporating successful management practices into its capital investment process and (2) analyze and apply environmental outcomes for green Recovery Act projects. GSA agreed with GAO's recommendations. |
The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) established sequestration to enforce discretionary spending limits and control the deficit. In August 2011, Congress and the President enacted the Budget Control Act of 2011 (BCA), amending BBEDCA. Among other things, the BCA established the Joint Select Committee on Deficit Reduction (Joint Committee), which was tasked with proposing legislation to reduce the deficit by $1.2 trillion or more through fiscal year 2021. The absence of such legislation triggered the sequestration process in section 251A of BBEDCA, known as the Joint Committee sequestration, which is the subject of this report. During fiscal year 2013, several laws changed the timing and amount of sequestration. As a result of those changes, the President ultimately ordered a sequestration on March 1, 2013, to achieve $85.3 billion in budget reductions. Consistent with BBEDCA, the Office of Management and Budget (OMB) calculated the following percentage sequestration reductions based on the funding level set by the CR in effect at that time: 7.9 percent for defense direct spending, 7.8 percent for defense discretionary spending, 5.1 percent for nondefense direct spending—other than Medicare payments and certain health programs, which are limited to 2 percent under BBEDCA, and 5 percent for nondefense discretionary spending. BBEDCA required that the sequestration reductions ordered on March 1, 2013, be applied uniformly, across the board, to nonexempt accounts and their sub-units, known as PPAs. BBEDCA provides that PPAs are identified by appropriation acts or accompanying reports for the relevant fiscal year or, for accounts not included in appropriation acts, with reference to the most recently submitted President’s budget. On March 26, 2013, Congress and the President enacted the Consolidated and Further Continuing Appropriations Act, which provided full-year appropriations to federal agencies and had the effect of reducing the sequestered amount for fiscal year 2013 from $85.3 billion to $80.5 billion.on total sequestered amounts for programs that are funded by permanent The final sequestered amount for fiscal year 2013 is dependent indefinite budget authority, such as entitlement programs like Medicare payments where obligations depend on the number of eligible beneficiaries receiving benefits. Our March 2014 report found that one of the ways agencies responded to sequestration was by using funding flexibilities to mitigate the effects of sequestration where available. These funding flexibilities include reprogramming and transferring funds and using unobligated balances. Reprogramming is the shifting of funds from one program activity to another within an appropriation account for purposes other than those contemplated at the time of appropriation, while transferring is the shifting of funds between appropriation accounts. remain legally available from prior year appropriations could provide agencies with funding flexibility to respond to sequestration. If a multiyear or no-year appropriation is not fully obligated by the end of the fiscal year, the unobligated balance may be carried forward into the next fiscal year and may remain available for obligation. For more information on reprogrammings and transfers, see the glossary of budget terms in appendix VI. enacted on January 17, 2014, did not exceed defense or nondefense spending limits, and therefore did not trigger a sequestration of discretionary appropriations. Nonexempt direct spending, including Medicare payments, will continue to be sequestered automatically for fiscal years 2014 through 2024, as it was in fiscal year 2013. The selected components and their partners reduced or delayed some services to the public and operations in 2013 as a result of sequestration. For example, components of federal agencies reported that their actions included the following: Due in part to personnel actions taken in response to sequestration, international passenger wait times for CBP inspections increased at some airports, and CBP delayed some air cargo inspections. For example, CBP officials reported that sequestration reductions did not leave them with sufficient funds to provide the overtime necessary to fully staff inspection booths, which resulted in increased average wait time for international passengers. From fiscal years 2012 to 2013, wait times increased from 19.7 minutes to 22.8 minutes at one airport and from 20.9 minutes to 26.8 minutes at another. Meanwhile, officials at one CBP field office stated that in some instances, officers could not inspect all cargo in the queue during their normal shift, which meant that some cargo was not inspected until the next shift began, which delayed the release of cargo for shipment. CMS reduced the frequency of certain medical facility inspections. For example, to implement sequestration reductions, CMS reported reducing the frequency of surveys to determine the quality of care and compliance with federal standards at psychiatric hospitals from once every 3 years to once every 4 to 5 years. Surveys of specialized organ transplant centers were reduced from once every 3 years to once every 4 to 6 years. We do not know the effect of the reduced oversight on patient safety or the quality of care provided by the health care facilities. Impact Aid and Title I school districts reduced some services to students. For example, three of the Impact Aid districts reported having to increase class sizes. Officials from one of the districts specifically reported an average increase of two or three students per elementary school class from the prior school year. Meanwhile, officials from one district that received Title I funding told us that the loss of funding contributed to the decision to reduce the number of reading and math specialists who provide extra instruction to students and assist teachers in improving their teaching methods. PIH reduced funding for the Housing Choice Voucher program. As a result, the number of very low-income households receiving rental housing assistance through the program at the end of calendar year 2013 declined by about 41,000 (2.2 percent) compared to the end of calendar year 2012 primarily due to sequestration. DOD reduced military training and readiness activities, such as canceling or limiting training, which the agency reported could increase the number of non-deployable units, decrease surge capacity to meet additional requirements with ready forces, and lead to skills gaps. In some instances, the effects of sequestration compounded other reductions in federal, state, and local funding sources. Representatives of a medical provider association have reported that the 2 percent reductions to Medicare payments required by sequestration compounded other reductions in payments. Payment reductions can result from the annual rate setting process for providers or specific legislative actions. Further, all of the seven Title I and Impact Aid school districts we spoke to told us that cuts to state funding in prior years had already reduced their budgets, which were further cut as a result of sequestration. In other cases, program partners supplied resources, where available, to mitigate the effects of sequestration. Officials at certain state survey agencies that we spoke to, which carry out health care facility safety inspections and investigations on behalf of CMS, said they would use additional state funds when necessary to compensate for lower federal funding levels and complete high-priority inspections.reserves accumulated from prior years to avoid terminating housing vouchers. In addition, officials at one of the four PHAs we interviewed told us their local government provided funding for public housing—which it does not usually do—to mitigate the effects of sequestration. Similarly, some PHAs used funding However, we found that in some cases the effects of sequestration were unknown because it is difficult to isolate the effects for some programs and activities that receive funding from multiple sources. For example, the effects of the 2 percent sequestration of Medicare payments are difficult to quantify due to difficulty in isolating the effects of sequestration from other factors that increased or decreased payments to providers, as well as possible changes in provider behavior to compensate for the sequestration reductions. Similarly, it is difficult to isolate the specific effects of sequestration on Title I school districts because Title I funding typically makes up a small portion of the school district’s total funding compared to state and local sources. In addition, because of the statutory formula for Title I, a reduced Title I allocation could be a result of factors other than sequestration, such as decreases in the formula count of children or reduced state per pupil expenditures. Planning for sequestration varied among the selected federal components. Some planning efforts were more centralized and occurred primarily at the agency level. For example, OESE and PIH largely followed sequestration plans set by Education and HUD, respectively. By contrast, CMS planned for sequestration primarily at the component level by identifying certain activities as spending priorities, in consultation with the HHS budget office. CBP headquarters generally managed planning for the required budgetary reductions and delegated implementation decisions affecting operations to program offices. In some cases where sequestration planning primarily occurred at the component level, technical questions posed challenges. CMS faced technical challenges in applying sequestration in accordance with the law and changing budget parameters. Specifically, CMS had difficulty determining all of the types of provider payments that would need to be cut and which funding was subject to special sequestration rules. Similarly, CBP budget officials told us that applying sequestration to fee accounts was more difficult than other accounts due to uncertainty over whether fee accounts would be exempt from sequestration, as well as uncertainty about how to apply sequestration cuts to fee accounts. Our March 2014 report similarly found that many agencies faced challenges in applying sequestration to certain programs, such as those funded through user fees and trust funds. We made two recommendations that could help alleviate some of the uncertainty for potential future sequestrations. Specifically, we recommended that OMB document and make publicly available its decisions regarding how sequestration was implemented and issue guidance directing agencies to formally document the decisions and principles used to implement sequestration for potential future application. OMB agreed with our recommendation and plans to publish its criteria used for making determinations about how sequestration was implemented in its guidance to agencies, OMB Circular No. A-11, Preparation, Submission, and Execution of the Budget, but did not specify when this guidance would be available. In addition, uncertainty surrounding the timing and amount of sequestration limited the components’ ability to provide substantive communication to its program partners and recipients. For example, CMS officials told us that, because sequestration took effect late in the fiscal year, it was difficult to provide timely communication to state survey agencies that would allow them to adequately plan their budgets. Recipients of PIH Indian Housing Block grants told us that uncertainty surrounding the fiscal year 2013 federal budget process presented challenges because they did not receive the full amount of their grants from HUD until several months into the calendar year. These findings are consistent with our March 2014 report, which found that uncertainty over if and when sequestration would occur limited agencies’ communication with stakeholders. To implement sequestration, federal agencies and components had to analyze each budget account separately to determine its PPAs in accordance with section 256(k)(2) of BBEDCA. Section 256(k)(2) of BBEDCA provides that PPAs shall be identified within the appropriation act or accompanying report for the relevant fiscal year covering the budget account, or for accounts not included in appropriations acts, as delineated within the most recently submitted President’s Budget. We reviewed a purposeful, nonrandom sample of five PPAs from each of the four nondefense components. We found that agencies complied with the criteria set forth in section 256(k)(2) in identifying each of the PPAs in our sample. In some cases, certain program characteristics limited the actions available to components for implementing sequestration. Officials from OESE and PIH told us that they had few options for implementing sequestration because some of their largest programs are based on eligibility formulas—established by law in some cases—or the funds are disbursed to program partners to fund various services to the public. As a result, the component could only achieve the required spending reductions by reducing the amount of the funds distributed to eligible partners or recipients. Partners and recipients therefore had reduced federal funds available for services. For example, eligibility criteria and formulas for allocating Title I grant funds are established by law and sequestration generally reduced the grant amounts that states and eligible school districts would have received absent sequestration. Similarly, CMS had little flexibility in applying sequestration cuts to Medicare payments because, with few exceptions, under BBEDCA all types of Medicare payments were subject to the 2 percent sequestration. Therefore, Medicare fee-for-service providers and Medicare Advantage and prescription drug plans had to absorb the reduction. In addition, some agencies had legal mandates that constrained their implementation options. For example, CBP is required to maintain a certain number of Border Patrol agents, which limited available personnel actions. In cases where officials did have some discretion in applying sequestration reductions, components reported that they had to make trade-offs to protect higher priority activities in their resource allocation decisions. For example, the Border Patrol did not apply the required reductions evenly across sectors because operational demands were higher in some sectors than others. Further, CMS chose to maintain funding for implementation of the federal health insurance exchanges despite the reductions. Similarly, within DOD, the military services sought to protect training requirements for deployed and next-to-deploy forces. To do this, DOD took actions such as canceling or limiting training for forces not preparing to deploy in fiscal year 2014. Furthermore, similar to our March 2014 report, case study components implemented sequestration cuts by, for example, reducing training and travel, reducing program management and support services, and rescoping or delaying grants. Previously initiated efficiency efforts helped components absorb some of the required reductions. For example, CBP was better positioned for sequestration, according to officials, due to efficiencies implemented over the past several years in response to declining budgets. Similarly, according to CMS officials, an initiative to improve the efficiency of its facility inspections that began in 2011 helped CMS plan for the fiscal year 2013 sequestration. Consistent with our March 2014 report, we found that actions components took to mitigate the effects of sequestration on mission priorities will not be available to the same extent, if at all, in future years. Specifically, CBP officials told us that it will be more difficult to implement sequestration in future years without adverse effects on their missions because actions taken in fiscal year 2013—such as reducing funding for equipment and fuel—will be difficult to replicate. CMS officials also told us that future cuts would be more difficult to implement because, for example, carryover balances may not be available to the same extent in future years. Similarly, DOD used portions of available unobligated balances from prior years to mitigate fiscal year 2013 sequestration reductions, but the agency may have lower prior year unobligated balances available to rely on in future years. Further, in some cases program partners, such as tribally designated housing entities and PHAs, used funding carried over from the previous year or their own reserve funds, but they may have fewer of these funds available in future fiscal years. Sequestration reduced funding for the partners and recipients that carry out federal programs, affecting services to the public and federal agency operations. These case studies illustrate how some spending reductions at the federal level ultimately reduced funding for program partners operating at the local level, which resulted in effects such as less frequent inspections of certain medical facilities; fewer households receiving housing vouchers; and reduced services for students in some school districts. In addition, these case studies provide further evidence that the uncertainty surrounding the timing and amount of sequestration hampered communication with program partners and recipients. This uncertainty limited the abilities of states, tribes, and other partners to effectively plan to manage their operations with limited resources. OMB’s implementation of the recommendations in our March 2014 report would facilitate agencies’ planning and implementation for a potential future sequestration by documenting federal agencies’ and OMB’s decisions and principles for planning for and implementing sequestration. Publicly available documentation would allow agencies and their program partners and recipients to build institutional knowledge that could better position them to implement a potential future sequestration. Some cost-savings strategies used by components and their program partners—such as deferring maintenance for schools, public housing units, and Border Patrol vehicles—cannot be continued indefinitely. There is a limit to agencies’ ability to achieve efficiencies and budget reductions by deferring or reducing funding for lower priority activities and agencies have limited authority to reprioritize many activities. As we previously reported, implementing future budget reductions will likely require Congress and the executive branch to reexamine how agencies carry out their missions. We provided a draft of this product to the Secretaries of DHS, Education, HHS, and HUD, and the Director, OMB for comment. DHS, Education, HHS, and HUD provided technical comments that were incorporated, as appropriate. OMB did not provide comments. We are sending copies of this report to DHS, Education, HHS, HUD, OMB, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions about this report, please contact Michelle Sager at (202) 512-6806 or sagerm@gao.gov or Edda Emmanuelli Perez at (202) 512-2853 or emmanuellipereze@gao.gov. Contact points for our work at individual agencies are shown appendixes I through IV of this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. CBP headquarters, Border Patrol sector, and OFO field office officials cited effects resulting from sequestration in three areas: (1) services to the public, (2) operations, and, (3) CBP’s workforce. Services to the public: OFO officials from the Houston, Los Angeles, and New York field offices cited effects on cargo operations resulting from sequestration. Specifically, to ensure that international air passenger wait times were kept to a minimum in fiscal year 2013, these three field offices chose to shift officers who typically inspected cargo to the air passenger environment. shift in resources, compounded by reductions in overtime, led to some delays in air cargo inspections. Officials from this field office stated that in some instances, officers could not inspect all cargo in the queue during their normal shift. As a result, some cargo was not inspected until the next shift began, delaying the release of cargo for shipment. CBP generally calculates air passenger wait times as the time interval between the arrival of the aircraft and the processing of the passenger by a CBP officer at the primary booth, less the passenger’s walk time. FEPA because it was instituted by the Federal Employees Pay Act, applies to all other positions in OFO (about 20 percent of the workforce, according to OFO). According to officials from the Airports Council International-North America, wait times had been a persistent issue over the last several years. OFO headquarters officials explained that sequestration reduced funding available to pay overtime necessary to fully staff inspection booths, which resulted in these increased wait times. Operations: According to USBP officials, sequestration affected agents’ ability to patrol remote borders because it resulted in reduced funding for overtime, among other things. USBP officials stated that Border Patrol agents typically need to work beyond their 8-hour shifts and claim overtime for the additional hours they spend on duty. According to CBP budget officials, agents may claim other types of overtime pay, other than AUO, for hours worked beyond their 8-hour shifts depending on the type of duties performed during this time and whether the work was scheduled in advance. However, AUO is the primary overtime for Border Patrol agents. In January 2014, for reasons unrelated to sequestration, DHS suspended AUO for certain positions, including those for full-time instructors and employees working in component headquarters offices, pending further review of AUO policies and practices. the Yuma sector are more than 3 hours away from Yuma sector headquarters, requiring significant use of AUO, according to sector officials. Likewise, USBP reported that a reduction to its vehicle maintenance, repair, and fuel funding resulted in agents traveling less frequently to remote sector locations, which led to reported effects on CBP’s operations. decrease in miles driven compared with miles driven in fiscal year 2012. For example, the Yuma sector reported about 13.27 million miles driven in fiscal year 2013 compared with about 19.80 million miles driven in fiscal year 2012; the Grand Forks sector in North Dakota reported about 2.4 million miles driven in fiscal year 2013 compared with about 3 million miles in fiscal year 2012. Yuma officials we spoke with stated that they discontinued the use of vehicles in need of repairs to reduce fleet-related costs in fiscal year 2013. Yuma officials stated that, as a result, their sector went from 90 percent vehicle availability before sequestration to 70 to 80 percent availability afterwards, thus limiting the number of miles patrolled. Officials from the Blaine sector stated that they placed two agents per vehicle to reduce fuel usage, which affected the miles of border patrolled in a given day. Blaine officials stated that they could not patrol one of their distant zones with optimal frequency as a result of the reductions to fuel. According to CBP’s Office of Administration, operational offices manage fuel and maintenance budgets for their vehicles. Accordingly, the Office of Administration was not able to provide definitive data to support reduced fuel and maintenance funding due to sequestration. this also had an effect on staffing and operations because home-to-work authorizations allow personnel to use a government vehicle for official purposes, which may include travel between the individual’s residence and various locations required for the performance of field work. Between March and June 2013, 9 sectors reported to Border Patrol headquarters that these reductions had led to delays in agents’ response times. For example, the Big Bend sector reported that an agent was delayed in arriving at a scene and subsequently county officials were required to release 10 subjects believed to be illegally in the United States. Documentation provided by OFO indicated that, in fiscal year 2013, OFO experienced a reduction in some enforcement actions at ports of entry, such as those related to the inspection of cargo and, seizures of inbound For example, between April and July 2013, OFO ammunition and drugs. reported that inspections of regulated cargo declined by about 21 percent, inbound ammunition seized decreased by about 79 percent, fraudulent documents intercepted at ports of entry decreased by about 15 percent, and heroin confiscations decreased by about 21 percent.Chicago field office officials stated that to prioritize the processing of people and goods and keep air passenger wait times down, as directed by OFO headquarters, the office limited its enforcement efforts in fiscal year 2013. Chicago officials expressed concern regarding potential long- term effects of declining enforcement efforts; their field office conducted fewer contraband exams per month, as well as passenger interviews, and outbound currency seizures during fiscal year 2013. According to Chicago field office officials, Chicago O’Hare International Airport experienced a 6 percent increase in arriving passenger volume in fiscal year 2013, so they would have expected these enforcement numbers to increase, not decrease. For example, CBP workforce: As of April 1, 2013, CBP suspended all nonmandatory training as a result of sequestration. Between March and June 2013, 6 Border Patrol sectors reported the cancellation of training classes ranging in topics from hazardous materials operations to employee supervision. Border Patrol and OFO officials we spoke with expressed concern regarding the effects of this canceled training on employees’ skill sets. Officials from the Blaine sector stated that nonmandatory training is essential to their workforce. For instance, Blaine sector officials stated that nonmandatory training classes that were canceled in fiscal year 2013 provided valuable skills, such as training in high-speed pursuit, leadership, weapons of mass effect, and incident command system. Officials from the Rio Grande Valley sector stated that some specialty training, such as canine training, was also canceled in fiscal year 2013 as a result of limited travel funding for their agents. Border Patrol and OFO officials—those in headquarters and in the field— also expressed concern regarding the effect of sequestration on employee morale. As a result of CBP hiring restrictions for positions other than agents and officers, officials from the Rio Grande Valley and San Diego sectors stated that agents were asked to perform administrative Officials from the Chicago, tasks, outside of their scope of responsibility. Los Angeles, and New York field offices stated that employee morale was affected as a result of asking officers and support staff to do more with fewer resources, including performing duties typically completed by mission support staff. According to CBP budget officials, CBP was better positioned to plan for and address further budget reductions in fiscal year 2013 because prior to sequestration it had taken efforts aimed at reducing costs and streamlining operations. As it became more certain sequestration would occur, CBP’s headquarters initiated planning as the reductions necessary to comply with sequestration evolved. After the sequestration order, CBP headquarters generally managed budgetary reductions and delegated implementation decisions affecting operations to program offices. According to CBP headquarters officials, it would be challenging for CBP to replicate some of these actions in future years depending on the levels of and conditions on any future funding. According to CBP officials, cost savings measures implemented prior to sequestration helped the component address reductions resulting from sequestration. For example, prior to sequestration, CBP implemented or expanded initiatives, such as Automated Passport Control and trusted traveler programs, to expedite screening procedures at ports of entry. OFO and air travel association officials stated that the implementation of Automated Passport Control had an effect on efficiently processing international air passengers at airports and managing wait times. In addition, CBP took steps prior to sequestration to reduce spending, such as limiting hiring and reducing operating expenses. Specifically, beginning in July 2012, CBP restricted non-agent/officer hiring and filled open positions only from within CBP. In addition, individual sectors and field offices took steps to operate more efficiently in fiscal year 2013 and beyond. For example, in August 2011 the Rio Grande Valley sector partnered with CBP’s Office of Air and Marine to institute a bulk fuel program that, according to this sector, saved CBP an average of approximately $1,200 per month through reduced fuel costs.officials at OFO’s Chicago field office stated that they chose to reduce overtime usage by about one-third from February through May 2013, prior to the sequestration order, to ensure that the Chicago field office would have enough funding to cover overtime costs in the peak summer travel period. According to CBP budget officials, CBP headquarters began to plan for sequestration in November 2012 and led planning efforts across CBP’s program offices by providing the offices with estimated funding reductions that they could use to prepare for sequestration. CBP adapted its sequestration plan as its anticipated reductions changed prior to and after the March 1, 2013, sequestration order. Table 2 provides a timeline of the anticipated sequestration reductions prior to and during fiscal year 2013. According to officials from CBP’s Offices of Administration and Program Development, in November, 2012, they developed a planned budget using CBP’s enacted fiscal year 2012 budget with a reduction of 8.2 percent from each discretionary program, project, and activity (PPA), and 7.6 percent for each direct spending PPA. CBP budget officials stated that in late November 2012 they provided this tentative budget to the program offices and asked them to provide actions to meet these reductions, assuming funds could not be transferred or reprogrammed.According to officials from CBP’s Office of Program Development, they instructed program offices to look for cuts to less critical areas first and focus on preserving personnel by implementing furloughs only if necessary. Program offices provided CBP headquarters with their proposed cuts by December 5, 2012, according to CBP headquarters officials. Some offices identified specific cuts to non-personnel areas, while others considered reductions to overtime or proposed furlough days. According to CBP budget officials, they worked with program offices that anticipated heavy employee furloughs to identify other options for achieving reductions. Although CBP ultimately mitigated the need to furlough employees in fiscal year 2013, CBP budget officials stated that furloughs were difficult to avoid given the initial estimates for the sequestered funding and projected full year budget authority. A major factor is that payroll-related costs consume a large percentage of CBP’s available funding; for example, OFO’s payroll expenses comprise more than 90 percent of its funds. According to DHS’s and CBP’s early sequestration and budget authority assumptions, OFO anticipated the equivalent of nearly 50 furlough days. The sequestration amount changed in January 2013 when the anticipated percentage reductions were revised to 5 percent. At this point, CBP’s internal preparations for potential reductions revealed that significant changes were likely to occur. See table 3 for CBP’s considered reductions to meet sequestration, as of January 2013. In January 2013, the Office of Management and Budget (OMB) issued a memorandum directing agencies to intensify efforts to prepare for sequestration; however, sequestration reductions were not finalized and it remained unclear whether certain accounts would be exempt, according to CBP budget officials. On February 21, 2013, the CBP Deputy Commissioner provided guidance on planning, with guiding principles of protecting critical missions, mitigating the disruption to employees, and maintaining operations and programs. This guidance specified that sequestration cuts, through furloughs and reductions to overtime, could decrease the number of equivalent work hours by more than 5,000 Border Patrol agents and 2,750 CBP officers. After receiving this guidance, Border Patrol and OFO headquarters provided planning priorities for sequestration to sectors and field offices. According to Border Patrol headquarters officials, sectors communicated their sequestration implementation plans with Border Patrol headquarters and worked with them to find appropriate reductions. Some sectors identified sector-specific areas that were most mission-critical to maintain during sequestration, including health and safety for agents and detainees, as well as maintaining control of the border between ports of entry. OFO field offices had discretion to determine specific reductions within the field office budgets and to prioritize their own actions, in consultation with OFO headquarters. According to OFO headquarters officials, they asked the field offices to outline port contingency plans in the event of severe reductions and to identify possible results and effects, including those related to public services. Field offices provided this information to OFO headquarters, which consolidated them into a formal memorandum that was distributed back to the field offices on February 26, 2013. The memorandum instructed field offices to focus on preserving essential services—such as the clearing of goods and persons—and to consider reductions to lower priority spending and operational activities—such as secondary training and enforcement activities, respectively. The effect of sequestration on specific fee accounts remained uncertain as of January 2013, according to CBP budget officials. Budget officials stated that fee accounts, such as the COBRA fee account, play an integral role in CBP’s planning and budget process because they reimburse CBP’s Salaries and Expenses account for certain expenses, such as overtime pay for CBP officers, that comprises about 30 percent of that account. According to CBP budget officials, they had a better understanding of their plans for sequestration with respect to fee accounts by late February 2013, but officials still needed additional clarification on how the cuts would be applied. Although OMB issued official guidance based upon input received from agencies in the summer of 2012, CBP remained uncertain about how this guidance would be applied to each of the unique fee accounts that it relied upon to fund its operations until August 2013. Ultimately, OMB determined that sequestration would be applied to the amount of fees collected and that, for COBRA fees, the funds would be available in future years. CBP headquarters coordinated the components’ reductions in funding and implemented some component-wide actions to meet sequestration; CBP’s program offices had the flexibility to determine many implementation decisions. USBP’s implementation of sequestration reductions varied among its sectors based on mission needs. Similarly, OFO’s reductions varied across its field offices. Because of the complexity of CBP’s fee accounts, reductions to the COBRA fee account remained unclear until late in fiscal year 2013. Although the final sequestration reduction of 5 percent was lower than the initial 8.2 percent reduction estimated by OMB, CBP budget officials reported that it was challenging to absorb this reduction in the last half of the fiscal year. Budget officials specifically mentioned that implementing sequestration was difficult because of the large percentage of CBP’s available funding dedicated to payroll—about 70 percent, or $8 billion. On the basis of its anticipated funding and sequestration reductions, CBP began to issue notices to all employees beginning on March 7, 2013, that they may be furloughed. Though sequestration went into effect on March 1, the amount of CBP’s anticipated reductions and resulting actions evolved over the course of the fiscal year. For example, although CBP issued furlough notices in early March 2013, the component subsequently mitigated the need for furlough days as a result of reprogramming, transfers, and increased funding available to CBP through the enactment of the Consolidated and Further Continuing Appropriations Act, 2013. Transfers included $36 million from other CBP accounts and $24 million from other DHS components to CBP’s Salaries and Expenses account. At the recommendation of the House Committee on Appropriations, CBP transferred an additional $7 million in unobligated balances from its 2011 and 2012 Border Security Fencing Infrastructure and Technology accounts to its Salaries and Expenses account. These unobligated balances had been set aside for emerging requirements and pilot programs, but were used instead, along with a transfer from the DHS Office of Intelligence and Operations account, to maintain minimum numbers of Border Patrol agents and CBP officers. To meet the remaining reductions required by sequestration, CBP reported that it implemented the following actions: suspended the hiring of operational and mission support staff from outside of CBP minimized travel to only that which was mission critical; reduced temporary duty station assignments; reduced retention, recruitment, and relocation expenditures; canceled the remaining nonmandatory training classes scheduled in fiscal year 2013; delayed or reduced the scope of certain contracts; and deferred the replacement of over 800 motor vehicles, increasing these affected vehicles’ lifecycle by a minimum of 1 year. USBP reported that reductions varied across its sectors relative to mission needs in an effort to implement sequestration with limited effects on personnel. For example, as of May 2013 CBP’s budget office estimated that the post-sequestration non-payroll reduction to the Yuma sector was 23 percent, whereas the estimated nonpayroll reduction to the Spokane sector was about 9 percent. To provide additional funds to sectors with increased mission requirements, USBP redirected funds away from one or two sectors that were able to operate on less than they had originally received, according to USBP officials. According to USBP officials, some sectors made significant cuts in the first and second quarters of fiscal year 2013 in anticipation of a possible sequestration. The funding for these sectors was redirected to other sectors later in the fiscal year. According to USBP officials, it was challenging to implement sequestration without affecting employees because salary and benefits for USBP represent 93 percent of total budget authority. USBP initially anticipated discontinuing its agents’ use of AUO; however, USBP ultimately chose to reduce non-pay expenditures and maintain existing overtime and premium pay reductions, resulting in a cost avoidance of about $5 million to AUO in fiscal year 2013. According to USBP, it closely managed, monitored, and updated overtime projections each pay period so the reduction efforts were successful and in July 2013, USBP determined it would continue its agents’ use of AUO. Border Patrol headquarters and sector officials stated that the reductions to AUO were challenging to implement because of the unpredictability of patrolling the border and the need for agents to frequently work beyond their 8-hour shifts to complete their duties. In addition to overtime reductions, USBP made reductions in nonpayroll expenditures, such as vehicle fleet fuel, maintenance, and acquisition. USBP also reduced a large detainee transportation contract, as well as specialized and supplemental training. Officials from the Blaine sector explained that to reduce costs in fiscal year 2013, they delayed necessary repairs on some vehicles, and used other modes of transportation such as snow mobiles, bicycles, and motorcycles to the extent possible. These officials stated, however, that eventually their sector will need to repair its aging vehicles and purchase new ones to maintain operations. This funding was intended for other than full-time hiring, but CBP could not bring students or temporary/seasonal workers on board during the hiring pause. could inspect passengers and cargo. OFO’s actual expenditures on overtime for its officers and agriculture specialists at the end of fiscal year 2013 exceeded its initial planned overtime budget. Figure 3 illustrates the fluctuations in COPRA overtime expenditures for OFO in fiscal year 2013. According to CBP budget officials, it was complicated to apply sequestration to fee accounts, including the COBRA fee account. Though OMB issued guidance in the summer of 2012, CBP budget officials stated that CBP remained uncertain about how this guidance would be applied to its fee accounts, including the COBRA fee account, until August 2013. For instance, CBP budget officials stated there was uncertainty about which fees were exempt from sequestration. According to CBP budget officials, OMB determined that the sequestration percentage reduction would be applied to fiscal year 2013 collected fees, and for the COBRA account, OMB determined that the sequestered funds would be available in fiscal year 2014. In fiscal year 2013, CBP collected about $647 million for the COBRA fee account. In September 2013, CBP budget officials stated that for fee accounts where the sequestered funds would be made available in the following fiscal year and not permanently reduced, the sequestered balances would be apportioned to CBP for use, that is, reimbursement of the Salaries and Expenses account, in the first quarter of fiscal year 2014. However, CBP was not apportioned the sequestered COBRA fee balances until December 2013. CBP’s budget office reported that the delayed availability of the sequestered COBRA fees created financial challenges for CBP during the first 2 months of fiscal year 2014. As a result of the delay, CBP was unable to reimburse certain costs in the Salaries and Expenses account, which delayed some procurement actions until the COBRA fee balances were apportioned. According to CBP officials, some of the actions taken in fiscal year 2013 to address sequestration would be difficult or impossible to replicate in future fiscal years to address additional budget cuts. For example, CBP Office of Administration and Office of Program Development officials expressed concern over USBP’s ability to sustain nonpay cuts taken in fiscal year 2013 such as those related to equipment and fuel. Further, CBP’s transfer and reprogramming actions were key to its ability to mitigate furloughs in fiscal year 2013; however, CBP budget officials stated that, depending on the levels of and conditions on any future funding, such actions may not be possible in future years to absorb additional reductions in funding. Nevertheless, according to CBP Office of Administration and Office of Program Development officials, CBP is in a better position to respond to possible future budget cuts as a result of its planning and implementation of the fiscal year 2013 sequestration. In addition, CBP officials noted some lessons learned from implementing sequestration in fiscal year 2013. For example, while planning and implementing sequestration, CBP maintained open communication internally, which CBP officials credited as a factor to the success in planning for sequestration. Border Patrol sector and OFO field office officials highlighted the importance of communication in planning for the fiscal year 2013 sequestration. Within OFO, field office officials said coordination internally and with stakeholders was an important aspect of their sequestration planning. For additional information, contact David C. Maurer at (202) 512-9627 or maurerd@gao.gov. Spending reductions required by sequestration had effects on some CMS activities, such as Medicare beneficiary outreach, in fiscal year 2013. However, the effects of reductions to some activities, such as Medicare payments, are difficult to quantify in part because they are difficult to isolate from other changes that took place in fiscal year 2013. CMS actions taken to implement sequestration reductions affected the frequency of certain surveys and affected certain state survey agencies’ budgets in fiscal year 2013. Specifically, officials from the Center for Clinical Standards and Quality (CCSQ), which is responsible for federal oversight of survey and certification, made policy changes that meant certain Medicare participating medical facilities were inspected less frequently. CMS officials told us that they made these policy changes to ensure that state survey agencies were able to complete statutorily required surveys. Except for frequency requirements that are mandated in statute, CMS establishes survey frequencies for other facility types based on available funding. For example, to implement sequester reductions, CMS officials reported that CMS reduced the frequency of psychiatric hospital surveys it conducts through a national contractor from once every 3 years to once every 4 to 5 years, which officials said freed funding for other activities. In a memorandum issued April 5, 2013, CMS instructed state survey agencies on how to prioritize their workloads in response to sequestration. For example, to cut down states’ workload, the operating division moved specialized organ transplant center surveys from states to a national contractor and reduced the frequency of these surveys from once every 3 years to once every 4 to 6 years. CMS also instructed states not to add nursing homes to the special focus facility (SFF) program in their state when an existing SFF nursing home has graduated from the program or has been terminated from Medicare participation. SFF nursing homes are poorly performing nursing homes within each state that are subject to two on-site surveys per year instead of one survey. As a result of the instruction not to replace SFF nursing homes, the number of such homes nationwide decreased from 152 when sequestration began to 62 as of March 2014, according to CMS officials. By reducing national contracts and support services, CMS limited the sequestration reduction of states’ Medicare provider survey and inspection funding, known as Medicare allocations, to an average of 3.2 percent rather than imposing the full reduction on states, according to officials. We do not know the effect of the reduced oversight from state survey agencies and national contractors on patient safety or the quality of care provided by the health care facilities. Several state survey agency officials that we spoke to reported that, because they had little time to adjust their staffing and budget plans after CMS established their fiscal year 2013 Medicare allocations, the state survey agencies used state funds to mitigate some of the effects of reduced federal allocations. Specifically, officials from four of the five state survey agencies we spoke to said they needed more than the amount of their initial federal allocations in fiscal year 2013 and would use state funds to cover the difference. For example, officials from one state survey agency told us it needed more than the amount allocated for survey activities. The officials said the state survey agency moved state funds originally intended for other health-related activities to avoid staff reductions that would have affected its ability to complete the statutorily required surveys. Officials from another state survey agency told us that as a direct result of sequestration reductions, 2013 was the first year the state needed more than the amount allocated to it by CMS. CMS reported that 15 of the 33 state survey agencies that had finalized their fiscal year 2013 expenditures as of March 2014 had spent all of their federal allocations and requested supplemental funding for fiscal year 2013, compared to 7 supplemental requests from those same 33 states in 2012. As of March 2014, CMS could not determine how much funding would be available for redistribution. A reduction in funds available to CMS for redistribution could create additional pressure for states in allocating their own funds to cover survey and certification activities. For example, two states told us they would have to cut licensure activities funded solely by the state if CMS could not provide the supplemental funds to reimburse the state for funds used to complete required activities. The state officials we spoke to reported that they were able to complete the highest priority surveys and complaint investigations by spending a combination of their federal allocations and state funding. However, two reported difficulty carrying out all of their surveys with the amounts available. For example, officials from one state said they could not complete needed revisit surveys that serve to verify that a facility has corrected serious deficiencies. While CMS considers these activities a lower priority, they are still an important activity to ensure patient safety. As a direct result of cuts made to implement sequestration reductions to discretionary funding in fiscal year 2013, call wait times increased for 1- 800-MEDICARE, a toll-free customer service line for Medicare beneficiaries to make inquiries about Medicare. Specifically, CMS cut funding to the 1-800-MEDICARE contractor, which reduced the number of customer service representatives available to answer calls. According to CMS, before sequestration callers waited about 2 minutes for their call to be answered. In the months after sequestration, average wait times increased to 5 and 6 minutes. In some cases, the immediate and longer term effects of sequestration reductions on CMS’s operations and services to the public are hard to quantify because of the difficulty isolating the effects of sequestration from other factors. As a result, CMS officials told us that CMS was not able to routinely monitor the effects of sequestration. Savings from the 2 percent sequestration reduction of Medicare payments and the effects of the cuts on overall Medicare spending, as well as Medicare providers, plans, and beneficiaries are unknown. The total amount of sequestered Medicare payments for fiscal year 2013 are not known because providers have up to 12 months to submit claims. CMS officials reported that $3.3 billion had been sequestered from $167 billion in prospective payments to Medicare Advantage and prescription drug plans from April 2013 through March 2014. The total amount of sequestered funds will likely differ from the estimated $11.3 billion that the Office of Management and Budget (OMB) provided in its fiscal year 2013 sequestration report. As noted in the background of this report, OMB’s estimates for programs that are funded by permanent indefinite budget authority, including Medicare payments, were based on estimated outlays for fiscal years 2013 and 2014. Final payments for fiscal year 2013 will depend on the actual numbers and types of services used by beneficiaries during the sequestration period. Research examining the effects of previous Medicare payment cuts suggests that providers may attempt to offset cuts by providing more services or more expensive services. As a result, the cuts may not produce the expected Medicare savings. In addition, it is not possible to isolate the effect that the payment reductions had on providers’ revenues in fiscal year 2013 because payments to Medicare providers were affected by a number of factors, such as increases or decreases resulting from the annual rate-setting process and the implementation of certain statutory provisions affecting payments. Similarly, it is not possible to attribute any changes in provider participation in the Medicare fee-for-service program or plan participation in the Medicare Advantage or prescription drug programs in 2014 directly to sequestration reductions. Although CMS officials and provider association representatives that we spoke to agreed that isolating the effects of the 2 percent Medicare payment reductions is difficult, provider associations reported that the reductions will be detrimental to providers because they exacerbated other budgetary pressures, particularly for providers that rely on Medicare payments for large portions of their revenues. For example, some hospitals have reported that the Medicare sequestration was one of several negative factors affecting hospital revenues that resulted in layoffs, decreased services, and delays in infrastructure investments in fiscal year 2013. A physician association reported that although the isolated effects on physicians from the first year of sequestration of Medicare payments are not detectable, the effects will likely be greater as cuts continue in future years and physicians face smaller Medicare payment increases and additional responsibilities associated with Medicare participation. Based on anecdotes of physicians’ reactions to previous payment reductions, the association officials predicted that sequestration could contribute to shifts in physician practice away from specialties with a high proportion of Medicare patients relative to patients with other forms of payment. However, they noted that it is difficult to single out actions directly responding to sequestration. How these potential changes in provider behavior could influence Medicare beneficiaries’ access to health care remains to be seen. Beneficiaries were partially shielded from the payment reductions made as a result of sequestration. The law did not allow Medicare participating providers to pass on the payment reductions to beneficiaries. All coinsurance and deductible amounts remained the same for beneficiaries. However, beneficiaries would have been financially liable for any increased cost sharing resulting from providers who provided more services, or more expensive services, to offset the sequestration cuts. Beneficiaries who use nonparticipating providers and receive payments directly from CMS in order to reimburse the provider did see those payments reduced, which required these beneficiaries to pay more. A small proportion of practicing Medicare physicians are nonparticipating. Sequestration resulted in fewer funds for new initiatives, according to CMS officials, but the effects on operations and services to the public will not be known until future years, if at all. Budget officials explained that in most years CMS funds new initiatives after core activities have been funded, but in fiscal year 2013 few or no programs had funds available for new initiatives because of sequestration. For example, CCSQ officials, who are responsible for survey and certification, told us they could not continue efficiency initiatives that had saved money in prior years because they did not have funds to pay for the upfront activities involved. data planned for fiscal year 2013 that was required but not separately funded by the Patient Protection and Affordable Care Act (PPACA). To meet discretionary spending limits for program operations, CMS cut $15 million from its information technology (IT) funding which delayed several system enhancements. However, it is difficult to quantify the forgone benefit of unfunded initiatives. For example, it is hard to predict the amount of savings CMS could have achieved from eliminating IT redundancies had IT system enhancements occurred. Moreover, budget officials said they could not identify all of the initiatives that CMS will not initiate as a result of funding reductions because program offices may have stopped bringing forward budget requests for new activities due to known budgetary constraints. For example, a prior efficiency initiative re-designed the survey process for dialysis centers. The survey redesign shortened the survey process for surveyors, thus saving money, according to CMS officials. The effect of sequestration on CMS’s staffing and operations is unclear because CMS has multiple sources of budget authority that may support payroll and benefits. CMS’s total full-time equivalents (FTE) increased from 5,926 at the beginning of fiscal year 2013 to 5,959 at the end of the year due in part to targeted hiring for activities related to increased responsibilities, including aspects of health care reform with funding provided by PPACA. For example, PPACA appropriated $10 billion for activities associated with CMS’s Center for Medicare and Medicaid Innovation over 9 years that supported 67 additional FTEs in fiscal year 2013. However, CMS lost 120 FTEs funded through its primary salaries and benefits PPA—the federal administration PPA—and could not fill another 299 vacancies as a result of a hiring freeze it implemented to achieve sequestration reductions without requiring furloughs. CMS staff funded through this PPA carry out the majority of CMS activities, including implementation of the federal health insurance exchanges in 2013. CMS officials said that, in general, CMS offices are experiencing difficulties in terms of staff doing more work with fewer resources. The reduced staff and inability to hire new staff throughout the fiscal year to address increasing workload had a negative effect on operational time frames, according to officials. For example, CMS officials reported that CMS processing times for providers seeking certification for participating in the Medicare program increased from between 1 and 4 weeks to up to 6 months due to the hiring freeze. To plan for reductions of CMS’s discretionary funding, CMS’s Office of Financial Management (OFM), in consultation with the CMS Administrator and HHS budget office, identified high-level priority areas to protect from budget cuts. For example, one spending priority identified by the operating division for 2013 was federal health insurance exchange implementation in those states not electing to operate an exchange or not certified or approved to operate one. When sequestration occurred, CMS determined that it would not cut funding planned for this activity, including from within its discretionary program management account. CMS also prioritized funding for Medicare fee-for-service appeals because, officials said, cuts to these activities could delay their contractors’ ability to address appeals and result in increased costs in future years.said funding for the durable medical equipment competitive bidding Officials program was also prioritized because CMS attributed savings to the program. CMS officials reported that their options for implementing sequestration reductions varied by the type of funding—discretionary versus direct spending—and application of sequestration rules. According to HHS officials and CMS officials from the Center for Medicare, CMS had no flexibility in implementing the Medicare payment reductions because, with limited exceptions, all payments had to be sequestered and sequestration rules dictated the formula, timing, and limitations on how CMS was to implement the reductions. Officials also reported having to reduce by 7 percent grants made to states after March 1 to establish health insurance exchanges in accordance with OMB’s sequestration guidance for programs with permanent indefinite budget authority. In fiscal year 2013, CMS awarded such grants to 25 states and the District of Columbia, but only those amounts obligated after March 1, 2013 were subject to sequestration, according to officials. Because sequestration began in the middle of the year, officials told us that CMS had to achieve the required reductions for state exchange grants by applying sequestration to the amounts obligated in the remaining months of the fiscal year, requiring it to reduce each grant made after March 1 by 7 percent from the expected amount. Additionally, because the state insurance grants are structured as the only activity within their PPA, CMS could not reallocate the sequester reductions to other activities in order to spare the grants from the reductions. In contrast, CMS officials told us the operating division had flexibility to implement reductions within the large PPAs contained in the discretionary program management account. In particular, they said that this funding structure provided flexibility within the program operations PPA to move funds around the many activities funded by the PPA, including Medicare fee-for-service claims processing by MACs, contractor administration, federal implementation of health insurance exchanges, provider education, beneficiary outreach, and many other initiatives. For instance, MAC funding through the program operations PPA was reduced by 2.4 percent. This reduction ended up having had no effect on MAC operations because CMS needed less funding than expected in fiscal year 2013 for transition costs for new MACs and the awarding of two MAC contracts scheduled for the end of fiscal year 2013 was delayed until fiscal year 2014 for reasons other than sequestration. The two MACs we spoke to confirmed that sequestration had no effect on their contracts or ability to carry out any activities in their statements of work. CMS also reported using carryover funds to mitigate the effects of sequestration reductions when available. Through direct spending, funds are available to the Medicare integrity program within the Health Care Fraud and Abuse Control (HCFAC) account without fiscal year limitation, which may result in funds remaining available for obligation during the next fiscal year. According to officials, CMS had enough carryover funds from fiscal year 2012 program integrity activities to offset $13 million in discretionary fiscal year 2013 sequestration reductions in HCFAC funding for CMS, which minimized the effect on a medical review support contractor, Part D data analysis, and Medicaid and CHIP Business Information Solution project that were slated to lose funding due to sequestration. CMS also used no-year funding remaining available for the Medicare-Medicaid Data Match Project (Medi-Medi) to offset sequestration reductions of the program’s fiscal year 2013 funding. According to officials, available carryover balances also mitigated the reduction of an estimated $2.2 million to CLIA surveys.agencies with which we spoke confirmed there were no reductions to their CLIA activities. CMS officials noted, however, it is possible that carryover funds will not be available in future years to offset funding reductions to the extent they were in fiscal year 2013. For example, officials reported having used up much of the funding available from prior years for Medicare program integrity. In addition to using carryover funds, certain offices told us that prior year initiatives helped them respond to the sequestration reductions. Officials in the Center for Medicare began considering how to implement specific percentage reductions to payments for Medicare fee-for-service claims as early as 2008 in response to proposals for Medicare cost reductions. They increased their preparation for sequestration of payments in late 2011. Officials said that these early preparations helped the center implement payment reductions quickly through the various contractors that maintain their payment systems when sequestration occurred. In addition, CCSQ officials told us that, beginning in 2011, officials started a broad-based initiative to improve the efficiency and effectiveness in survey processes as they recognized a significant gap between an increasing workload and the funding amount typically allocated for survey and certification activity. This initiative, including corresponding outreach to state survey agencies, helped CCSQ plan for sequestration in fiscal year 2013. CMS officials said that it was difficult and time consuming to determine how to apply sequestration pursuant to the law and within changing budgetary parameters. In particular, CMS had difficulty determining all of the types of Medicare provider payments subject to sequestration and which Medicare funding was subject to special sequestration rules. For example, CMS officials initially thought that subsidies for the Program of All-inclusive Care for the Elderly (PACE) were exempt from sequestration, like certain Medicare low-income subsidy payments. Upon further discussion with OMB late in the planning process, CMS determined that these payments were not exempt and adjusted the plan payments accordingly. Officials said the adjustments accounted for a very small amount of PACE funding. The timing of sequestration and changing budgetary parameters also delayed CMS’s ability to make final planning decisions. For example, CMS based its initial sequestration planning decisions on the annualized amount set out in the continuing resolution in effect at the time sequestration was ordered. After the Consolidated and Further Continuing Appropriations Act, 2013, which provided a lower discretionary appropriation base than CMS used to calculate the sequestration reductions, CMS officials said they had to determine how to absorb the same amount of reductions, which then represented a larger portion of the appropriation, in the remainder of the fiscal year. The timing of sequestration and related CMS guidance created uncertainty for some stakeholders. For example, CCSQ officials told us that they strive to limit uncertainty for states so the states can plan their budget adequately. This was difficult in fiscal year 2013 because sequestration took effect in March, which effectively doubled the percentage cut because it all had to be taken in the second half of the fiscal year. On April 5, 2013, CMS issued a memorandum informing states about sequestration reductions and actions states should take to implement the cuts. Although officials from several state survey agencies we spoke to described the timing of CMS’s communication regarding sequestration as the best it could have been, they still faced challenges adjusting their budgets. For example, one state survey agency told us it received official notice of its allocation amount in May 2013, which left the state very little time to plan for absorbing the cut by the end of the fiscal year in September 2013. CMS informed providers and plans about the Medicare payment reductions following the sequestration order in March. In early May CMS issued additional guidance to Medicare Advantage and prescription drug plans regarding the application of reductions for various plan types. In this communication, CMS noted, for example, that the agency is prohibited from interfering in payment arrangements between plans and providers who contract with them. A hospital representative reported anecdotally that the timing of sequestration and CMS’s official communication to providers limited hospitals’ time to plan adequately for the reduced payments. In addition, hospital and physician representatives said that CMS’s guidance regarding payment reductions was not sufficient for them to understand how cuts were applied without additional clarification. See figure 5 for information on CMS actions related to Medicare payments and survey and certification. For additional information, contact Kathleen King at (202) 512-7114 or kingk@gao.gov. Sequestration resulted in cuts of about 5 percent to Title I and Impact Aid grant funding that supports services to thousands of school districts nationwide. These sequestration cuts affected grant recipients in different ways and contributed to some reduced services to students. Title I is the largest grant program administered by OESE, with grants issued to over 53,000 schools in districts nationwide in fiscal year 2013. The program provides much of its total funding to districts serving high concentrations of students from low-income families, to provide services to help improve the academic achievement of students in high-poverty schools or students at risk of academic failure (see table 6). For Impact Aid, many districts receive funding from this program—a little over 1,100 districts serving almost 930,000 federally connected students nationwide in fiscal year 2013 (see figure 7). Effects of sequestration on school districts varied due to the timing of funding disbursements to grant recipients. In general, Title I grant recipients felt the effects of sequestration later than districts that received Impact Aid grants. Specifically, the sequestration cuts affected Impact Aid recipients in school year 2012-2013, while the cuts did not affect Title I recipients until school year 2013-2014. This is, in part, due to when Education disburses funding to states and school districts. Education typically disburses Title I grants to states, for disbursement to school districts, in July and October each year. Education disbursed some of its Title I fiscal year 2013 funding to states in October 2012, prior to sequestration, for school year 2012-2013. Education then applied the entire amount of the sequestration cuts for fiscal year 2013 to the next grant disbursement, in July 2013, for school year 2013-2014. Therefore, the sequestration cuts did not affect the October 2012 disbursement used for the 2012-2013 school year. In contrast, Education disbursed a majority of the fiscal year 2013 funding for Impact Aid in October and November 2012, during school year 2012-2013, prior to sequestration, and applied the sequestration cuts to grant disbursements made in May 2013. According to Education officials, delaying the cuts from the 2013 sequestration for the larger state grant programs, such as Title I, enabled recipients to plan and may have tempered some of the negative consequences of sequestration. Another reason sequestration affected districts differently is that the relative importance of Title I and Impact Aid grant funding in districts’ budgets varies greatly. School district budgets are generally funded by multiple sources and are determined by many factors, including local taxes, state government contributions, and other federal financial support sources. Moreover, the relative contribution of these resources varies among school districts. As a result, the effects of grant reductions from Education vary for grant recipients based on their respective situations, including the availability of other resources to fill any budget gap. While the receipt of Title I grants is widespread among districts, funds from this program generally account for a small portion of most districts’ overall funding. Though the proportion can vary by district, for fiscal year 2010, the most recent year for which data are available, Title I made up about 3 percent of total elementary and secondary education funding from all sources nationwide, according to the National Center for Education Statistics. The extent to which districts rely on Impact Aid funding also varies, with one district’s reliance as high as 88 percent of its fiscal year 2013 operating budget, according to Education data. In addition, five of the districts we contacted said that it is difficult to isolate the effects of sequestration cuts solely to Title I or Impact Aid because the districts had also experienced reductions to state funding and to other federal programs and activities due to sequestration. These various state and federal funding cuts the districts experienced have led to reductions in staffing levels, transportation, and school programs, as well as districts having to shift funding from other sources to support programs affected by the cuts, according to district officials. For example, officials from all of the selected districts that received Title I or Impact Aid grants mentioned how the districts had experienced reductions to their state funding prior to sequestration. In one case, district officials told us that, prior to sequestration, from 2010-2012, the district had to lay off teachers in order to balance the district’s budget after the state cut funding to education; however, additional local tax revenue allowed the district to avoid further layoffs when sequestration occurred. Related to reductions to other federal programs and activities, officials from one district reported that in addition to Impact Aid, the district also experienced funding cuts to other federal programs due to sequestration such as special education, vocational education, Indian education, and Title I, among others. While this district received about 25 percent of its funding from Impact Aid, the other federal funding sources contributed an additional 23 percent to its total budget in fiscal year 2013. In another example, an Impact Aid district we contacted reported that the Department of Defense cut funding to bus routes, among other things, which the district was then forced to fund, placing a further strain on the district’s budget. Even though sequestration cuts affected grant recipients in different ways and the effects are difficult to isolate, we found from our interviews with state officials and the seven school districts we contacted that cuts from sequestration had contributed to some extent to reductions in services to students. Title I funding comprised between 5 and 18 percent of the budgets of the three Title I districts we selected. Even though this was not a large percentage of the districts’ budgets, cuts to Title I funding contributed to decisions to reduce staff positions and professional development opportunities, reduce or delay academic programs, and defer maintenance and technology upgrades, according to the officials we spoke with. Specifically, for the three Title I districts we contacted, officials provided this information: One Title I district reported that cuts to Title I funding contributed to decisions to reduce staffing levels by not filling vacated positions in certain areas. Officials told us that the loss of funding contributed to the decision to reduce the number of reading and math specialists which provide extra instruction to students and assist teachers in improving their teaching methods. Since this district has a large population of low income students, officials were concerned that the loss of these specialists could cause students in need of additional tutoring to fall further behind. Officials from two of the selected districts told us the funding reductions contributed to decisions to reduce professional development opportunities for their staff. Officials from one of the districts thought these reductions could affect teaching staff preparedness in advance of implementing new academic standards, which would then affect the instruction that the district’s students received. Two districts reported that Title I reductions contributed to decisions to reduce or delay some academic or after-school programs. For example, one district reported that the loss of funding contributed to the decision to reduce after-school programs, while officials from another district told us the reductions contributed to the decision to delay implementation of new academic programs designed to improve the district’s academic performance. All three Title I districts reported that Title I reductions contributed to decisions to defer maintenance and technology upgrades.example, officials from the three districts said their district delayed technology upgrades with one official describing the district technology as aging. Impact Aid funding represented anywhere from 15 to 35 percent of the total budget of the four Impact Aid districts we selected. District officials told us that they had to take a number of steps to absorb the reductions in Impact Aid. Two of these selected districts are located entirely on federal lands, while federal lands made up 80 percent of a third district, according to officials from each of the respective districts. As a consequence, these districts do not have a local tax base to mitigate the loss of federal funding. According to district officials, to absorb the cuts to Impact Aid in the 2012-2013 school year they had to reduce staff positions and professional development opportunities, increase class sizes, reduce school programs, defer maintenance and technology upgrades, and reduce transportation. Specifically, for the four Impact Aid districts we contacted, officials provided this information: Three districts reported that they had to reduce staffing levels, primarily through attrition and not filling vacated positions, including those for teachers and aides. Officials from one of these districts reported having to reduce their instructional staff positions by 14 full- time equivalents. Officials from these districts told us that they primarily reduced staffing levels by not replacing departing staff. Four of the districts reported having to reduce professional development opportunities. One district official told us that, as a consequence, there was concern the district will be unable to support its teachers during a time when the official thought there were sizable changes in the expectations for how the teachers delivered instruction. Three districts reported having to increase class sizes. For example officials from one of the districts reported increasing elementary school classes by an average of two or three students. Three of the selected districts told us they reduced school programs, which included reductions to art, music, or athletic programs. For example, officials from one of the districts on Indian lands told us that they reduced the program teaching the Navajo language and culture– a program that is in high demand in their district. Four districts reported needing to defer maintenance and technology upgrades because of sequestration. For example, officials from one district reported that they were only performing emergency maintenance. In addition, these officials reported that deferring maintenance on a roof at one of the high schools led to flooding in three of the classrooms. In another example of deferred maintenance, district officials from another district told us they reduced funding for maintenance on their large fleet of buses. These officials told us that they were concerned about the reductions in maintenance because the bus routes cover a large geographic area over sections of unfinished roads, which places a strain on the bus fleet. In addition to deferring maintenance, officials from this district also described deferring upgrades to the district’s technology. Officials expressed concern over the district’s ability to implement new educational standards and assessments without the upgrades considering that the new standards rely on using technology. Two of the selected districts reported reducing or eliminating transportation routes, though for one of the districts state cuts from prior years also contributed to this decision. These districts also said that as a consequence of route reductions and eliminations, some students travelled further to reach their bus pickup points which, for one district, caused students to miss school. One district also reported that the district had to eliminate bus routes for students who attended after-school tutoring and academic enrichment programs. Agency-wide cuts in administrative expenses due to sequestration resulted in reduced OESE staffing levels and required OESE to spend less on travel and other expenses, which OESE officials said led to increasing workloads for staff and reductions in some grant oversight activities. For example, according to OESE officials, decreases in hiring since 2011, which were exacerbated by sequestration, have led to increased workload for current staff and may have contributed to staff burnout. Overall, OESE lost 10 staff positions in fiscal year 2013, resulting in a total of 233 staff by the end of the fiscal year. OESE also reported that from fiscal year 2012 to fiscal year 2013 it experienced a 47 percent reduction to its travel budget, which affected its ability to conduct grantee oversight and technical assistance. For example, according to OESE officials, due to sequestration cuts, they had to conduct about four to five fewer on-site compliance reviews for the Impact Aid program in fiscal year 2013, which also reduced the amount of technical assistance that would have been provided to grant recipients by way of these reviews. Officials said that while some grant oversight and technical assistance can be done remotely, it is also necessary to be on the ground to review actual documents for compliance reviews and to build strong working relationships with grantees. Additionally, OESE officials said they offered technical assistance via webinars to assist grantees or grant applicants in lieu of on-site visits or attending technical conferences. However, officials were concerned that applicants may be more comfortable asking questions privately rather than during a webinar session with other grantees listening in on the conversation. As a result of these changes to OESE’s delivery of technical assistance, officials were concerned, for example, that there could be an increase in late Impact Aid grant applications in the future, which could subject grantees to a penalty and reduce their funding. The reductions to the travel budget also reduced OESE’s ability to provide general outreach, such as by presenting at conferences and sending staff to conferences for training, among other travel needs. Overall, OESE officials were not certain whether they could determine the extent to which sequestration has affected OESE’s progress toward achieving some of its performance and priority goals because achievement of some goals are dependent on many factors, such as the actions of states or school districts, as well as budgetary resources. For example, one of the agency’s priority goals for elementary and secondary education, which is supported by some OESE programs, is to improve learning by ensuring that more students have an effective teacher. Education’s target goal is that a majority of states will have developed and adopted statewide requirements for comprehensive teacher and principal evaluations and support systems, and at least 500 school districts will have implemented these evaluations and systems, by September 30, 2013. The agency’s fiscal year 2013 Annual Performance Report released in March 2014 showed that while the agency has results for one of three metrics related to this goal, results for the remaining two metrics were forthcoming, pending the release of state progress reports. Furthermore, the report cited challenges, which could be unrelated to federal budget constraints, that could hinder the achievement of this priority goal including districts’ and states’ current fiscal situation; potential changes in leadership; scaling up of systems in a relatively short time frame; and coordination among the agency’s programs to ensure consistency of policy and communication. In response to sequestration, OESE followed the plan set out by Education, which included the reductions in Education’s overall administrative accounts and OESE’s grant programs. OESE officials told us that planning for sequestration started at the top of the agency and filtered down to the agency’s components. Officials told us they were informed about Education’s budget plans in a series of meetings with the agency’s budget office. Due to sequestration, officials told us OESE reduced staffing by limiting the hiring of new staff to replace those that departed. Officials told us they were required to follow a process implemented agency-wide for approving personnel actions in which components within the agency were to submit hiring plans for approval that prioritized proposed personnel actions along with a description of the effects of not fulfilling the proposed positions. The Office of Management, the Budget Service, and the Office of the Deputy Secretary were required to coordinate in approving high-priority personnel actions while also allowing the agency to operate within sequestration budget levels. OESE officials told us this meant that OESE, in some cases, replaced senior level staff with lower paid entry level staff in order to allow the agency to fill more of the vacated positions. By implementing this agency-wide personnel action, along with other actions to achieve administrative savings, Education avoided furloughs in fiscal year 2013. While there were staff reductions, officials told us that OESE received more funding for training in fiscal year 2013 in order to better prepare staff for working with fewer resources. Officials described how OESE developed a needs assessment for individual staff and, then, if the assessment identified an area of need that affected that staff member’s performance plan, OESE prioritized training to address that need. Overall, officials thought OESE would be stronger in the long run because of the commitment to training their staff. OESE officials said they followed certain priorities in implementing the sequestration cuts to grants awarded through a competitive process. For these grants, OESE officials said, agency regulations generally require components to prioritize funding of existing grants over new grants. As a consequence, officials overseeing these grant programs only awarded new grants if there were funds remaining for the program after all of the existing grants were funded. Officials then had the option to fund new grants to qualified applicants remaining from the previous year. Officials could also open a grant to new competition if there were not sufficient numbers of qualified applicants from the previous year or if the grant program had a new policy priority. Agency officials could not quantify how many fewer competitive grants were issued due to sequestration. By contrast, OESE had limited flexibility in determining how to allocate reductions to formula grants, such as Title I or Impact Aid, because specific eligibility criteria and formulas for allocating grant funds are established by law and Education is required to provide funds to grantees that meet the statutory criteria. As part of implementing sequestration of the Title I and Impact Aid programs, OESE officials said they informed grantees about sequestration by disseminating information on the potential reductions through advocacy organizations and states. According to officials, OESE disseminated information to grantees whenever the information became available through a variety of means including the National Association of Federally Impacted Schools (NAFIS), an advocacy organization representing districts receiving Impact Aid, and the National Council for Impacted Schools. OESE also communicated with state educational agencies, such as through each agency’s chief state school officer. In addition, OESE officials disseminated information through Education’s relevant e-mail list. As an example of how grant recipients were informed about sequestration, in a July 2012 letter Education informed the chief state school officers of the potential timing of the sequestration for formula grant programs to help the states plan for sequestration, should the reductions occur. Specifically, among the grants referenced, the letter informed the chief state school officers that districts receiving Impact Aid would absorb their funding cuts during the 2012-2013 school year, while for Title I districts sequestration would not be implemented until the 2013- 2014 school year. Both representatives from NAFIS and select state representatives we spoke with through the National Title I Association confirmed having received this communication from Education. The chief state school officers also provided examples of other communication from Education, but also noted that, while Education provided what information it could to help with planning, it was difficult to predict final funding levels due to the complexity of the Title I formula. For additional information, contact Melissa Emrey-Arras at (617) 788- 0534 or EmreyArrasM@gao.gov. HUD data indicated that about 1.86 million very low-income households were receiving rental housing assistance through the Housing Choice Voucher program at the end of calendar year 2013, a decline of about 41,000 (2.2 percent) compared to the end of calendar year 2012, primarily due to sequestration (see figure 9). HUD officials told us that PHAs generally reduced the number of households that received assistance by not re-issuing vouchers made available by households that left the program rather than by terminating vouchers of current recipients. Some of the households participating in the rental assistance program also faced higher costs and other challenges in 2013 because some PHAs reacted to the sequestration cuts by increasing minimum rents, decreasing inspections of units, or reducing utility allowances.funding reduced, three of the PHAs we interviewed also reported taking steps to reduce costs they incurred when a household receiving rental With their assistance moved to an area covered by a different PHA or vice versa. For example, one PHA did not continue to provide rental assistance if a household moved to a higher-cost area. These PHA actions can make it more difficult for households to maintain their benefits when moving. Aggregate PHA voucher reserves decreased 46 percent from $1.3 billion in December 2012 to $709 million in September 2013. The reserves are funds these agencies have accumulated from prior appropriations and which they generally use to fill funding shortfalls if program expenses are higher than expected. PHAs used these reserves to mitigate some of the effect of sequestration on the number of vouchers they administered. However, PHA program reserves for vouchers had been reduced by $650 million in the aggregate in 2012 because of reductions in HUD’s fiscal year 2012 funding. and the subsequent sequestration cuts in fiscal year 2013, PHAs will have reduced capacity to mitigate effects of any funding cuts in future years. As of the end of September 2013, the most recent month for which data were available, PHAs had on hand reserves adequate to fund an average of 0.5 months of voucher expenses, compared to 0.9 months in December 2012. Also by the end of September 2013, 165 PHAs had exhausted their reserves, compared with 84 PHAs in the same situation at the end of 2012. PHA reserves for vouchers were generally reduced to about 1 month of expenses. Although sequestration did not substantively reduce the number of units of public housing available, it necessitated that PHAs draw down on their reserves for these programs. None of the PHAs we interviewed told us that sequestration reduced the total number of units operated (either occupied or vacant). HUD data showed that the total number of public housing units operated declined from December 2012 to December 2013 by about 6,000 (0.5 percent), to 1.151 million. HUD officials attributed this decline to the general deterioration of units due to funding in recent years being lower than needed to repair and maintain all units, which was extended and deepened by the effects of sequestration. Stakeholder groups told us that the time necessary to prepare units for occupancy by new residents after others vacate has increased as a result of cuts in spending on maintenance staff, which also led to lower utilization of units and fewer people served. However, HUD data showed that the average occupancy rate for units remained at 96 percent throughout 2013. Other steps PHAs took to reduce costs in the aftermath of sequestration also negatively affected families residing in public housing. For example, two PHAs we interviewed increased the case loads for their staff, and two PHAs reduced their office hours, both of which could reduce the level of service provided to families. In addition, two PHAs we interviewed took longer to complete maintenance or repairs, and two canceled some ancillary tenant programs, both of which HUD officials told us could negatively affect a PHA’s performance and scores in HUD’s assessments of resident satisfaction and management. To mitigate the effects of sequestration, two PHAs reported that they drew down reserve funds maintained to address public housing operating fund shortfalls. PHAs need a reserve level equal to 4 months of operating expenses to obtain the highest possible score in HUD’s assessments of PHAs’ financial health. Although PHAs had $4.3 billion (about 8 months of total operating expenses) in such reserves as of the end of their fiscal year in 2012, their level of reserves varied.PHAs, accounting for about 21 percent of units operated, had less than 4 months of operating expenses in reserves. Further, 3 percent of PHAs, accounting for 6 percent of units operated, had less than 1 month of operating expenses in reserves. HUD officials told us that continued funding cuts could cause larger declines in the number of units of public housing operated as some PHAs deplete their reserves. For example, 16 percent of Data reflecting the amount of reserves PHAs held at the end of calendar year 2013, which would reflect the effects of sequestration, were not available in time for this report. Further, PHAs whose fiscal year ended at the end of June or September were affected in the same fiscal year both by sequestration as well as a $750 million reduction in reserves in fiscal year 2012 that resulted from a reduction in HUD’s appropriation. This would prevent a determination of how much of any decline in reserves in the PHAs’ fiscal year was due to sequestration even after the data are available. Representatives from all four of the tribes and TDHEs we interviewed told us that sequestration did not have a large effect on their activities in 2013 because the entities typically carry over some previous year funding or still had reserves available from the predecessor to the IHBG program. As a result, they were able to draw on these funds to offset sequestration’s cuts and complete planned projects or activities in 2013. However, three said that sequestration would reduce the activities they could conduct in future years because they would be carrying over fewer funds at the end of fiscal year 2013. In addition, HUD officials told us that not all tribes and TDHEs had carry-over funding or reserves on which they could rely. Of the 361 tribes and TDHEs that received IHBG funding in 2013, 61 applied for and received interim funding from HUD prior to receiving their final funding, for which having no carry-over funding or reserves was a requirement. According to a HUD official, the number of tribes and TDHEs without carry-over funding or reserves was likely higher than 61, as not all tribes and TDHEs that were eligible for interim funding may have applied. Representatives from tribes and TDHEs told us that the federal budget process for fiscal year 2013 created challenges for budget planning because they did not know the full amount of their grants under IHBG until several months into the calendar year. While HUD released approximately $39 million in interim funding from January through May to tribes and TDHEs that would have exhausted their reserves and carry- over funding, recipients did not know their final fiscal year 2013 grant amount until May 20, 2013. By comparison, in 2012, HUD notified tribes and TDHEs of their final grant amount on January 18. HUD began to provide final funding to tribes and TDHE’s on June 18, 2013. Staff from two IHBG recipients and two tribal housing associations told us that the funding delays created challenges or uncertainty. For instance, according to one association, in some cases construction plans were delayed or halted or construction-related contracts had to be renegotiated. Some IHBG recipients were more severely affected than others because sequestration reduced the portion of the IHBG grant formula that is based on estimated tribal needs. Under the IHBG formula, funding is first allocated for operating and modernizing units developed under the predecessor of the IHBG program, and the remaining funding is then As a allocated based on tribes’ needs for additional affordable housing.result, the need-based component of the formula funding was reduced by 9 percent to achieve the overall reduction in funding due to sequestration of 5 percent. Therefore, tribes whose funding primarily comes from the need-based component of the formula, because they have proportionately fewer housing units developed under the predecessor of the IHBG program, received a larger cut in funding. Officials from one IHBG recipient we interviewed said that sequestration exacerbated the decrease in the need portion for their small tribes, which consequently limited the services they provided to families. Sequestration also contributed to HUD delaying reviews and decreasing services to tribes. For instance, although HUD regulations required a review of the formula to apportion IHBG grants by May 2012, HUD officials said they had not completed this review because of effects on the agency from lower funding in recent years, continuing resolutions, and sequestration cuts. HUD has begun taking some actions to assess the formula, including establishing an Allocation Formula Negotiated Rulemaking Committee and holding public meetings with tribes in August and September 2013. HUD officials said they anticipate holding another meeting in spring 2014 to continue negotiating the IHBG formula but do not know when the new formula will be completed because of the numerous steps involved in the process. In another example, staff from HUD’s Office of Native American Programs (ONAP) said the general hiring freeze the agency implemented in response to sequestration limited the office’s ability to replace several senior staff who retired. The staff had no estimate of when those vacancies would be filled. Moreover, representatives of two of the IHBG recipients and one tribal housing association told us of delays and other difficulties contacting HUD staff, which they attributed to turnover in ONAP and other effects of sequestration. For example, one tribe reported delays in receiving needed approvals on a new construction project from its ONAP regional office. According to the tribe, the delays hindered the project’s progress, resulting in protracted timelines. In response to the budget reductions resulting from sequestration, HUD planned and implemented several department-wide personnel actions that applied to PIH. PIH employees, along with most other HUD employees, were furloughed for 5 days, saving PIH about $3.5 million. HUD initially planned to furlough employees for 7 days, but in August 2013 HUD reduced the number of furlough days by using funds it initially planned to use to reorganize its Office of Multifamily Housing Programs and to close 16 of its 80 field offices.reprogrammings between and within accounts to provide an additional $0.9 million for PIH to use to pay salaries and expenses. HUD further reduced PIH expenses for salaries, predominantly through a hiring freeze but also through additional means such as reduced overtime and monetary awards. Finally, HUD reduced non-salary expenses such as travel and training by $1.3 million. To implement sequestration cuts for the Housing Choice Voucher program, HUD used a set-aside appropriation to provide supplemental funding to PHAs that would otherwise be required to terminate some families’ assistance and expanded a special team that offers technical assistance to PHAs. HUD officials told us that because HUD determines funding for individual PHAs by formula, based primarily on each PHA’s costs in the previous year, sequestration’s cuts were passed directly to the PHAs. HUD provides PHAs with a portion of the funding for which they are eligible based on HUD’s appropriation for the voucher program, which can be lower than the total formula eligibility of all PHAs. In 2012, HUD provided PHAs with 100 percent of their eligible amount. Because of sequestration, in 2013 HUD provided PHAs with 94 percent of the funding for which they were otherwise eligible, rather than the 99 percent they would have received in the absence of sequestration. Because HUD did not have a final fiscal year 2013 appropriation before the beginning of calendar year 2013, HUD obligated funding for the first 3 months of 2013 at 98 percent of PHAs’ funding eligibility, which reflected the amount of funding the program had under the continuing resolution that funded HUD through March 27, 2013. HUD officials told us that PHAs may have spent funds at the 98 percent level for the first few months of the year. As a result, to reduce their expenditures for 2013 overall to the 94 percent level, they likely reduced the number of vouchers they leased by the end of the year to an amount lower than they otherwise would have had to if they had known their final funding amount earlier. PHAs are also eligible to receive funding for administrative expenses based on a formula involving the number of units they lease. As with the program funding, PHAs receive a portion of the funding for which they are eligible based on HUD’s appropriation for the voucher program. In recent years, that funding has been lower than the total formula eligibility of all PHAs. For example, in 2012, PHAs received 80 percent of their administrative expenses eligibility. In 2013, prior to sequestration HUD expected PHAs would receive 72 percent of their administrative expenses eligibility, but due to sequestration PHAs received 69 percent of their eligibility. As in recent years, part of HUD’s fiscal year 2013 appropriation for the Housing Choice Voucher program contained a set aside of $103 million that HUD could provide to PHAs for four specified purposes. The appropriation act altered the purposes for which this funding could be used. Specifically, HUD could provide supplemental funding to PHAs that faced terminating some participating families from the rental assistance program due to insufficient funds (even after taking reasonable cost saving measures). HUD chose to prioritize this use of the set aside, and used $83 million to prevent terminations, which HUD officials stated was sufficient to prevent all terminations. To receive the supplemental funding, PHAs had to demonstrate that they would have had to terminate families from the program, immediately stop issuing new vouchers, and use all their reserves to fund vouchers. HUD provided the supplemental set-aside funding to 294 PHAs. Most PHAs we interviewed reported that the set-aside funding was helpful, but one association of PHAs noted that because most of the set aside was used to prevent terminations, less funding was available for the other purposes that had previously assisted PHAs in prior years, such as providing additional funding to PHAs experiencing significant increases in voucher costs from unforeseen circumstances. In response to sequestration, PIH increased the number of staff (from 6 to 13) assigned to its shortfall prevention team, which provides technical assistance and other support to PHAs that are at risk of needing to terminate families from the program. The team worked with staff from PIH’s Financial Management Center and regional offices to identify PHAs at risk of having a funding shortfall, which would require the PHA to terminate some families from the program. The team then worked with the at-risk PHAs to implement cost-cutting measures such as immediately ceasing to issue vouchers to families on their waiting lists, pulling previously issued vouchers from families that had not yet used them and returning those families to the waiting list, increasing minimum rents and reducing utility allowances. PIH officials told us that in some cases these actions were sufficient to prevent PHAs from having to terminate families from the program. If the team determined that a PHA was still at risk of a shortfall despite the cost-cutting measures, the team encouraged the PHA to apply for set-aside funds from HUD to protect currently assisted families from termination. HUD officials told us that the nature of the grant for operating public housing led to sequestration’s cuts being passed directly to PHAs and HUD had no flexibility to decide where to make cuts. As with the voucher program, eligibility for funding for public housing operating expenses is determined by formula. PHAs receive a portion of the funding for which they are eligible based on HUD’s appropriation for the public housing operating fund. The total amount of formula funding for PHAs for public housing operations effectively was $450 million lower than in 2012, before accounting for sequestration, a decline of almost 10 percent. Sequestration reduced this funding by an additional $199 million, and the across-the board-rescission reduced funding by $8.5 million, resulting in a total decline in formula allocations of $658 million (14 percent) relative to fiscal year 2012. As a result, PHAs received 82 percent of their formula eligibility in total for fiscal year 2013. In 2012, PHAs received 95 percent of their formula eligibility. Before sequestration, HUD funded PHAs in January and February of 2013 at 92 percent of their public housing formula eligibility, based on the lower of the House and Senate versions of the appropriations bill. In March, HUD reduced the funding proration to 81 percent due to the likelihood of sequestration. After sequestration, because January and February funding had been provided at a level higher than the 82 percent proration for the year, HUD provided funding for April through December 2013 at 79 percent of PHAs’ formula eligibility. To assist PHAs in implementing sequestration and reducing costs, PIH issued documents with frequently asked questions on sequestration and administrative streamlining related to sequestration. For example, PIH notified PHAs that it was lowering the reporting frequency for energy efficiency reports from quarterly to annually thereafter. PIH also noted it would conduct fewer on-site and remote monitoring reviews, prioritizing PHAs with higher risk and significant problems. HUD officials told us they considered applying broad waivers of administrative requirements to assist PHAs in reducing costs, such as reducing the frequency of required income verifications for residents with fixed incomes. However, they decided that HUD did not have authority to change some of the requirements and for others would have had to go through the full regulatory rulemaking process, which includes a public comment period, and thus decided not to proceed with these actions. HUD officials told us they had little flexibility in implementing sequestration for IHBG because funding through the program is determined by formula. HUD sent letters to tribes on March 12, 2013, notifying them of sequestration and that their funding likely would be reduced. However, HUD did not notify recipients of their final formula funding amounts until May 20, 2013, for two reasons. First, the full-year appropriation providing funding for federal government programs was not enacted until March 26, 2013. Second, the processes that HUD must follow to finalize the IHBG grant funding formula took about 60 days to complete. HUD sent grant agreements to most tribes on June 11, 2013, and funds were available to tribes beginning in mid-June, depending on how quickly the tribes approved and returned the agreements. In 2012, funds were available to tribes beginning in February. For additional information, contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov. This report examines: (1) the effects of fiscal year 2013 sequestration on the operations, performance, and services to the public for selected components within federal agencies; and (2) how selected components planned and prepared for and implemented fiscal year 2013 sequestration. This report builds off of our previously issued report that evaluated how 23 federal agencies, including the Departments of Defense (DOD), Education, Health and Human Services (HHS), Homeland Security (DHS), and Housing and Urban Development (HUD), prepared for and implemented the fiscal year 2013 sequestration at the agency level, and the effects of sequestration on agencies’ operations, performance, and services to the public. To achieve these objectives, we selected six case study components within federal agencies for review. In selecting components, we sought to cover a significant share of the $85.3 billion in funds ordered for sequestration on March 1, 2013, including both direct spending and discretionary appropriations, as well as programs with a high level of interaction with the public. We also sought to cover a range of federal missions (e.g., education, health, and defense) and the different program delivery tools the federal government uses to achieve its missions, such as grants, vouchers, contracts, loans and loan guarantees, and direct services. Based on these criteria, which are discussed in more detail below, we selected the following components: DOD’s Operation and Maintenance accounts; DOD’s Procurement accounts; DHS’s U.S. Customs and Border Protection (CBP); Education’s Office of Elementary and Secondary Education (OESE); HHS’s Centers for Medicare & Medicaid Services (CMS); and HUD’s Public and Indian Housing (PIH). We used a multistep process to select these components. First, we began the selection process by considering the 24 federal agencies identified in the Chief Financial Officers (CFO) Act of 1990, as amended. These agencies accounted for approximately 98 percent of the total sequestered funding in fiscal year 2013. They also accounted for the majority of federal spending in 13 of the federal government’s 17 broad mission areas, or budget functions. We excluded from consideration the Department of Veterans Affairs, because its accounts were exempt from sequestration. We excluded the Department of State and the Agency for International Development (USAID), because we determined that the effects of reductions at these agencies were less likely to directly affect the American public than reductions at the other agencies under consideration. The Department of State and USAID were both included in our government-wide review. These data were used as a proxy for determining those agencies with the largest amount of sequestered funding, because data on the amount of sequestered funds by agency were not readily available in a format that we could analyze at the time that we began the selection process. Once such data were available, we compared the results of our analysis with the results when using the amount of sequestered funding by agency as calculated by OMB. We determined that our final selections were broadly consistent with the results when using OMB data on the amount sequestered and that no further adjustments were needed. we chose not to include two nondefense components from the same agency. We used a matrix to determine that certain criteria were satisfied. Specifically, we used OMB data on budget functions to ensure that we had a range of federal missions (e.g., education, health, and national defense) and OMB object class data to ensure that we had a range of different program delivery tools the federal government uses to achieve its missions. We used data from OMB’s March 1 sequestration report to ensure that the selected case study components represented both sequestered direct spending and discretionary appropriations. If multiple components met our criteria, we gave preference to components that were determined to have a higher impact on services to the public. Overall, these six case study components accounted for roughly $48 billion, or more than 56 percent, of the total sequestration ordered on March 1, including roughly 77 percent of sequestered defense spending and almost 36 percent of sequestered nondefense spending. Results from selected case studies, however, cannot be generalized. We issued the results of our review of DOD’s Operation and Maintenance and Procurement accounts along with our review of DOD’s Research, Development, Test, and Evaluation account separately in November. Within the four nondefense components, we selected a limited number of programs, activities, or offices for more in-depth data gathering and analysis. See table 1 at the beginning of this report for an overview of the selected programs. We selected these programs based on the size of their budget, level of interaction with the public, the availability of measurable estimates of the effects of sequestration, and other factors. Similar to our criteria for selecting case study components, we also sought to cover a range of the different program delivery tools the federal government uses to achieve its missions, such as grants, vouchers, contracts, and direct services. For details on how we selected programs and activities within individual case study components, see appendixes I through IV. To address our objectives, we reviewed documents previously obtained for our agency-level review, such as a list of sequestered PPAs, total discretionary and direct spending funding levels for fiscal year 2013, and total amount sequestered. We also reviewed reprogramming restrictions and transfer authorities identified as part of the information request and supporting documentation of how these authorities were used, if at all, in response to sequestration. In addition, we reviewed additional agency documents, such as operating and spending plans for fiscal year 2013 and illustrative examples of sequestration-related guidance and formal communications with agencies’ employees, unions, and other stakeholders. We reviewed additional documents—provided by agency officials at the selected components—related to planning for and implementing sequestration in fiscal year 2013. These documents included guidance issued to internal subcomponents or to external program partners and recipients. We also reviewed relevant planning documentation, when available, demonstrating the components’ analysis of alternatives for implementing spending reductions. We analyzed budget and financial data for fiscal year 2013 to identify spending reductions at the PPA level and documentation of reprogramming, transfer, and other funding actions used in response to the fiscal year 2013 sequestration. We did not assess the appropriateness of actions that agencies or components took to implement sequestration, such as transfer and reprogramming actions. We interviewed agency officials from each component, including officials in budget and management offices as well as officials in program offices. In discussing the effects of sequestration, we asked agency officials to isolate the effects of sequestration from other factors such as operating under a continuing resolution (CR) and the rescissions enacted in the Consolidated and Further Continuing Appropriations Act, 2013, to the degree possible. We recognize that these other factors could also contribute to budget uncertainty and affect component’s operations, performance, and services to the public. For example, because CRs only provide funding until an agreement is reached on final appropriations, they create uncertainty for components about both when they will receive their final appropriation and what level of funding ultimately will be available. Our past work has shown that an agency may delay hiring or contracts during the CR period, potentially reducing the level of services agencies provide and increasing costs. We asked agencies to identify the source of any data provided and a description of any known limitations or purposes for which the data being provided should not be used. We reviewed agencies’ supporting documents to assess the reasonableness of their data and any quantitative estimates of the effects of sequestration on agency operations, performance, and services to the public. Specifically, we reviewed the data and methodology used to calculate the estimates and we reported the estimates when they met our evidentiary standards. In some cases we found it appropriate to report agency estimates, as long as we also included significant contextual information and information about limitations regarding the estimates. In other cases, if agency explanations of the data and methodologies used to estimate the effects of sequestration indicated significant uncertainty surrounding the estimates, we did not report the estimates. To further assess the reliability of the data provided by agencies we interviewed knowledgeable officials as needed. We determined that the data were reliable for the purposes used in this report. To obtain further information on the effects of fiscal year 2013 sequestration on selected components’ services to the public, we interviewed select program partners that assist the components in carrying out their missions, recipients of the components’ support and services, or their representatives. For CBP, we interviewed representatives from the Airports Council International, Airlines for America, the American Association of State Highway and Transportation Officials, and the American Trucking Association. For CMS, we interviewed officials from a purposeful sample of Medicare contractors—two Medicare Administrative Contractors and a Zone Program Integrity Contractor—and state survey agencies to obtain information on CMS’s planning and implementation of sequestration, as well as effects to CMS’s fee-for-service operations, CMS program integrity activities, and state survey and certification oversight activities. For OESE, we interviewed officials from seven school districts that receive Title I or Impact Aid grants. We selected these school districts based on variation in the grant amounts they received, each district’s reliance on grant funding, and geographic location. In addition, we interviewed two national associations representing states and districts receiving Title I and Impact Aid grants and six state Title I grant administrators. For PIH, we interviewed officials from four local public housing agencies, which we selected based on their size, geographic location, and use of set-aside funding to avoid terminations in their voucher program, two national associations, and the National Low Income Housing Coalition. For more information on the program partners and recipients we spoke with and how they were selected, see appendixes I to IV. To examine the extent to which selected components identified their PPAs in accordance with the criteria set out in section 256(k)(2) of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, we reviewed a purposeful sample of five PPAs from each of the four nondefense components discussed in this report. In selecting PPAs, we sought to include some of the PPAs that fund programs and activities within case study components selected for more in-depth review. However, we also considered the source used to define the PPA, whether the PPA contained direct spending or discretionary appropriations, the types of activities the PPA supports, and instances in which the agency reported that a PPA was defined at the account level. Therefore, some of the PPAs selected do not align with the programs and activities selected for more in-depth review. Table 8 provides a list of the PPAs that we reviewed. Because we used a nonrandom, purposeful sample, the results of our analysis of the selected PPAs cannot be generalized to other PPAs within the component or department. While we assessed the extent to which selected components identified their PPAs in accordance with the criteria set out in section 256(k)(2) of BBEDCA, we did not assess each PPA for compliance with other sections of BBEDCA. For example, we did not assess the extent to which a PPA was properly characterized as “discretionary appropriations” or “mandatory spending” for the purposes of implementing sequestration. While we reviewed components’ operating plans and other budgetary data, we did not test components’ financial systems to determine that the component implemented sequestration at the PPA level as reported. We conducted this performance audit from April 2013 to May 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appropriation: Budget authority to incur obligations and to make payments from the Treasury for specified purposes. An appropriation act is the most common means of providing appropriations; however, authorizing and other legislation itself may provide appropriations. Annual appropriation: A provision of law appropriating funds enacted annually to provide budget authority to incur obligations and make payments from the Treasury for specified purposes. Supplemental appropriation: A provision of law appropriating funds in addition to those already enacted in an annual appropriation act. Supplemental appropriations provide additional budget authority, usually in cases where the need for funds is too urgent to be postponed until enactment of the regular appropriation bill. Supplemental appropriations may sometimes include items not appropriated in the regular bills due to a lack of timely authorizations. Advance appropriation: Budget authority that becomes available 1 or more fiscal years after the fiscal year for which the appropriation was enacted. For example, a fiscal year 2012 appropriation could provide that budget authority for a specified activity would not become available until October 1, 2012 (the start of fiscal year 2013) or later. For sequestration, funding enacted as advance appropriations— available in fiscal year 2013—was included in the sequestrable base. Availability: Budget authority that is available for incurring new obligations. Budget account: An item for which appropriations are made in any appropriation act and, for items not provided for in appropriation acts, the term means an item for which there is a designated budget account identification code number in the President’s budget. Budget authority: Authority provided by federal law to enter into financial obligations that will result in immediate or future outlays involving federal government funds. One-year appropriation: Budget authority available for obligation only during a specific fiscal year that expires at the end of that fiscal year. Multiyear appropriation: Budget authority available for a fixed period of time in excess of 1 fiscal year. This authority generally takes the form of 2-year, 3-year, and so forth availability but may cover periods that do not coincide with the start or end of a fiscal year. No-year appropriation: Budget authority that remains available for obligation for an indefinite period of time. A no-year appropriation is usually identified by language such as “to remain available until expended.” Permanent appropriation: Budget authority that is available as the result of previously enacted legislation and is available without further legislative action. Many programs with permanent appropriations are exempt from sequestration (see “mandatory” below). Definite appropriation: Budget authority that is stated as a specified sum at the time the appropriation is enacted. This type of authority, whether in an appropriation act or other law, includes authority stated as “not to exceed” a specified amount. Indefinite appropriation: Budget authority that, at time of enactment, is for an unspecified amount, such as entitlement programs where obligations depend on the number of eligible beneficiaries receiving benefits. Also for fee-funded accounts in which total obligations depend on demand for the good or service provided by the program (e.g., programs funded by regulatory fees). Indefinite appropriations may be appropriated as all or part of the amount of proceeds from the sale of financial assets, the amount necessary to cover obligations associated with payments, the receipts from specified sources—the exact amount of which is determinable only at some future date—or it may be appropriated as “such sums as may be necessary” for a given purpose. For sequestration, unless otherwise specified in law, agencies were directed to implement sequestration for accounts with indefinite authority by reducing the remaining obligations from fiscal year 2013 sequestrable resources by a uniform percentage. Expired budget authority: Budget authority that is no longer available to incur new obligations but is available for an additional 5 fiscal years for disbursement of obligations properly incurred during the budget authority’s period of availability. Budget function: The functional classification system is a way of grouping budgetary resources so that all budget authority and outlays of on-budget and off-budget federal entities and tax expenditures can be presented according to the national needs being addressed. National needs are grouped in 17 broad areas to provide a coherent and comprehensive basis for analyzing and understanding the budget. Carryover balance (unexpended balance): The sum of the obligated and unobligated balances. Continuing resolution: An appropriation act that provides budget authority for federal agencies, specific activities, or both, to continue in operation for a specific period of time when Congress and the President have not completed action on the regular appropriation acts by the beginning of the fiscal year. Direct spending: Budget authority that is provided in laws other than appropriation acts and entitlement authority (for example, Supplemental Nutrition Assistance, Medicare, and veterans’ pension programs). Direct spending, also referred to as mandatory spending, includes payment of interest on the public debt, and nonentitlements such as payments to states from Forest Service receipts. For sequestration, many mandatory programs are exempt. But for those that are not exempt, the PPAs for mandatory accounts are generally delineated in the President’s budget for fiscal year 2013. Discretionary spending: Outlays from budget authority that is provided in, and controlled by, appropriations acts. Expended funds: Funds that have actually been disbursed or outlaid. Mandatory spending: See definition of direct spending above. Obligated balance (obligated funds): The amount of obligations already incurred for which payment has not yet been made. Technically, the obligated balance is the unliquidated obligations. Budget authority that is available for a fixed period expires at the end of its period of availability, but the obligated balance of the budget authority remains available to liquidate obligations for 5 additional fiscal years. At the end of the fifth fiscal year, the account is closed and any remaining balance is canceled. Budget authority available for an indefinite period may be canceled and its account closed if (1) it is specifically rescinded by law or (2) the head of the agency concerned (or the President) determines that the purposes for which the appropriation was made have been carried out and disbursements have not been made from the appropriation for 2 consecutive years. Obligation: An obligation is a definite commitment that creates a legal liability of the government for the payment of goods and services ordered or received, or a legal duty on the part of the United States that could mature into a legal liability by virtue of actions of another party. Program, Project, or Activity (PPA): An element within a budget account. The programs, projects, and activities as delineated in the appropriation act or accompanying report for the relevant fiscal year covering that account. For accounts not included in appropriation acts, PPAs are delineated in the most recently submitted President’s budget or congressional budget justifications, specifically the program and financing schedules that the President provides in the “Detailed Budget Estimates” in the budget submission for the relevant fiscal year. Reprogramming: Reprogramming is the shifting of funds from one program to another within an appropriation or fund account for purposes other than those contemplated at the time of appropriation. The authority to reprogram is implicit in an agency’s responsibility to manage its funds; no statutory authority is necessary but the agency may be required to notify the congressional appropriations committees, the authorizing committees, or both of any reprogramming action. Rescission: Legislation enacted by Congress that cancels budget authority previously enacted before the authority would otherwise expire. For sequestration, the Consolidated and Further Continuing Appropriations Act, 2013 included across-the-board rescissions, which were applied to full-year appropriations for fiscal year 2013 (in addition to the reductions required by the Joint Committee sequestration). Sequestration: In general, the permanent cancellation of budgetary resources under a presidential order. For fiscal year 2013, the uniform percentage reduction is applied to all programs, projects, and activities within a budget account, with some program exemptions and special rules. Spending authority: A specific form of budget authority that authorizes obligations and outlays using offsetting collections credited to an expenditure account. Spending authority is typically provided in authorizing laws and in some cases appropriation acts limit obligations. Transfer: The shifting of funds between accounts is called a transfer. An agency may not transfer funds unless it has statutory authority to do so. Unobligated balance (unobligated funds): The portion of budget authority that has not yet been obligated. For an appropriation account that is available for a fixed period, the budget authority expires after the period of availability ends and is no longer available for new obligations, but its unobligated balance remains available for 5 additional fiscal years for recording and adjusting obligations properly chargeable to the appropriations period of availability. For example, an expired, unobligated balance remains available until the account is closed to record previously unrecorded obligations or to make upward adjustments in previously under-recorded obligations (such as contract modifications properly within scope of the original contract). At the end of the fifth fiscal year, the account is closed and any remaining balance is canceled. For a no-year account, the unobligated balance is carried forward indefinitely until (1) specifically rescinded by law or (2) the head of the agency concerned (or the President) determines that the purposes for which the appropriation was made have been carried out and disbursements have not been made from the appropriation for 2 consecutive years. For more information on budget terms and concepts, see GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP (Washington, D.C.: September 2005) (published in cooperation with the Secretary of the Treasury and the Directors of OMB and the Congressional Budget Office). In fiscal year 2013, CBP employed about 60,000 employees, including CBP officers, Border Patrol agents, agriculture specialists, and Air Interdiction agents (pilots), among others. Established geographically by region, the Office of Field Operations (OFO) and its respective 20 field offices around the United States distribute key policies and procedures to field staff. Field offices provide guidance to their regional ports and ensure the dissemination and implementation of CBP guidelines. For fiscal year 2013, OFO was congressionally directed to maintain 21,775 officers. OFO’s post- sequestration fiscal year 2013 funding represented about 27 percent of CBP’s fiscal year 2013 post-sequestration funding. a: Explanatory Statement, Consolidated and Further Continuing Appropriations Act, 2013, 159 Cong. Rec. S1287, S1549 (daily ed. Mar. 11, 2013). Fiscal year 2013 funding prior to sequestration: $3.2 billion Sequestered amount: $156.3 million Post-Sequestration funding: $3.05 billion b: According to CBP’s budget office, the $3.2 billion represents funding for CBP’s Border Security Inspections and Trade Facilitation Programs, Projects, and Activities (PPA). Funding for OFO comprises the majority of this PPA. CBP collects COBRA user fees for air passenger customs and vessel passenger customs inspections, among other things. COBRA fee collections fund activities involving CBP officers ensuring that all carriers, passengers, and their personal effects entering the U.S. are compliant with customs laws. According to CBP, fees, such as the COBRA fee, play an integral role in CBP’s planning and budget process because they reimburse CBP’s Salaries and Expenses account, for certain expenses, such as overtime for CBP officers, that comprise about 30 percent of that account. The COBRA account post-sequestration fiscal year 2013 funding represented about 3.5 percent of CBP’s total fiscal year 2013 post-sequestration funding. Fiscal year 2013 funding prior to sequestration: $419.4 million Sequestered amount: $27 million Post-Sequestration: $392.4 million c: This amount represents the fiscal year 2013 budget authority as stated in the explanatory statement accompanying the Consolidated and Further Continuing Appropriations Act, 2013. The OMB baseline established in its March 1 report for this account was $529.4 million. The U.S. Border Patrol (USBP) is responsible for patrolling nearly 6,000 miles of Mexican and Canadian international land borders and over 2,000 miles of coastal waters surrounding the Florida Peninsula and the island of Puerto Rico. For fiscal year 2013, USBP was legislatively mandated to maintain 21,370 agents across its 20 sectors. USBP’s post-sequestration fiscal year 2013 funding represented about 31 percent of CBP’s fiscal year 2013 post-sequestration funding. Fiscal year 2013 funding prior to sequestration: $3.7 billion Sequestered amount: $180.7 million Post-Sequestration funding: $3.52 billion d: Pub. L. No. 113-6, 127 Stat. 198, 345 (2013). e: According to CBP’s budget office, the $3.7 billion represents funding for CBP’s Border Security and Control between Ports of Entry PPA. Funding for USBP comprises the majority of this PPA. Michelle Sager, Director, Strategic Issues, (202) 512-6806 or sagerm@gao.gov. Edda Emmanuelli Perez, Managing Associate General Counsel, (202) 512-2853 or emmanuellipereze@gao.gov. For issues related to the Department of Housing and Urban Development: Daniel Garcia-Diaz, Director, Financial Markets and Community Investment, (202) 512-8678 or garciadiazd@gao.gov. For issues related to the Department of Defense: John Pendleton, Director, Defense Capabilities and Management, (202) 512-3489 or pendletonj@gao.gov, or Michael Sullivan, Director, Acquisition and Sourcing Management, (202) 512-4841 or sullivanm@gao.gov. For issues related to the Department of Education: Melissa Emrey-Arras, Director, Education, Workforce, and Income Security, (617) 788-0534 or emreyarrasm@gao.gov. For issues related to the Department of Health and Human Services: Kathleen King, Director, Health Care, (202) 512-7114 or kingk@gao.gov. For issues related to the Department of Homeland Security: David C. Maurer, Director, Homeland Security and Justice, (202) 512-9627 or maurerd@gao.gov. The following staff contributed to this report: Elizabeth Curda and Melissa Wolf (Assistant Directors); Katherine Lenane (Assistant General Counsel); Thomas McCabe (Analyst-in-Charge); Margaret Adams, Shari Brewster, Robert Gebhart, Lauren Grossman, Donna Miller, Laurel Plume, Alan Rozzi, and Walter Vance. In addition, staff that contributed to sections of this report on selected agencies are listed in table 9. | On March 1, 2013 the President ordered a sequestration of $85.3 billion across federal government accounts. Final appropriations enacted on March 26, 2013 reduced this amount to $80.5 billion. Under current law, a sequestration of direct spending will occur through fiscal year 2024 and another sequestration of discretionary appropriations could occur in any fiscal year through 2021. GAO was asked to evaluate how agencies prepared for and implemented sequestration in fiscal year 2013. GAO's March 2014 report broadly examined fiscal year 2013 sequestration at 23 large federal agencies. This report examines in greater depth: (1) the effects of fiscal year 2013 sequestration on the operations, performance, or services to the public for selected components within federal agencies; and (2) how those selected components planned for and implemented the fiscal year 2013 sequestration. GAO reviewed programs and activities operated by four components of federal agencies: CBP, CMS, OESE, and PIH. GAO selected these case studies based on factors such as the share of total sequestered funds and level of direct services provided to the public. GAO also incorporated findings from a November 2013 report that addressed similar objectives for select operations at DOD. GAO's case study selections account for about 77 percent of the total defense funding sequestered and 36 percent of the total nondefense funding sequestered in fiscal year 2013. Fiscal year 2013 sequestration reduced funding to selected components of federal agencies and their program partners—such as state and local governments—that assist in carrying out agency missions. As a result, the selected components and their partners reduced or delayed some services to the public and operations in 2013. For example: Public housing authorities reported providing rental assistance to about 41,000 fewer very low-income households compared to 2012—a 2.2 percent reduction—because the authorities received less program funding from the Department of Housing and Urban Development's Office of Public and Indian Housing (PIH). The Department of Health and Human Services' Centers for Medicare & Medicaid Services (CMS) reported reducing the frequency of surveys to determine quality of care and compliance with federal standards at psychiatric hospitals from once every three years to once every four to five years and specialized organ transplant centers from once every three years to once every four to six years. The Department of Homeland Security's U.S. Customs and Border Protection (CBP) reported that sequestration reductions did not leave them with sufficient funds to provide the overtime necessary to fully staff inspection booths which resulted in increased average wait times for international passengers. From fiscal years 2012 to 2013, wait times increased from 19.7 minutes to 22.8 minutes at one airport and from 20.9 minutes to 26.8 minutes at another. School districts GAO spoke with reported that reduced funding from the Department of Education's Office of Elementary and Secondary Education (OESE) resulted in less resources for specialists providing extra instruction to students and an increase in the average number of students per elementary school class. For example, one district reported an average increase of two or three students per elementary school class from the prior school year. The Department of Defense (DOD) reported that canceled or limited military training and readiness activities could increase the number of nondeployable units, decrease surge capacity to meet additional requirements with ready forces, and lead to skills gaps. In some cases, program partners reported increasing reliance on other federal, state, and local funding sources, where available, to mitigate sequestration's effects on their services to the public. Certain state agencies reported that they relied on additional state funds to inspect and investigate health care facilities on behalf of CMS. However, in other cases, program partners reported that reductions in other funding sources magnified sequestration's effects on services to the public. For example, officials at 7 school districts that receive federal education grants reported that sequestration compounded prior-year reductions in state funding. However, GAO found in some cases the effects of sequestration could not be isolated from the effects of other changes in funding. For example: The effects of the 2 percent sequestration of Medicare payments are difficult to quantify due to the challenge of isolating the effects of sequestration from other factors that increased or decreased payments to providers, as well as possible changes in provider behavior to compensate for the sequestration reductions. It is difficult to isolate the specific effects of sequestration on Title I school districts because Title I funding typically makes up a small portion of the school district's total funding compared to state and local sources. A district's Title I formula allocation could also be reduced as a result of factors other than sequestration. GAO found that sequestration planning and implementation varied among the selected components. In some cases, agencies directed components' efforts, while in others components provided guidance and set priorities for program offices. Consistent with GAO's March 2014 report, officials from all federal agency components reported that uncertainty regarding the timing and amount of sequestration and technical questions about how to apply sequestration to certain complex accounts presented challenges for planning and implementation. For example: CMS officials had difficulty determining all of the types of provider payments that would need to be cut and which funding was subject to special sequestration rules. According to CBP budget officials, applying sequestration to fee-based accounts was more difficult than applying sequestration to other accounts. In addition, uncertainty surrounding the timing and amount of sequestration limited some components' ability to substantively communicate with program partners and recipients, making it difficult for partners to plan and execute their budgets during the fiscal year. For example, recipients of Indian Housing Block grants from PIH did not receive the full amount of funds until several months into the calendar year. Components that had initiated efficiency efforts prior to sequestration reported that they were better positioned to plan for and implement sequestration in fiscal year 2013. For example, CMS officials reported that savings from a 2011 initiative to improve the efficiency of its facility inspections helped the component plan for and implement sequestration. In reviewing how agencies implemented sequestration, GAO also selected five programs, projects, and activities (PPAs) from each of the four nondefense case study components based on the specific programs or activities reviewed within each component and other factors and found that components complied with the provision in the Balanced Budget and Emergency Deficit Control Act of 1985 that specifies how PPAs should be identified for the purpose of sequestration. In cases where officials had some discretion in implementing sequestration reductions, components reported that they sought to protect higher priority activities, either by using funding flexibilities or modifying or canceling contracts or other ongoing activities. For example, within DOD, the military services sought to protect training requirements for deployed and next-to-deploy forces by canceling or limiting training for forces not preparing to deploy in fiscal year 2014. However, for some programs, officials reported having limited options to implement sequestration. For example, some of the case study components' largest programs—such as HUD's Housing Choice Voucher Program and Education's Title I grants—are based on eligibility formulas and the funds are disbursed to program partners to provide services to the public. As a result, these program partners had to identify specific actions—such as limiting the number of housing vouchers issued and increasing classroom size—to absorb the reductions and mitigate their effects on the public. GAO is not making new recommendations in this report. We provided a draft of this product to the selected case study agencies and the Office of Management and Budget (OMB) for comment. DHS, Education, HHS, and HUD provided technical comments that were incorporated, as appropriate. OMB did not provide comments. |
Our tests of IT equipment inventory controls at four case study locations, including three VA medical centers and VA headquarters, identified a weak overall control environment and a pervasive lack of accountability for IT equipment items across the locations we tested. As summarized in table 1, our statistical tests of key IT inventory controls at our four case study locations found significant control failures. None of the case study locations had effective controls to safeguard IT equipment from loss, theft, and misappropriation. Our statistical tests identified a total of 123 lost and missing IT equipment items across the four case locations, including 53 IT equipment items that could have stored sensitive personal information. Such information could include names and Social Security numbers protected under the Privacy Act of 1974 and personal health information accorded additional protections from unauthorized release under the Health Information Portability and Accountability Act of 1996 (HIPAA) and implementing regulations. Although VA property management policy establishes guidelines for holding employees and supervisors pecuniarily (financially) liable for loss, damage, or destruction because of negligence and misuse of government property, except for a few isolated instances, none of the case study locations assigned user-level accountability for IT equipment. Instead, these locations relied on information about user organization and user location, which was often incorrect and incomplete. Under this lax control environment, missing IT equipment items were often not reported for several months and, in some cases several years, until the problem was identified during a physical inventory. Our statistical tests of IT equipment existence at the four case study locations identified a total of 123 missing IT equipment items. The 123 missing IT equipment items included 44 at the Washington, D.C., medical center; 9 at the Indianapolis medical center; 17 at the San Diego medical center; and 53 at VA headquarters. Our statistical tests of missing equipment found that none of the four test locations had effective controls. Missing IT equipment items pose not only a financial risk but also a security risk associated with compromising sensitive personal data maintained on computer hard drives. The 123 missing IT equipment items included 53 that could have stored sensitive personal information, including 19 from the Washington, D.C., medical center; 3 from the Indianapolis medical center; 8 from the San Diego medical center; and 23 from VA headquarters. Because of a lack of user-level accountability and the failure to consistently update inventory records for inventory status and user location changes, VA officials at our test locations could not determine the user or type of data stored on this equipment and therefore the risk posed by the loss of these items. VA management has not enforced VA property management policy and has generally left implementation decisions up to local organizations, creating a nonstandard, high-risk environment. Although VA property management policy establishes guidelines for user-level accountability, the three medical centers we tested assigned accountability for most IT equipment to their information resource management (IRM) or IT Services organizations, and VA headquarters organizations tracked IT equipment items through their IT inventory coordinators. However, because these personnel did not have possession (physical custody) of all IT equipment under their purview, they were not held accountable for IT equipment determined to be missing during physical inventories. Because of this weak overall control environment, we concluded that at the four case study locations essentially no one was accountable for IT equipment. Absent user-level accountability, accurate information on the using organization and location of IT equipment is critical to maintaining effective asset visibility and control over IT equipment items. However, as table 1 shows, we identified high failure rates in our tests for correct user organization and location of IT equipment. Because property management system inventory records were inaccurate, it is not possible to determine the timing or events associated with lost IT equipment as a basis for holding individual employees accountable. Although our Standards for Internal Control in the Federal Government requires timely recording of transactions as part of an effective internal control structure and safeguarding of sensitive assets, we found that VA’s property management policy neither specified what transactions were to be recorded for various changes in inventory status nor provided criteria for timely recording. Further, IRM and IT Services personnel responsible for installation, removal, and disposal of IT equipment did not record or assure that transactions were recorded by property management officials when these events occurred. We found errors related to the accuracy of other information in IT equipment inventory records, including equipment status (e.g., in use, turned-in, disposal), serial numbers, model numbers, and item descriptions. As shown in table 1, estimated overall error rates for recordkeeping were lower than the error rates for the other control attributes we tested. Even so, the errors we identified affect management decision making and create waste and inefficiency in operations. Many of these errors should have been detected and corrected during annual physical inventories. To assess the effect of the lax control environment for IT equipment, we asked VA officials at the case study locations covered in both our current and previous audits to provide us with information on the results of their physical inventories performed after issuance of recommendations in our July 2004 report, including Reports of Survey information on identified losses of IT equipment. As of February 28, 2007, the four case study locations covered in our current audit reported over 2,400 missing IT equipment items with a combined original acquisition value of about $6.4 million as a result of inventories they performed during fiscal years 2005 and 2006. Based on information obtained through March 2, 2007, the five case study locations we previously audited had identified over 8,600 missing IT equipment items with a combined original acquisition value of over $13.2 million, $12.4 million of which was identified at the Los Angeles medical center. Because inventory records were not consistently updated as changes in user organization or location occurred and none of the locations we audited required accountability at the user level, it is not possible to determine whether the missing IT equipment items represent recordkeeping errors or the loss, theft, or misappropriation of IT equipment. Further, missing IT equipment items were often not reported for several months and, in some cases, several years. Although physical inventories should be performed over a finite period, at most of the case study locations, these inventories were not completed for several months or even several years while officials performed extensive searches in an attempt to locate missing items before preparing Reports of Survey to write them off. According to VA Police and security specialists, it is very difficult to conduct an investigation after significant amounts of time have passed because the details of the incidents cannot be determined. The timing and scope of the physical inventories performed by the case study locations varied. For example, the Indianapolis medical center had performed annual physical inventories in accordance with VA policy for several years. The Washington, D.C., medical center performed a wall-to- wall physical inventory in response to our July 2004 report. In this case, inventory results reflected several years of activity involving IT inventory records that had not been updated and lost and missing IT equipment items that had not previously been identified and reported. In addition, the San Diego and Houston medical centers had not followed VA policy for including sensitive items, such as IT equipment valued at less than $5,000, in their physical inventories. Our investigator’s inspection of physical security at officially designated IT warehouses and storerooms at our four case study locations that held new and used IT equipment found that most of these storage facilities met the requirements in VA Handbook 0730/1, Security and Law Enforcement. However, not all of the formally designated storage locations at two medical centers had required motion detection alarm systems and special door locks. We also found numerous instances of informal IT storage areas at VA headquarters that did not meet VA physical security requirements. In addition, although VA requires that hard drives of IT equipment and medical equipment be sanitized prior to disposal to prevent unauthorized release of sensitive personal and medical information, we found weaknesses in the disposal process that pose a risk of data breach related to sensitive personal information residing on hard drives in the property disposal process that have not yet been sanitized. VA requires that hard drives of excess computers be sanitized prior to reuse or disposal because they can store sensitive personal and medical information used in VA programs and activities, which could be compromised and used for unauthorized purposes. For example, our limited tests of excess computer hard drives in the disposal process that had not yet been sanitized found hundreds of unique names and Social Security numbers on VA headquarters computers and detailed medical histories with Social Security numbers on computer hard drives at the San Diego medical center. Our limited tests of hard drives that were identified as having been subjected to data sanitization procedures did not find data remaining on these hard drives. However, our limited tests identified some problems that could pose a risk of data breach with regard to sensitive personal and medical information on hard drives in the disposal process that had not yet been sanitized. For example, our IT security specialist noted excessive delays—up to 6 years—in performing data sanitization once the computer systems had been identified for disposal, posing an unnecessary risk of losing the sensitive personal and medical information contained on those systems. VA Handbook 0730/1, Security and Law Enforcement, prescribes physical security requirements for storage of new and used IT equipment, requiring storerooms to have walls to ceiling height, overhead barricades that prevent “up and over” access from adjacent rooms, motion intrusion detection alarm systems, and special key control, meaning room door lock keys and day lock combinations that are not master keyed for use by others. Most of the designated IT equipment storage facilities at the four case study locations met VA IT physical security requirements; however, we identified deficiencies related to lack of intrusion detection systems at the Washington, D.C., and San Diego medical centers and inadequate door locks at the Washington, D.C., medical center. In response to our findings, these facilities initiated actions to correct these weaknesses. We also found numerous informal, undesignated IT equipment storage locations that did not meet VA physical security requirements. For example, at the VA headquarters building, our investigator found that the physical security specialist was unaware of the existence of IT equipment in some storerooms. Consequently, these storerooms had not been subjected to required physical security inspections. Further, during our statistical tests, we observed one IT equipment storeroom in the VA headquarters building IT Support Services area that had a separate wall, but no door. The wall opening into the storeroom had yellow tape labeled “CAUTION” above the doorway. The storeroom was within an IT work area that had dropped ceilings that could provide “up and over” access from adjacent rooms, and it did not meet VA’s physical security requirements for motion intrusion detection and alarms and secure doors, locks, and special access keys. In another headquarters building, we observed excess IT equipment stacked in the corners of a large work area that had multiple doors and open access to numerous individuals. We also found that VA headquarters IT coordinators used storerooms and closets with office-type door locks and locked filing cabinets in open areas to store IT equipment that was not currently in use. The failure to provide adequate security leaves the information stored on these computers vulnerable to data breach. Mr. Chairman, although VA strengthened existing property management policy in response to recommendations in our July 2004 report, issued several new policies to establish guidance and controls for IT security, and reorganized and centralized the IT function within the department under the CIO, additional actions are needed to establish effective control in this area. For example, pursuant to recommendations made in our July 2004 report, VA updated its property management policy to clarify that IT equipment valued at under $5,000 is to be included in annual inventories. However, as noted in this testimony and described in more detail in our companion report, VA had not taken action to assure that these items were, in fact, subjected to physical inventory. In addition, the new CIO organization has no formal responsibility for medical equipment that stores or processes patient data and does not address roles or necessary coordination between IRM and property management personnel with regard to inventory control of IT equipment. The Assistant Secretary for Information and Technology, who serves as the CIO, told us that the new CIO organization structure will include a unit that will have responsibility for IT equipment asset management once it becomes operational. However, this unit has not yet been funded or staffed. To assure accountability and safeguarding of sensitive IT equipment, effective implementation will be key to the success of VA IT policy and organizational changes. Our companion report released today made 12 recommendations to VA to strengthen accountability of IT equipment and minimize the risk of theft, loss, misappropriation, and compromise of sensitive data. These included recommendations for revising policies related to recordkeeping requirements to document essential inventory events and transactions, ensuring that physical inventories are performed in accordance with VA policy, enforcing user-level accountability for IT equipment, and strengthening physical security of IT equipment storage locations. VA management agreed with our findings and concurred with all 12 recommendations. In VA’s written comments provided to us, it noted actions planned or under way to address our recommendations. Poor accountability and a weak control environment have left the four VA case study organizations vulnerable to continuing theft, loss, and misappropriation of IT equipment and sensitive personal data. To provide a framework for accountability and security of IT equipment, the Secretary of Veterans Affairs needs to establish clear, sufficiently detailed mandatory agencywide policies rather than leaving the details of how policies will be implemented to the discretion of local VA organizations. Keys to safeguarding IT equipment are effective internal controls for the creation and maintenance of essential transaction records; a disciplined framework for specific, individual user-level accountability, whereby employees are held accountable for property assigned to them, including appropriate disciplinary action for any lost equipment; and maintaining adequate physical security over IT equipment items. Although VA management has taken some actions to improve inventory controls, strengthening the overall control environment and establishing and implementing specific IT equipment controls will require a renewed focus, oversight, and continuing commitment throughout the organization. We appreciate VA’s positive response to our current recommendations and planned actions to address them. If effectively implemented, these actions will go a long way to assuring that the weaknesses identified in our last two audits of VA IT equipment will be effectively resolved in the near future. Mr. Chairman and Members of the Subcommittee, this concludes my statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact McCoy Williams at (202) 512-9095 or williamsm1@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Major contributors to this testimony include Gayle L. Fischer, Assistant Director; Andrew O’Connell, Assistant Director and Supervisory Special Agent; Abe Dymond, Assistant General Counsel; Monica Perez Anatalio; James D. Ashley; Francine DelVecchio; Lauren S. Fassler; Dennis Fauber; Jason Kelly; Steven M. Koons; Christopher D. Morehouse; Lori B. Tanaka; Chris J. Rodriguez; Special Agent Ramon J. Rodriguez; and Danietta S. Williams. In addition, technical expertise was provided by Keith A. Rhodes, Chief Technologist, and Harold Lewis, Assistant Director, Information Technology Security, Applied Research and Methods. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In July 2004, GAO reported that the six Department of Veterans Affairs (VA) medical centers it audited lacked a reliable property control database and had problems with implementation of VA inventory policies and procedures. Fewer than half the items GAO selected for testing could be located. Most of the missing items were information technology (IT) equipment. In light of these concerns and recent thefts of laptops and data breaches at VA, this testimony focuses on (1) the risk of theft, loss, or misappropriation of IT equipment at selected locations; (2) whether selected locations have adequate procedures in place to assure accountability and physical security of IT equipment in the excess property disposal process; and (3) what actions VA management has taken to address identified IT inventory control weaknesses. GAO statistically tested inventory controls at four case study locations. A weak overall control environment for VA IT equipment at the four locations GAO audited poses a significant security vulnerability to the nation's veterans with regard to sensitive data maintained on this equipment. GAO's Standards for Internal Control in the Federal Government requires agencies to establish physical controls to safeguard vulnerable assets, such as IT equipment, which might be vulnerable to risk of loss, and federal records management law requires federal agencies to record essential transactions. However, GAO found that current VA property management policy does not provide guidance for creating records of inventory transactions as changes occur. GAO also found that policies requiring annual inventories of sensitive items, such as IT equipment; adequate physical security; and immediate reporting of lost and missing items have not been enforced. GAO's statistical tests of physical inventory controls at four VA locations identified a total of 123 missing IT equipment items, including 53 computers that could have stored sensitive data. The lack of user-level accountability and inaccurate records on status, location, and item descriptions make it difficult to determine the extent to which actual theft, loss, or misappropriation may have occurred without detection. GAO also found that the four VA locations reported over 2,400 missing IT equipment items, valued at about $6.4 million, identified during physical inventories performed during fiscal years 2005 and 2006. Missing items were often not reported for several months and, in some cases, several years. It is very difficult to investigate these losses because information on specific events and circumstances at the time of the losses is not known. GAO's limited tests of computer hard drives in the excess property disposal process found hard drives at two of the four case study locations that contained personal information, including veterans' names and Social Security numbers. GAO's tests did not find any remaining data after sanitization procedures were performed. However, weaknesses in physical security at IT storage locations and delays in completing the data sanitization process heighten the risk of data breach. Although VA management has taken some actions to improve controls over IT equipment, including strengthening policies and procedures, improving the overall control environment for sensitive IT equipment will require a renewed focus, oversight, and continued commitment throughout the organization. |
DOL and VA oversee four employment and training programs targeted to veterans (see table 1). DOL administers its programs through state workforce agencies in each state. DOL oversees these programs through federal officials stationed in each region, including a Director of Veterans’ Employment and Training located in each state. DOL’s VETS administers three of the employment programs targeted to veterans. VETS also funds its portion of the TAP, which is a joint program with the Department of Defense and VA. VA funds the Vocational Rehabilitation & Employment Program. In December 2012, we examined the extent to which certain federal veterans’ employment and training programs vary in terms of the services they deliver and the veterans who receive them. We reported that some federal veterans’ programs provide similar services (e.g., job placement) but largely serve different populations. In addition to its programs administered by VETS, DOL offers employment and training services to the general population—including veterans. These programs include a national system of public employment services available to all individuals seeking employment. Those services include job search and labor market information and, as with its veterans programs, DOL administers its general programs through state workforce agencies that provide services at AJCs. Formerly known as One-Stop Career Centers, AJCs unify service locations for multiple federally-funded employment and training programs in a single system. AJCs serve two types of customers—job seekers and employers—and provide access to a full range of services pertaining to employment, training and education, employer assistance, and guidance for obtaining other assistance. Federal law requires these programs to give veterans priority over the general population, meaning that veterans can access services ahead of the general population or, if funds are limited, that veterans access services instead of the general population. From April 1, 2012, to March 30, 2013, AJCs served about 1.6 million veterans nationally through DOL’s Employment and Training Administration. Most of DOL’s employment service programs—both for veterans and the general public—report the same performance measures, known as common measures: Percentage of program exiters who have obtained employment (entered employment rate); percentage retaining employment for 6 months after exiting the program (employment retention rate); and 6-month average earnings of program exiters (average earnings). TAP was established over 20 years ago to meet the needs of separating servicemembers during their period of transition to civilian life by offering job-search assistance and related services (see fig. 1). TAP consists of several significant components provided by the Department of Defense, VA, DOL, and the Small Business Administration, among others. One of the components, DOL’s TAP employment workshops, consists of comprehensive 3-day workshops at selected military installations nationwide. Workshop attendees learn about job searches, career decision-making, current occupational and labor market conditions, resume and cover letter preparation, and interviewing techniques. Participants also are provided with an evaluation of their employability relative to the job market. TAP workshops must have a minimum of 10 participants and a maximum of 50 participants, per DOL guidelines. The Department of Defense is generally required to mandate participation, with some exceptions. Under the VOW to Hire Heroes Act of 2011, DOL has been required to use a contractor to conduct these employment workshops since November 21, 2013. The funding level for the DOL-provided employment workshop component of TAP for fiscal year 2014 was about $14 million, according to DOL’s 2015 Congressional Budget Justification. With these funds, VETS provided nearly 7,000 employment workshops that served over 207,000 participants, according to DOL. DOL reported that this was an 11 percent increase in participants, compared to fiscal year 2013. DOL attributed the increased demand for its employment workshops to the fact that TAP became mandatory for all transitioning servicemembers in fiscal year 2013. DOL requested $14 million for fiscal year 2015 in order to provide about 5,400 employment workshops with a planned average class size of 35 exiting servicemembers or spouses. This amount included the costs for conducting the pilot workshops outlined in the Dignified Burial Act. All of the content from TAP is also available online. The online or “virtual” curriculum was added to benefit servicemembers at geographically separated units, those with a short-notice separation and those contemplating retirement because some servicemembers may not have access to classrooms for transition instruction. Online TAP mirrors the traditional TAP offerings, and allows servicemembers, veterans, and spouses to access it from anywhere in the world. The Dignified Burial Act required DOL to provide TAP to veterans and their spouses at locations other than military installations for the purposes of assessing the feasibility and advisability of providing such a program. The act required the workshops to be piloted for 2 years starting in January 2013: in three to five states (at least two of which had to have high levels of veteran unemployment); at a sufficient number of locations to meet the needs of veterans and spouses within each pilot state; anywhere except military installations (could, however, include National Guard or reserve facilities not on active duty military installations); and, in a manner that generally follows the content of TAP. The Dignified Burial Act also required DOL to provide to Congress an annual report on the provision of the workshops for each year of the pilot. In response to the Dignified Burial Act, DOL provided the same employment workshops—including the same curriculum delivered by the same contractor—for the veterans’ employment workshop pilot as it uses for active servicemembers as part of on-base TAP. DOL officials said the TAP workshops offered employment training elements that were relevant to veterans, such as information on the federal hiring process, resume writing, and job searching practices. DOL officials also said that its TAP workshops satisfied the Dignified Burial Act’s requirement that the training should generally follow the content of the TAP.DOL has published two annual reports on the pilot. As required by the act, DOL provided the workshops to veterans in three states that volunteered to assist with the pilot—Georgia, Washington, and West Virginia—from November 2013 to December 2014. DOL officials said they selected the pilot states using a number of factors, including selecting two states with high veteran unemployment rates—Georgia and West Virginia—as DOL also considered states’ veteran population, required by law. number of military installations, infrastructure, geographic dispersion, and capacity to administer the program.West Virginia because it also presented the opportunity to test the pilot in one rural state. Officials said that they selected DOL instructed each state to hold 5 workshops; West Virginia subsequently held 7 additional workshops and Washington canceled 1, bringing the three-state total to 21. DOL provided guidance to the pilot states about where to hold the workshops and other requirements and then asked the state workforce agencies to select individual workshop locations based on DOL officials’ belief that state workforce agency officials would have a better idea of where the workshops were most needed. For example, DOL told pilot states the workshops could be held anywhere except military installations, as generally required by law, and that the classrooms needed to have internet access and be able to accommodate a large number of people. While each state held the workshops at locations other than military installations, the three state workforce agencies used different approaches in selecting locations for the workshops. Georgia, for instance, chose locations in part using veteran population data from VA’s website, Washington chose several locations close to military installations, and West Virginia chose locations mostly near rural areas. While states used different methods to select the workshop locations, Georgia and Washington held most workshops at AJCs. West Virginia held workshops mainly at National Guard installations and community college campuses because the state’s AJCs did not have classrooms that could accommodate large numbers of participants or the technology to present the course materials, according to state officials. DOL also instructed states to market the pilot to veterans and their spouses; each state developed its own marketing strategy. According to state workforce agency officials we interviewed, they worked with other organizations to inform veterans about the workshops. For example, officials from Washington’s state workforce agency said they collaborated with federal, state, and non-profit organizations, such as the National Guard, Job Corps, and local VA offices, and also sent marketing e-mails to unemployed veterans they identified through the Department of Defense’s Unemployment Compensation for Ex-servicemembers program. Similarly, in West Virginia, officials said they asked their partners, including veteran service organizations and community colleges, to inform their constituents about the workshops. West Virginia officials advertised the workshops through mass marketing efforts, such as television and the state workforce agency website. A Georgia official told us they also worked with state and local partners to inform veterans about the workshops and that they recruited participants through a homeless women’s veterans center. Additionally, all three states developed flyers that they distributed through their various partners. Finally, DOL instructed pilot states to help DOL collect information on pilot participants by enrolling workshop participants in the AJC database to get basic demographic data on them and eventually track their employment outcomes. Officials said they are collecting outcome data for workshop participants using the same measures as other DOL employment programs, namely whether veterans found a job, if they retained the job, and their average wage earnings. Additionally, the department asked states to administer DOL surveys that asked participants about their satisfaction with the workshop, including whether it accomplished its objectives and how much participants valued the training. Workshops were conducted during weekday business hours due to AJCs not being open during evenings or weekends. on the veterans’ employment workshops; officials said that developing a new survey would have been costly and time consuming because, for example, it would have required both departmental and Office of Management and Budget approval.customer satisfaction questions such as the extent to which participants felt the workshop was useful rather than why participants took the workshop. Officials noted that DOL implemented the pilot within its existing TAP budget and spent about $52,000 on costs for the pilot. Officials in all three pilot states reported that the workshops benefitted veterans by enhancing their job search capabilities, including helping them (1) write resumes, (2) build interviewing skills, and (3) translate their military experience into civilian job skills. For example, officials in West Virginia stated that one workshop helped a veteran translate experience as an infantryman and command sergeant major into core competencies of personnel management and logistics, noting the veteran could market his skills as a logistics expert and apply for management positions. The officials further noted that the workshop likely increased participants’ confidence in their civilian lives, pointing specifically to one participant who had been so motivated by the workshop that he found work and shelter after being homeless. A National Guard representative in West Virginia told us that the workshops also helped veterans prepare for job fairs. Officials in Washington noted that some participants found the workshop useful because it incorporated all of DOL’s individual employment services into a single 3-day session in a more intensive learning environment. On average, the 110 participants who completed the DOL satisfaction survey rated the workshop highly—respondents rated the course a 9 out of 10 overall, with 10 being “excellent”—and many echoed the specific benefits that officials noted. For example, 95 of 110 participants reported that they believed both that the training was relevant to their job search needs and that the training improved their skills. A little more than half of the participants (59 of 110) also wrote in—rather than checking a box—that they particularly valued the workshop’s resume writing assistance. DOL’s second annual report to Congress on the pilot noted that the satisfaction survey results across the three pilot states were similar. In addition, officials from two veteran service organizations told us that the workshops could enhance veterans’ job search skills. One veteran service organization official also told us that the workshops could be more meaningful to veterans than the TAP workshops they took before they left the military because some separating servicemembers may not be able to anticipate what challenges they will face in civilian life and they may not realize how important the skills that are taught in TAP will be to them. Despite efforts noted earlier to market the pilot and recruit participants, states struggled to attract participants and meet DOL’s targets for class participation. In 21 workshops across the three states, a total of 250 veterans participated in the pilot, according to DOL data. DOL instructed states to have a minimum of 10 participants enrolled in order to schedule a workshop and a maximum of 50 participants—the same guidelines as for DOL’s TAP workshops—with a preferred class size of 30-35 participants. Although several state officials told us that most workshops had at least 10 veterans enrolled initially, fewer than half of the workshops had 10 or more veterans actually attend; dozens of enrolled veterans did not show up. Furthermore, only 2 workshops had more than 30 participants. The five largest workshops were all located in an area of West Virginia in which participants may have been Department of Defense civilian contract workers facing a reduction in force. As in Georgia and Washington, workshops in other areas of West Virginia averaged fewer than 10 participants (see fig. 2). State officials and others offered several potential reasons for the generally low participation in the pilot workshops. For example, a state official in Georgia explained that some veterans may not have registered for the workshops because they could not spare 3 consecutive business days if, for example, they were engaged in a job search. Similarly, an official from a veteran service organization noted some veterans might need the time to work at a part-time job. Likewise, DOL’s second annual report indicated that states felt challenged by the 3-day format, which they believed precluded many individuals from participating and also resulted in a number of participants leaving at some point during the 3 days. Some state officials also said that some veterans who had registered for the workshops dropped out because of “life demands,” such as not having child care, which kept them from participating. An official in Georgia noted that an ice storm forced them to postpone four of the workshops and might have decreased participation in the rescheduled workshops. One DOL official said that participation might have been low in some locations because some veterans used services from similar programs such as job search services through AJCs. After noticing that registrants were dropping out, officials in West Virginia started calling registrants before workshops to remind them. West Virginia officials also worked with a hotel chain to offer free lodging during workshops to try to increase participation. However, a West Virginia official said that these efforts did not seem to have a significant effect on participation. Several state and veteran service organization officials suggested ideas for increasing participation for any future iteration of the workshops, including (1) holding shorter workshops; (2) providing options for participants to attend only certain portions, such as resume writing; (3) offering workshops at night or on weekends; and (4) having DOL help with marketing. DOL’s second annual report noted that states found the lack of funding for marketing the pilot a challenge, saying that they could have engaged in a more comprehensive recruiting effort to ensure greater commitment from participants if funding had been available. DOL has published information about the veterans’ employment workshop pilot in two annual reports required by the Dignified Burial Act. The 2014 pilot report provided an interim picture of workshop attendance and plans for data collection, and the 2015 report provided final attendance numbers—250 participants in three states—and certain participant demographics. The second annual report noted that a majority of participants were male and between the ages of 25 and 44. We conducted some further analyses of the data DOL collected, breaking down age ranges, employment status, and education levels (see sidebar). For example, the majority of participants for whom DOL collected demographic data were employed. DOL also collected data through a participant satisfaction survey; as we mentioned earlier, many survey respondents believed the workshop had increased their job search skills. Additionally, DOL interviewed state workforce agencies on best practices and challenges states faced. For example, DOL identified as a best practice West Virginia’s formation of a diverse working group that included the West Virginia National Guard, local workforce investment boards, community colleges, and local veteran service organizations. Regarding challenges, states noted a lack of funding for state marketing as significant, according to DOL’s 2015 report. States also indicated that the 3 consecutive day format excluded veterans who were unable to commit to attending for that period of time and resulted in a number of participants leaving at some point during the workshop. Lastly, the 2015 report also noted DOL plans to collect employment outcome data for workshop participants, which will not be available until October 2016. The Dignified Burial Act tasked us with reporting to Congress on the pilot, including the feasibility and advisability of providing veterans’ employment workshops nationally. However, DOL’s pilot design left unanswered at least three key questions that sound design practices suggest should be considered. Reponses to these questions could provide important information regarding the feasibility and advisability of expanding veterans’ employment workshops nationally. 1. What is the need for the program overall and for any specific, targeted groups of veterans? 2. What is the pilot’s role amid existing federal employment and training programs? 3. Relative to any needs it identifies, against what goals and objectives can DOL assess the pilot or an expanded version of it? Sound pilot design practices call for a needs assessment to better identify the population best served by the program or services being piloted as well as those populations that might not need the services. DOL officials said that they intended the pilot to serve the general veteran population and their spouses, the eligible beneficiaries identified in the Dignified Burial Act. Furthermore, DOL officials noted that because the law had defined a population of eligible beneficiaries, it would have been duplicative to conduct a needs assessment. As DOL noted in its second annual report, however, the general veteran population has widely varied employment experience, dates of separation, and disability status; this suggests different levels of need for the workshops. Had DOL more closely followed sound design practices by conducting a needs assessment, it could have tested this assumption and determined where the greatest need, if any, lay. For example, DOL could have determined whether to target the program to all veterans, regardless of their experiences or, instead, to certain targeted groups that may, because of their situations, be more likely to need and benefit from the workshops. DOL officials also said that there was not enough time and financial resources to conduct a needs assessment, pointing, as noted earlier, to the fact that DOL received no additional funding for this pilot and had to complete it within 2 years.information without expending significant time or resources. For example, DOL could have consulted with significant external stakeholders, such as the VA and veteran service organizations, to seek input on questions about veterans’ needs. Sound design practices indicate the importance of having relevant and timely communications with all stakeholders throughout the design and delivery of the program to fully engage all parties and obtain information in order to achieve all of the pilot’s objectives. DOL officials did not reach out to these stakeholders with expertise in veterans’ issues because, as they designed it, the pilot did not include information on benefits and services offered through the VA, and thus they viewed collaboration with them as unnecessary. As a result, DOL missed opportunities to gather potentially valuable input to inform the pilot’s design, such as better determining the needs of the veteran population, what their participation rates might be, and how to most effectively use limited resources to market the workshops to veterans. For example, officials from two veteran service organizations said they would have helped DOL market the workshops in an effort to increase attendance. However, DOL could have gathered some Without specific guidance from DOL about the needs the pilot should address, states determined their own target populations. For example, West Virginia targeted individuals in rural areas, while Georgia focused on veterans who were not required to take TAP prior to leaving the military, according to state workforce agency officials. lacks the benefit of knowing for which veterans the program was most useful and thus whether its approach likely helped those most in need of the resources it devoted to the program. As previously noted, federal law mandates that the Department of Defense require transitioning servicemembers to participate in an employment workshop, with some exceptions. In addition, because the design did not include a needs assessment, DOL did not know how many workshops would be required to meet the potential demand and the extent to which its existing resources would allow it to meet the identified need. DOL officials said they determined that existing resources would cover only 15 workshops across the three states. Officials could not point to any formal analysis conducted to determine this number, despite the Dignified Burial Act requiring DOL to offer the workshops at a sufficient number of locations within each state to meet the needs of eligible individuals. Officials from West Virginia’s state workforce agency asked DOL to authorize additional workshops because they said that five was insufficient to reach all of the veterans they believed would likely benefit from attending.the additional workshops would help make them more geographically accessible across the state. The overall low attendance levels for the pilot workshops raise questions about the extent to which existing workshops met the demand for them. If DOL had determined the number of workshops needed in each state as part of a needs assessment, it could have been better positioned to learn what additional demand—if any— there might be for the workshops and what the costs could be of meeting that demand. According to sound design practices, agencies should determine the extent to which a pilot might fill gaps in federal services or enhance existing programs while avoiding inappropriate overlap or duplication with those programs. DOL followed this design practice somewhat, but could have gone further. DOL officials said, prior to the enactment of the Dignified Burial Act and in interviews during our review, that the pilot duplicated existing employment and training programs already available to veterans. However, DOL did not conduct a formal assessment of the extent to which similar programs not only exist, but are also serving veterans (and their spouses). By more closely following sound design practices, DOL could have used the 2-year pilot to better understand the population the program should target. For example, in addition to consulting with stakeholders as previously noted, DOL could have used data underlying a DOL-funded study of how AJCs serve veterans to learn the numbers of veterans served by AJCs in the pilot states. By not building into its design an assessment of the extent to which existing programs serve the identified needs of all veterans (or targeted groups), it is difficult to draw well-informed conclusions about the advisability of expanding the pilot while being mindful of DOL’s resources and the need to avoid unnecessary overlap and duplication of services veterans may already be receiving. Officials in one pilot state told us they thought the workshops filled a gap by providing higher quality and more updated information on how to write resumes and prepare for interviews than anything the state could deliver to veterans. Officials from two veteran service organizations also suggested the workshops could enhance DOL’s employment programs. Officials from one veteran service organization told us that veterans could receive basic employment information through the workshops and then focus on specific training needs when they access other DOL services. In contrast, a DOL official told us that he had attended a workshop and thought DOL’s other employment and training programs covered all of the topics in the workshop. Conducting a formal assessment of the extent to which the pilot could either fill a service gap or enhance current programs could have better positioned DOL to serve individuals whom existing programs overlook or could serve in the future. Sound design principles indicate that goals and objectives can help an agency define a pilot’s need and scope, as well as help uncover any differences in expectations and concerns program stakeholders have with implementing the pilot. DOL officials told us that the goal of the pilot was to test its feasibility. However, DOL did not create clear, measurable goals—as well as objectives that link to those goals—that would define what testing the pilot’s feasibility meant. States, in turn, administered the pilot based on their perception of the pilot’s goals. For instance, West Virginia officials said the purpose of the pilot was to help veterans get “job-ready.” Washington and Georgia officials said the purpose was to serve individuals who did not take TAP. The lack of clearly and consistently defined goals and objectives limits DOL’s ability to measure the pilot’s performance related to any expected outcome or better inform decisions about its future. DOL’s annual report provides information on participant demographics, survey data, and upcoming employment outcomes, but DOL cannot determine how well the pilot performed against specific goals and objectives. Therefore, the department missed an opportunity to better establish the value of the pilot, which could have assisted stakeholders such as the Congress in making sound decisions about its future. The federal government has created a number of programs that assist veterans and servicemembers transitioning to civilian life, including the employment workshop pilot for veterans and their spouses. In embarking on this effort, DOL’s approach—asking states to volunteer to participate and making no modifications to the existing TAP workshop—allowed it to implement the pilot within 2 years and without additional funding. While this approach was understandable given the time and resource constraints DOL cited, the pilot design did not fully embrace certain sound practices that would have enabled it to better inform congressional decision-making about the advisability of expanding the pilot. Specifically, questions about the need for offering the workshops to veterans and their spouses, the program’s role amid other existing federal programs, and specific goals and objectives against which program performance could be measured remain unanswered. The pilot has ended, but these questions raise the issue of how to leverage the federal investment that was made in the pilot as well as the efforts the states put into delivering the workshops. In light of the low attendance levels of veterans in the pilot workshop, information on the fundamental issue of whether such a workshop could fill a niche for veterans that is not currently met by existing programs is important. Collaboration with stakeholders such as VA and veteran service organizations could provide useful perspective in developing this information. Such information could assist Congress in making sound decisions on any potential future iterations of the veterans’ employment workshop. To inform decisions on any potential future iterations of the veterans’ employment workshop, we recommend that the Secretary of Labor assess and report to Congress the extent to which further delivery of employment workshops to veterans and their spouses could fill a niche not fully served by existing federal programs. Such an assessment could involve collaboration with VA and other stakeholder organizations. We provided a draft copy of this report to DOL for review and comment. DOL concurred with our recommendation and noted that it will conduct a deliberate assessment of (1) the need for the services offered under the pilot; (2) which services are most useful for veterans and their spouses; and (3) what overlap exists with programs providing similar services to this population. DOL added that the assessment should compare the services the AJC system provides to veterans and their spouses with the information contained in DOL’s veterans’ employment workshops and online curriculum. DOL also stated that the assessment should identify if specific services provided within the AJC system require revision or redesign to better meet the employment needs of veterans and their spouses. DOL’s comments are reproduced in appendix II. We also provided relevant portions of the draft to VA, which had no comments. We are sending copies of this report to relevant congressional committees, the Secretary of Labor, and other interested parties. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7215 or sherrilla@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. The objectives of this report were to examine (1) how the Department of Labor (DOL) implemented the veterans’ employment workshop pilot program, (2) what state officials reported regarding the benefits and challenges of the workshops in the pilots, and (3) how the pilot informs decisions about its possible expansion. To provide information on how DOL designed the pilot, how it planned to evaluate it, and the extent to which DOL collaborated with other organizations during the pilot’s design, we reviewed relevant federal laws and regulations and e-mail correspondence between DOL officials on the steps they took to design the pilot and documents describing DOL’s plan for collecting data to determine the pilot performance. We also interviewed officials from DOL’s Veterans’ and Employment Training Service (VETS) about how they selected the states to test the pilot, what steps were taken to set up the infrastructure of the workshops, such as classroom requirements and training materials, and the extent to which they collaborated with other federal and non-federal entities. We also asked VETS officials about the types of performance data they planned to collect and how they planned to report the results of the pilot. We interviewed Department of Veterans Affairs and veteran service organization officials about the extent to which DOL collaborated with them during the design of the pilot and the extent to which DOL collaborated with them in developing and implementing the pilot. To provide information on how the pilot was implemented and what state officials reported regarding the benefits and challenges of the workshops in the pilots, we conducted telephonic interviews with DOL and state workforce agency officials in each of the pilot states: Georgia, Washington, and West Virginia. During our interviews we asked these officials what their roles and responsibilities were, how workshop locations were selected, what marketing efforts states employed to publicize the workshops, and the extent to which they collaborated with other federal and non-federal entities. We also asked about the benefits the veterans’ employment workshops offered participants as they searched for employment, the extent to which the workshops provided information on veterans’ benefits not offered by DOL, and any challenges the states faced in delivering the workshops. We reviewed DOL participant data, the results of DOL’s survey of workshop participants, and DOL’s two annual reports on the pilot, including verifying the reports’ workshop attendance figures with DOL and pilot states. To determine the reliability of the data, we interviewed agency officials knowledgeable of DOL’s data collection and reporting systems and reviewed agency documentation. We concluded the participant data were sufficiently reliable to describe certain demographic characteristics of the population that took the workshops and were enrolled in DOL’s American Job Centers (AJC). To determine the reliability of the survey data, we interviewed agency officials who developed the survey, reviewed agency documentation, and consulted with GAO subject matter experts in survey design. We determined that DOL’s survey data were sufficiently reliable for presenting qualitative response information. To identify how the pilot informs decisions about its possible expansion, we reviewed how practices in pilot design can affect what an agency learns in its evaluation of a pilot. We reviewed guidance from federal agencies on program design and evaluation found during the course of our research and guidance identified by subject matter experts. We reviewed design and evaluation guidance from the Centers for Disease Control and Prevention because officials from DOL’s Chief Evaluation Office said they use that guidance for their evaluation practices. We reviewed design guidance recommended by GAO subject matter experts on program design and evaluation. We also reviewed GAO’s Standards for Internal Control, which identifies elements of effective internal controls including management responsibility for defining objectives in specific and measurable terms, communicating necessary information to achieve objectives, and establishing and operating monitoring activities. Moreover, we conducted an independent search for guidance to further support the standards for program design noted in this report. We found, for example, guidance supporting the standard of establishing and maintaining clear communication channels with relevant stakeholders from the Department of Health and Human Services’ Agency for Healthcare Research and Quality and the National Institutes of Health. We found additional support for conducting a needs assessment identifying whether a new program is needed from the Department of Education and the Department of Transportation. GAO subject matter experts in program design and evaluation verified the leading practices and the extent to which the practices were relevant to our review of the veterans’ employment workshop pilot by comparing the criteria with steps of evaluation design listed in our guide on program evaluations. See table 2 for the list of leading practices we identified in pilot design and pilot implementation. Andrew Sherrill, (202) 512-7215 or sherrilla@gao.gov. In addition to the contact named above, Bill MacBlane (Assistant Director), Drew Nelson (Analyst in Charge), David Chrisinger, David Forgosh, Alex Galuten, Monika Gomez, Stephanie Shipman, and Walter Vance made key contributions to this report. Also contributing to this report were Juli Cutts, Laura Hoffrey, Kathy Leslie, Mimi Nguyen, Ronni Schwartz, and James Whitcomb. | The federal government has long offered programs that assist veterans with finding employment. In 2013, the Dignified Burial and Other Veterans' Benefits Improvement Act of 2012 was enacted, which required DOL to provide employment workshops to veterans and their spouses at locations other than military facilities through a 2-year pilot that ended in January 2015. The act also included a provision for GAO to report on the training and possible expansion of the pilot. This report addresses: (1) how DOL implemented the pilot, (2) what state officials reported regarding the benefits and challenges of the pilot, and (3) how the pilot informs decisions about its possible expansion. GAO reviewed relevant federal laws and regulations; identified leading practices on pilot design from federal agencies, subject matter experts, and GAO's standards for internal control; and interviewed officials from DOL, the Department of Veterans Affairs, state workforce agencies in each of the three pilot states, and veteran service organizations. GAO also obtained information on the pilot from DOL data and a DOL survey of workshop participants. The Department of Labor (DOL) was required by law to provide employment workshops to veterans and their spouses in a pilot program. In response, DOL used the same 3-day employment workshops for the pilot that it provides to servicemembers on military bases as part of the Transition Assistance Program (TAP) in order to implement the pilot within time and resource constraints, according to DOL officials. DOL selected three states for the pilot—Georgia, Washington, and West Virginia—based on a number of factors, including two states with a high veteran unemployment rate, as required by law. DOL instructed each of the states to conduct five workshops—West Virginia held an additional seven and Washington canceled one—and delegated the responsibility for choosing locations and marketing the pilot to state workforce agencies. States held the workshops at locations other than military facilities and employed different marketing approaches to publicize the workshops, including flyers and e-mail. DOL officials said that time and resource constraints, such as implementing the pilot within its existing TAP budget, influenced the department's pilot implementation, including its decision to use the same TAP workshops, conducted over 3 consecutive days, and to offer five workshops per state. Officials in all three pilot states reported that the workshops benefitted veterans by enhancing their job search capabilities—including resume writing and interviewing—but states had difficulty attracting participants. The workshops generally fell short of DOL's attendance goals: a minimum of 10 participants and a preferred class size of 30-35 participants. A total of 250 participants attended the workshops and fewer than half of the workshops had 10 or more participants. Several state officials noted that it was difficult for veterans to schedule 3 consecutive business days to attend the workshop, and some suggested that shortening the course or offering night or weekend alternatives could have increased attendance. DOL's design of the pilot limits the ability to inform Congress about the feasibility and advisability of expanding the pilot. DOL's two annual reports to Congress on the pilot provided information on topics such as workshop attendance, participant demographics and satisfaction with the workshop, and noteworthy state practices and challenges. While such information is useful, DOL's pilot design leaves unanswered key questions about the need for the program, the pilot's role amid other federal programs, and the goals and objectives for measuring its progress. For example, sound pilot design practices call for agencies to conduct a needs assessment, which could have helped DOL identify the population best targeted by the pilot, given veterans' varied employment experience and limited federal resources. DOL officials said that they did not have the time and resources to do such an assessment. Additionally, DOL did not assess the extent to which such a program might fill gaps in existing federal employment programs available to veterans, as sound pilot practices suggest. As a result, it remains unclear whether, as DOL officials contend, this pilot unnecessarily duplicates other programs. Moreover, this type of information could assist congressional deliberation about the need for future employment workshops and leverage the federal investment that has already been made in implementing the now-completed pilot program. GAO recommends that DOL assess and report to Congress the extent to which further delivery of the employment workshop to veterans and their spouses can fill a niche not fully served by existing federal programs. DOL agreed with GAO's recommendation and noted several actions it plans to take to address the recommendation. |
Beginning in 2011, OMB issued one of two memorandums establishing oversight requirements for conferences as part of a larger effort to help promote efficient spending in executive agencies. First, in September 2011, OMB issued a memorandum directing all executive agencies and departments to conduct a thorough review of the policies and controls associated with conference-related activities and costs, and report to OMB on the results. Further, OMB’s memorandum required that all conference-related activities and costs be approved by the Deputy Secretary until he or she could certify that the appropriate policies and controls were in place for mitigating the risk of inappropriate spending practices regarding conferences. Then in May 2012, OMB issued a second memorandum to executive agencies and departments, outlining new policies for conference sponsorship, hosting, and attendance. This memorandum states that conference costs should be appropriate, necessary, and managed in a manner that minimizes costs to taxpayers. OMB’s May 2012 memorandum, among other requirements, outlines a series of new policies and practices to ensure that federal funds are used appropriately on conference-related activities and that agencies reduce spending on conferences when practicable. These policies include the initiation of Deputy Secretary-level review of all planned conferences costing more than $100,000 each and of all future conferences estimated to cost more than $100,000 each. During these reviews, agencies also should ensure that conference attendance and costs are limited to the levels required to carry out the mission of the conference. The memorandum further prohibited costs in excess of $500,000 on a single conference without a signed waiver from the head of the respective agency. Finally, the memorandum requires each executive agency to report annually on its official website the expenses for any agency- sponsored conference exceeding $100,000. Specific reporting requirements include: the location, date, and total conference costs incurred by the agency for the conference; a brief explanation of how the conference advanced the mission of the agency; and the total number of individuals whose travel costs or other conference costs were paid by the agency. Subsequent to OMB’s conference reporting requirements, the Consolidated and Further Continuing Appropriations Act, 2013 established a requirement for executive agencies to notify their respective Inspector General of any agency-hosted conference costing more than $20,000, and to provide the notice within 15 days of the conference. The notice must include the date and location of the conference, and the number of employees attending. The act also requires agencies to submit annual reports to the Inspector General or senior ethics official regarding the costs and contracting procedures related to each conference when the cost to the government exceeds $100,000. DOD’s September 2012 policy and November 2013 update are generally consistent with the three key elements of OMB’s requirements for The key approving conferences and reporting associated costs.elements of OMB’s requirements for agencies are the prohibition of conferences with costs in excess of $500,000 unless the head of the respective agency signs a waiver, establishment of a Deputy Secretary- level review process for conferences with costs in excess of $100,000, and public reporting annually of the costs of agency-sponsored conferences with costs in excess of $100,000. DOD’s variances from OMB’s requirements for the first two elements are attributable to DOD’s size and complexity and, according to DOD’s policy, were done with OMB’s concurrence. Specifically, the Secretary of Defense delegated some responsibility for reviewing and approving conferences that is not explicitly granted by OMB’s requirements. Despite these variances, some provisions within DOD’s conference policy exceed OMB’s requirements by providing additional detail for how to implement the conference approval process and requiring additional conference cost reporting. DOD’s policy established the need for a waiver for any conference with costs in excess of $500,000, but placed the authority for granting those waivers at a lower level than required by OMB. DOD’s policy prohibits DOD components from incurring costs greater than $500,000 on a single conference, unless a waiver is granted by certain designated officials. OMB’s May 2012 memorandum requires that the waivers be signed by the head of an agency, which for DOD is the Secretary of Defense; however, the Secretary of Defense delegated this authority to 23 senior leaders across DOD. These leaders include the Secretaries and Under Secretaries of the military departments, the Chief of the National Guard Bureau, the Director of the Joint Staff, the Commanders of the combatant commands, the Under Secretaries of Defense, and the DCMO. To address OMB’s requirements regarding the review and approval of conferences, DOD’s policy established a tiered approval structure. Like the delegation of waivers for conferences costing over $500,000, DOD’s policy places the approval authority for conferences costing less than $500,000 at lower levels than called for by OMB. Specifically, OMB’s May 2012 memorandum specified that Deputy Secretaries within agencies are responsible for approving spending on conferences that will cost more than $100,000 but not in excess of $500,000. In DOD’s policy, these responsibilities and authorities are delegated to the same 23 senior leaders that have responsibility for approving waivers for conferences costing in excess of $500,000. These officials may, in turn, delegate approval authority to 81 other specific officials identified in the policy. Figure 1 depicts DOD’s tiered approval structure for conferences. DOD’s policy notes that the Secretary of Defense and the Deputy Secretary of Defense remain accountable for all of DOD’s conference- related activities, but explains that delegation to these senior leaders is being done in recognition of DOD’s size and complexity and with OMB’s concurrence. According to DCMO officials, it was infeasible to keep the waiver and approval authorities at the level of the Secretary or Deputy Secretary because the Secretary of Defense and Deputy Secretary of Defense did not have time to review and approve the number of DOD conferences expected to cost over $100,000. They also told us that they informed OMB of the Deputy Secretary of Defense’s decision to delegate approval and waiver authorities, and received verbal concurrence from OMB staff to do so. While DOD’s policy vests approval and waiver authority at a lower level than called for by OMB, DOD’s policy provides additional oversight by requiring senior-level review and pre-approval of all conference-related costs, regardless of the total, compared to OMB’s requirement for senior- level review of conferences only when the estimated cost is more than $100,000. Under DOD’s tiered approval structure, higher-cost DOD- hosted or attended conferences must be reviewed and pre-approved by senior leaders who have the option to delegate the approval authority for lower-cost conferences. The DOD policy explains that such requirements are intended to ensure that conferences hosted by DOD are executed in a responsible manner and that DOD is prudent when sending personnel to conferences hosted by others. The conference policy updated in November 2013 also explicitly states that if it becomes apparent that the cost for a DOD-hosted conference will exceed the estimated cost and breach the next approval threshold, approval must be obtained from the higher-level approval authority as soon as possible. Additionally, if a DOD component initially estimates that the total cost of attendance at a non-DOD hosted conference will exceed $100,000 for that DOD component, then the conference must be approved by that DOD component’s highest tier of approval authority. The November 2013 policy also states that approval is not required for conferences that incur no cost to DOD, including instances where all conference costs are paid for by a non-DOD entity in accordance with DOD’s gift acceptance rules. In explaining the conference review and approval authorities, DOD’s policy provides criteria for personnel to determine whether an event meets the definition of a conference and is subject to the approval process. It notes that some conferences subject to DOD’s policy are referred to by other terms, such as conventions and seminars. The policy provides key indicators of a conference that include, but are not limited to: registration and registration fees, a published agenda, and scheduled speakers. Also, the policy describes activities that should not be considered conferences even if they meet the general definition of a conference and are, therefore, exempt from the review and approval process. These exemptions include DOD meetings necessary to carry out: statutory command and staff oversight functions, such as investigations, inspections, audits, or non-conference planning site visits; internal agency business matters, such as meetings that take place as part of an organization’s regular course of daily business; or planning or execution of operational exercise activities or pre- deployment, deployment, or post-deployment activities. Events where participation by DOD personnel is required for: change of command, official military award, funeral, or other such ceremonies; or military or civilian recruiting or recruitment advertising. Formal classroom training, such as regular courses of instruction or training seminars. These activities may be offered by government organizations, institutions of higher learning or professional licensure or certification, or other training entities. However, events are not exempt simply because they offer continuing education credits or the equivalent. Meetings of advisory committees where one or more of the members is not a full-time or permanent part-time federal officer or employee. DOD’s policy also describes elements to be included in the calculation of the estimated total cost of each planned conference, which then determines the approving official who must approve or reject the related request. For example, the cost estimate should include, among other elements, attendees’ authorized travel costs and per diem, audiovisual and other equipment usage, and registration fees. Costs are not to include such expenses as federal employee time for conference planning or attendance. Also, DOD policy prohibits the use of department funds for any entertainment expenses at DOD conferences. DOD’s policy addresses OMB’s requirement that all agencies issue an annual public report on agency-sponsored conferences with costs of more than $100,000 that occurred during the prior fiscal year, as well as subsequent statutory reporting requirements. DCMO officials told us that no department-wide data were maintained on conference costs prior to the adoption of the annual reporting requirement. DOD’s policy requires each DOD component to track the required reporting elements, which are monitored and consolidated by the Office of the DCMO for reporting. In addition to the total conference costs, the DOD components are to track information on which DOD component hosted the conference, the dates and location of the conference, the number of individuals whose expenses were paid by the agency, and a brief description of how the conference advanced DOD’s mission. While OMB called for each agency to publicly report its conference costs by January 31 of each year, DOD’s first annual report, which covered fiscal year 2012, was not approved by the Deputy Secretary of Defense and posted on the DCMO’s website until February 2013. DOD otherwise met all of OMB’s conference reporting requirements. According to its report, DOD hosted 295 conferences during fiscal year 2012 that each had a total cost in excess of $100,000. DOD reported that these conferences collectively cost approximately $89 million. DOD also noted that after the issuance of OMB’s May 2012 memorandum, the Deputy Secretary of Defense signed waivers approving four conferences that each cost in excess of $500,000 during fiscal year 2012. Waivers were approved for a suicide prevention conference, a symposium on education for military service members, a military health system research symposium, and a conference on DOD’s information assurance mission. DOD reported that these four conferences ranged in cost from around $550,000 to over $2 million, with a collective cost of almost $6 million. Additionally, DOD took actions that expanded on OMB’s annual reporting requirement by issuing policy in September 2012 and updating its policy in November 2013 to establish that the DCMO will submit internal, non- publicly available quarterly reports to the Deputy Secretary of Defense on conferences hosted or attended by DOD personnel.DCMO compiled DOD’s first report on quarterly conference costs and submitted it in March 2013 to the Deputy Secretary of Defense. This report on conferences held in the first quarter of fiscal year 2013 repeated the type of cost data that was included in DOD’s fiscal year 2012 annual report for conferences that were hosted by DOD and cost over $100,000, and included additional information on non-DOD hosted conferences attended by DOD personnel that cost over $20,000. Later, DOD submitted its second-quarter report for the fiscal year in May 2013, and its third-quarter report in September 2013. For each DOD-hosted conference, the quarterly reports included additional information not found in the fiscal year 2012 annual report. Specifically, the quarterly reports included a breakout of the total cost for a DOD-hosted conference and included hosting costs (e.g., audiovisual equipment and facility rental), registration fees collected, and attendees’ estimated travel costs. Also, the quarterly reports included information on whether a DOD-hosted conference involved spousal travel, use of a non-federal conference planner, co-sponsorship with a non-federal organization, or a no-cost contract. Under DOD’s November 2013 updated conference policy, DOD components are to enter conference cost data in a new, online reporting system referred to as the DOD Conference Tool. Specifically, each conference in excess of $20,000 must be entered into the DOD Conference Tool within 10 working days of the approval or the signing of the waiver memorandum. In addition, within 30 days of the completion of each conference, the DOD components are to update their previous estimates based on any new information, such as adjusting the number of participants who attended or the cost factors that went into the cost estimate. According to officials from the Office of the DCMO, the DOD Conference Tool is intended to help standardize the reporting process across DOD and will help DOD component officials by spreading the administrative burden of collecting and reporting data throughout the year instead of requiring a concentrated effort each quarter. The officials also told us that prior to the requirement to use the DOD Conference Tool, components could, and did, use a variety of methods to report their conference costs. Aggregated reports from the DOD Conference Tool will be provided quarterly to the Deputy Secretary of Defense. Further, the DOD Conference Tool is intended to help DOD fulfill the reporting requirements included in the Consolidated and Further Continuing Appropriations Act, 2013. For example, personnel from the DOD Inspector General’s office have been granted access to the DOD Conference Tool, which meets the new requirement to report certain conference information to agencies’ Inspectors General. In implementing DOD’s conference policy, DOD components have been consistent with the policy, but have taken various approaches. For example, the military departments have delegated approval authority—as allowed under DOD’s policy—differently. Also, some components have issued supplemental guidance that, among other matters, identifies the elements that conference requests are to address. In our review of 563 approved requests for conferences in the second and third quarters of fiscal year 2013, we found that a majority (311) of the requests addressed key elements, such as noting how a conference is necessary or fulfills a mission, and including a cost estimate. While the remaining 252 requests we reviewed did not contain documentation for all of the elements, we did not find circumstances where a specific element was consistently missing from a significant number of requests. In implementing the policy, some officials within the components identified concerns about the efficiency of the conference approval process. Specifically, these officials expressed concern that DOD’s policy requires a lengthy review process for all conference requests regardless of cost, raising questions particularly about the process’s efficiency for low-cost conferences (those under $20,000). In implementing DOD’s policy for approving conference costs, the military departments have taken various approaches consistent with the policy regarding the delegation of approval authority. A senior DCMO official noted that it is acceptable for the military departments to implement the conference policy differently as long as they stay within the bounds of DOD’s policy. DOD’s policy permits specified senior leaders within the military departments to delegate their approval authority for DOD-hosted conferences costing less than $500,000 and for attendance at non-DOD hosted conferences costing less than $100,000. The DOD components— including the military departments—have varied in their delegation of approval authority. For example: The Department of the Army has delegated approval authority for Army-hosted conferences with costs less than $100,000 to appropriate principal officials and commanders. The Army has restricted approval authority for attendance at all non-DOD hosted conferences at the level of the Secretary or Under Secretary of the Army, or to the Administrative Assistant to the Secretary of the Army. The Department of the Navy has extended approval authority to its Assistant for Administration for Navy-hosted conferences costing $500,000 or less and for non-DOD hosted conferences for which attendance costs do not exceed $100,000. The Department of the Air Force initially delegated approval authority for Air Force-hosted conferences costing less than $500,000 and for non-DOD hosted conferences costing less than $20,000 to its major commands and certain other subordinate commands. However, since March 2013, the Air Force has retained authority for all conference approvals, regardless of cost, at the level of the Secretary or Under Secretary of the Air Force as part of its broader sequestration guidance. Military department officials explained that one reason they decided to maintain approval authority at a high level was to ensure close scrutiny and management of conference costs during the current environment of reduced budgets. Also, these officials noted that it is difficult to maintain visibility over the total attendance costs when personnel from multiple military service commands plan to attend the same conference. Further, the Department of the Navy oversees personnel from the Navy and Marine Corps, and could have personnel from both services attending the same conference. If the approval authority is delegated, there would be a risk that the total estimated costs would not be aggregated across military service commands and that requests would not receive the appropriate level of review. In addition, officials from the Office of the DCMO and the military departments told us that maintaining high levels for approval authority helps mitigate risks to DOD other than the financial risk of unnecessary spending on conferences. Specifically, these officials said that military department leaders did not want to risk sending personnel to conferences that could be perceived as inappropriate for representatives of DOD, regardless of the financial cost of the conference. By maintaining approval authority at a high level within the military departments, senior DOD leaders are aware of the types of conferences that their civilian and military personnel are attending and can reject requests for conferences that they perceive as potentially damaging to DOD’s reputation. A DCMO official commented that although DOD’s conference policy allows for more latitude with regard to delegating approval authority than is currently being exercised, the decision thus far to ensure minimum risk by keeping approval levels high is an acceptable implementation of DOD’s policy. Additionally, DOD components have, in some cases, developed supplemental guidance to implement a conference approval process that is consistent with DOD’s policy. Components’ guidance generally specifies procedures for preparing and submitting requests to host or attend conferences, including how to obtain pre-approval by the appropriate approval authority and what information to include so that the approval authority can determine if the conference is necessary and cost effective. For example, several DOD components have issued templates that standardize the required elements for senior-level reviews, such as including the purpose of a conference, how it fulfills a DOD mission, and specifying estimated costs. We found that the DOD components generally were consistent with DOD and component-level guidance in processing requests to host or attend conferences. DOD’s September 2012 policy and some of the implementing guidance issued by the components—including the military departments—reference the following four key elements that help approval authorities determine the merit of a particular conference: (1) a statement by the requester that the conference is necessary or fulfills a DOD mission; (2) a cost estimate; (3) an assessment of the conference request by a legal counsel; and (4) for DOD-hosted conferences, consideration of alternative means of delivering the information. In our review of 563 approved requests for conferences in the second and third quarters of fiscal year 2013, we found that a majority (311) of the requests addressed and documented all four key elements. While the remaining 252 requests we reviewed did not contain documentation of all four key elements, we did not find circumstances where a specific element was consistently missing from a significant number of requests. Specifically, for the 563 approved conference requests we reviewed: 98 percent of all requests included a statement by the requester that the conference is necessary or fulfills a DOD mission; 92 percent of all requests included a cost estimate; 66 percent of all requests included an assessment of the conference request by legal counsel; and 65 percent of requests for DOD-hosted conferences included evidence that the requester considered alternative means of delivering the information, such as video teleconferencing, and deemed those means infeasible. We also found that many conference requests included additional information for approving officials to review that was not among the required elements, such as a description of how the requesting organizations were reducing costs to host or attend the conference. Some examples of cost-saving efforts were using public transportation instead of a rental car, not approving travel costs for conference attendees unless they were speaking or making a presentation at the conference, and hosting conferences at government facilities instead of a hotel or convention center. Further, where evidence of a key element was missing, we found that in some cases, a record of the key element was maintained somewhere other than with the conference request documentation we reviewed. For example, officials from the three military service commands with whom we followed up about missing evidence of a legal review in their conference requests told us that legal reviews were documented in a document management system or were documented at the service headquarters level. Each DOD component also has implemented DOD’s requirement for quarterly reporting to the Deputy Secretary of Defense. Our review found that the DOD components varied in how and when they obtained the data for reporting conference costs. For example, some military service commands and DOD components required the original conference requester to complete a report after the conference with updated cost information and used this data for reporting purposes. Officials from other military service commands and DOD components told us that they reviewed travel vouchers within DOD’s travel system or used other financial management systems to obtain updated cost data for each conference. DOD’s November 2013 update requires the DOD components to enter reportable cost data into the new DOD Conference Tool within 30 days of a conference’s completion if the conference costs more than $20,000. According to a DCMO official, the components began using the DOD Conference Tool in the fourth quarter of fiscal year 2013. While we found that the components’ implementation of the conference review and approval process has generally been consistent with DOD’s policy, some officials within the components and military service commands have identified concerns about the approval process. During our interviews and in response to our questionnaire, officials cited common concerns related to the time and resources spent on conference approval, and the approval levels required by components for conferences with a low or no cost to DOD. In response to our question regarding what concerns, if any, DOD components and military service commands had with DOD’s conference policy, the most common concern was the amount of time and resources spent to complete the review and approval process. Specifically, officials from 33 percent of the 18 DOD components and 22 percent of the 54 military service commands reported concerns with time and resources. Several military service commands noted in their responses that individuals requesting to host or attend a conference must wait months before requests are approved or rejected. For example, officials from one military service command reported that the process sometimes required a 60-day period to obtain conference approval. In addition, we found that some conference requests took several months to receive final approval. In one instance, the initial request was submitted almost five months in advance of when the conference was scheduled to begin, but final approval was not granted until two weeks prior to the beginning of the conference. Officials from the military departments told us that they have prioritized conference requests from individuals in certain career specialties—such as chaplains and medical professionals—to ensure that they receive the necessary training in time to maintain their professional licensures or certifications. In addition, personnel sometimes are eligible to receive price discounts by completing early registration for certain non- DOD hosted conferences. One non-DOD hosted conference that we reviewed offered a $300 discount if attendees registered before a certain date. Some officials raised specific concerns about the number of personnel required for conference reviews. Based on responses that we received from 18 DOD components and 54 military service commands, we found that conference requests often are reviewed by personnel from at least four offices. The multiple reviews can include financial management, administrative, and legal personnel, plus subsequent review by the general officer, flag officer, or senior executive at that organization. Officials from one military service command noted that there is often a bottleneck effect created at the higher approving levels. Officials from another command noted that the approval process for attending conferences is cumbersome and involves significant personnel resources. According to component and command officials, reviewing offices also vary in how many individuals are available for part-time or full-time duty to review conference requests. These individuals typically have other duties, and their assignment to review conference requests is a part-time or collateral duty. Therefore, individuals who review conference requests as a collateral duty may sometimes have to defer their reviews if they need to address higher priorities among their job responsibilities. Officials from several DOD components and military service commands reported difficulty identifying and implementing procedures to mitigate the amount of time spent on the review process. For example, officials from one DOD academic institution acknowledged the problem of missing deadlines for early registration and not benefitting from a discounted rate. However, in response to our questionnaire, these officials said that they had difficulty instituting procedures for timely decisions on requests to attend non-DOD hosted conferences because the requester may not know about the conference in time to complete the approval process before the early registration date expires. Additionally, several of the DOD components have developed guidance to initiate conference reviews as early as possible, such as 90 days prior to the start of the conference. However, officials from multiple components noted the difficulty of this requirement in that the need for conference attendance may not be known that far in advance. According to officials from some of the military services, many of the non-DOD entities hosting conferences frequently attended by DOD personnel recognize DOD’s constrained budget environment and are willing to work to minimize the costs to DOD. Officials said that in many cases conference hosts have waived registration fees and other conference costs for DOD personnel. For example, Army officials told us they were able to achieve a significant cost avoidance by accepting a professional nonprofit association’s offer to waive registration fees and cover travel expenses for key attendees to ensure the Army’s participation at the association’s annual conference despite fiscal constraints. As a result, the Army saved about $1 million over previous years’ attendance costs. In addition, some officials raised specific concerns that the approval process requires the same amount of time and resources regardless of the estimated cost of the conference. Officials noted that the approval process involves the same resources for a conference with low or no cost to DOD as it does for a conference costing $20,000 or more. Our questionnaire to DOD components and military service commands found that officials at 28 percent of the 18 DOD components that responded and 14 percent of the 54 military service commands that responded expressed concern over the approval tiers required by their component’s conference guidance. In their responses, some officials specified that the required tier of review was excessive for conferences for which DOD incurred low or no cost. Because DOD invests a relatively small amount of resources on conferences with low or no cost to DOD, some officials felt that such conferences represented a low risk to DOD and did not require the same scrutiny as more expensive conferences. In our review, we found that a few conference requests that resulted in a low or no cost to DOD took several months between the initial request and the approval. For example, we reviewed a request for one individual to attend a three- day, non-DOD hosted conference with a total estimated cost below $1,000, and the request was not approved for almost three months. Most of the requests to attend non-DOD hosted conferences, according to our review, were for conferences with low or no cost to DOD. As shown in figure 2, in nearly 94 percent of the 405 requests for personnel to attend non-DOD hosted conferences, the estimated cost of attendance was less than $20,000 for each conference. Similarly, for the 556 DOD-hosted and non-DOD hosted conference requests that we reviewed for which cost information was available,found that the aggregate cost to DOD for all low-cost conferences was significantly lower than the aggregate cost to DOD for more expensive conferences, even though the number of individual requests to attend conferences with low or no cost to DOD was much higher. Specifically, the total estimated cost for 424 DOD-hosted and non-DOD hosted conferences costing $20,000 or less was around $2 million, while the total estimated cost for 132 DOD-hosted and non-DOD hosted conferences costing over $20,000 was approximately $13.8 million. we Conferences with no cost to DOD often occur when a non-DOD organization that is sponsoring DOD research in a specific field covers all the costs for DOD officials to present the research at a conference. Further, a low cost for a conference can occur when only one or two DOD officials are attending a conference. According to DOD officials, individuals may also strive to keep conference costs below $20,000 to avoid having to report conference costs for DOD’s quarterly and annual reports. For example, DOD components and military service commands may limit the number of people who are allowed to attend a conference to keep the cost below $20,000. DOD’s November 2013 policy update was issued after we received the responses to our questionnaires and reviewed conference requests. This update specified that there is no requirement for review and approval of requests for conferences that have no cost to DOD, including conferences where all costs are paid by non-DOD entities and the payments are in accordance with DOD gift acceptance rules. According to one DCMO official involved in writing the policy, even with the November 2013 update, the components still have the option to review conferences that incur no cost to DOD in accordance with their conference approval process to facilitate senior leaders’ visibility over conference attendance by personnel within their component. Further, the official stated that components are free to institute additional conference processes and procedures as long as they are consistent with the minimum requirements in DOD’s November 2013 updated policy. We provided a draft of this report to DOD for review and comments. In written comments, which are reprinted in their entirety in appendix II, DOD concurred with our findings. DOD noted that it remains committed to balancing the need for rigorous oversight of conference spending with the benefits of hosting and participating in conferences that are essential to DOD’s mission. Also, DOD noted that the balance can be difficult to achieve, and officials understand the concerns that the approval process for conferences is too long, especially for conferences with only a small cost. DOD stated that it will continue to monitor the situation to determine if additional steps are necessary. DOD also provided technical comments, which were incorporated into this report as appropriate. We are sending copies of this report to the Secretary of Defense; the Secretaries of the Army, Navy, and Air Force; the Director of the Office of Management and Budget; and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-5741 or ayersj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. To determine the extent to which the Department of Defense’s (DOD) conference policy is consistent with the Office of Management and Budget’s (OMB) requirements for conference approval and cost reporting, we reviewed an executive order and a series of memorandums issued by OMB in fiscal years 2011 through 2013 on promoting efficiency and eliminating excess spending within executive branch agencies. In particular, we reviewed OMB’s May 2012 memorandum, Promoting Efficient Spending to Support Agency Operations, which includes three key elements for conference sponsorship, hosting, and attendance. These elements are the prohibition of conferences with costs in excess of $500,000 unless the head of the agency signs a waiver, Deputy Secretary-level review of conference expenses in excess of $100,000, and public reporting annually of agency-sponsored conferences with costs in excess of $100,000. We assessed the extent to which DOD was consistent with the OMB memorandum in issuing DOD’s September 29, 2012, memorandum, Implementation of Conference Oversight Requirements and Delegation of Conference Approval Authority, and its November 6, 2013, memorandum, Implementation of Updated Conference Oversight Requirements. In reviewing DOD’s conference policy, we interviewed officials from the Office of the Deputy Chief Management Officer (DCMO) and OMB staff. We also interviewed officials from the Office of the DCMO and obtained relevant documents to review DOD’s planned approach for meeting reporting requirements in the Consolidated and Continuing Appropriations Act, 2013. Specifically, we reviewed training materials and spoke to officials about the web-based tool planned to help facilitate reporting beginning in the fourth quarter of fiscal year 2013. To determine how DOD components have implemented DOD’s conference policy, we identified the DOD components’ processes and procedures for approving conference requests and reporting conference costs. To that end, we developed, administered, and analyzed responses to a combination of structured interviews and questionnaires that referred to DOD’s September 2012 conference policy, which was the existing policy when we conducted the majority of our review. The structured interviews and questionnaires were completed by officials at the offices of the Under Secretaries of Defense, Joint Staff, National Guard Bureau, and combatant commands and all four military services (Army, Navy, Air Force, and Marine Corps). To cover as much of the population as possible within the services, we asked each service to provide a list of “major subordinate commands.” Both the DOD component and military service command questionnaires consisted of open-ended questions on conference policies, procedures, and costs within the component or command being questioned, a subset of which requested quantitative responses. We pre-tested the questionnaire with one Army command, one Navy command, one Marine Corps command, and one DOD component. After the pre-test, we administered the final questionnaires using a combination of phone interviews and emails. We received oral and written responses from 100 percent of the18 DOD components and 54 military commands that we selected for interviews or emailed questionnaires. All components and commands that provided responses are listed at the end of this appendix. The responses that we received to quantitative questions (e.g., the number of conferences hosted in fiscal year 2013) were summarized as standard descriptive statistics. To analyze the content in open-ended responses, one GAO analyst reviewed each open-ended response from each DOD component and military service command to identify recurring themes. Using the identified themes, the analyst then developed categories for coding the responses. A second GAO analyst reviewed each response from each DOD component and military service command and reviewed the first analyst’s themes and categories to reach concurrence on the themes and categories. Both GAO analysts then independently reviewed the answers to each open-ended question and placed them into one or more of the coding categories. A third analyst then reconciled the first and second analysts’ coding and, through discussion, made a final decision whenever there was disagreement. The key categories we identified and analyzed were (1) steps taken to respond to and verify the accuracy of data provided for the annual and quarterly reporting requirements and (2) concerns about DOD or component conference policy. Because DOD’s September 2012 policy was the existing policy when DOD officials responded to our structured interviews and questionnaire, any concerns they raised about DOD’s conference policy were in reference to the September 2012 policy. We interviewed officials from each of the military services who were involved in the implementation of DOD’s conference policy, and we reviewed service guidance—including instructions, templates, and checklists—to determine whether it was consistent with DOD’s conference policy. Further, in evaluating how DOD collects, maintains, and reports conference costs, we reviewed DOD’s publicly reported annual conference report for fiscal year 2012 and assessed the extent to which it contained all elements required by OMB’s May 2012 memorandum. We also reviewed DOD’s internal quarterly reports on conference costs for the first three quarters of fiscal year 2013. We compared the information included in the quarterly reports to DOD’s fiscal year 2012 annual report to identify differences between the annual and quarterly reporting requirements. We also obtained and evaluated requests for conferences planned for the second and third quarters of fiscal year 2013. We obtained requests for this time period because the approval process established by DOD’s September 2012 policy was not fully implemented until the second quarter of 2013. Further, conference requests for the fourth quarter of 2013 were not widely available during our review. To obtain conference requests, in our structured interviews and emailed questionnaires we asked officials from each DOD component and military service command to provide us all documents associated with requests for conferences planned to date in fiscal year 2013, including DOD-hosted and non-DOD hosted conferences. For the DOD components, Army, and Air Force, we received documentation directly from the organizations we interviewed or to which we emailed questionnaires. According to Navy and Marine Corps officials, the necessary documentation was centrally maintained in those services’ document management systems instead of at the major commands or other subordinate commands; therefore, we received conference request documentation for those two services’ major commands from a central office within Navy and Marine Corps headquarters, respectively. For the Navy, we were provided access to a document management system and manually reviewed documents associated with conference requests. For the Marine Corps, we were emailed documents associated with conference requests from a similar document management system. Further, to evaluate conference requests we developed a standardized checklist of key elements needed by approval authorities for their determination of whether a conference should be approved or rejected. We developed a checklist with the following four key elements based on DOD guidance and component-level guidance: (1) an explanation of why the conference was necessary or mission essential; (2) evidence of a legal review of the conference request; (3) evidence of a cost estimate; and, (4) for DOD-hosted conferences, evidence that alternative means of delivering the information, such as video teleconferencing, was considered and deemed infeasible. We assessed the documentation for each conference request against the four key elements to determine if these elements were included. Using our checklist, we reviewed and assessed 563 approved requests for conferences hosted by DOD or attended by DOD personnel in the second and third quarters of fiscal year 2013. We interviewed officials and, where appropriate, obtained documentation from the following DOD organizations: Office of the Secretary of Defense, Office of the Deputy Chief Department of the Army Office of the Administrative Assistant to the Secretary of the Army Office of the Army General Counsel Department of the Navy Office of the Assistant for Administration Office of the Director, Navy Staff Bureau of Naval Personnel Office of the Director, Marine Corps Staff Department of the Air Force Office of the Administrative Assistant to the Secretary of the Air Office of the General Counsel The following 72 offices responded to our questionnaire. These offices were either emailed a copy of the questionnaire and provided written responses or were contacted by phone and responded orally to the questionnaire in a structured interview. We also requested copies of all fiscal year 2013 conference requests from these organizations and used the requests from the second and third quarters of fiscal year 2013 in our analysis, as described earlier in this report. Army (3) U.S. Army Forces Command U.S. Army Materiel Command U.S. Army Training and Doctrine Command (24) Commander, Navy Reserve Force Commander, Navy Installations Command Commander, Operational Test and Evaluation Force Commander, U.S. Pacific Fleet Office of Diversity and Inclusion Naval Air Systems Command Naval Facilities Engineering Command Naval Sea Systems Command Naval Supply Systems Command Space and Naval Warfare Systems Command U.S. Navy Bureau of Medicine and Surgery U.S. Fleet Cyber Command U.S. Fleet Forces Command U.S. Naval Academy U.S. Naval Forces Central Command U.S. Naval Forces Europe and Africa U.S. Naval Forces Southern Command U.S. Naval War College Naval History and Heritage Command Bureau of Naval Personnel (13) Air Force Chief of Chaplains Air Education and Training Command Air Force Global Strike Command Air Force Materiel Command Air Force Reserve Command Air Force Space Command Air Force Special Operations Command Air National Guard Readiness Center U.S. Air Force Academy U.S. Air Forces in Europe (14) Marine Corps Forces, Pacific Marine Corps Forces Command Marine Corps Forces Reserve Marine Corps Forces Cyberspace Command Marine Corps Forces Europe and Africa Marine Corps Forces, South Marine Corps Forces Strategic Command Marine Corps Forces Special Operations Command Marine Corps Combat Development Command Training and Education Command Marine Corps Logistics Command Marine Corps Recruiting Command Marine Corps Installations Command Marine Corps Forces Central Command DOD Components (18) U.S. Pacific Command U.S. Special Operations Command Office of the Under Secretary of Defense for Acquisition, Technology Office of the Under Secretary of Defense, Comptroller Defense Finance and Accounting Service Defense Contract Audit Agency Office of the Under Secretary of Defense for Intelligence Office of the Under Secretary of Defense for Personnel and Office of the Under Secretary of Defense for Policy We conducted this performance audit from May 2013 to January 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Johana Ayers, (202) 512-5741 or ayersj@gao.gov. In addition to the contact named above, key contributors to this report were Tina Won Sherman, Assistant Director; Melissa Blanco; Richard Burkard; Susannah Hawthorne; Greg Marchand; Amanda Miller; Richard Powelson; Sharon Reid; Monica Savoy; Amie Steele; and Roger Stoltz. | DOD hosts conferences and sends its personnel to external conferences for training, professional development, and continuing education. However, concerns about executive agencies' spending on conferences prompted OMB in 2012 to direct agencies to establish policies and practices for conference hosting and attendance. DOD issued its policy in September 2012 to improve oversight of conference costs and updated it in November 2013, citing lessons learned from implementing the September 2012 policy, among other things. The conference report accompanying the National Defense Authorization Act for Fiscal Year 2013 mandated that GAO review DOD's oversight and management of conferences. This report assesses (1) the extent to which DOD's conference policy is consistent with OMB's conference requirements and (2) how DOD components have implemented DOD's conference policy. GAO assessed DOD's 2012 conference policy and 2013 update against OMB requirements and reviewed components' implementation of the policy. GAO analyzed responses to a questionnaire completed by officials from 72 components and military commands and reviewed 563 requests for conferences planned for the second and third quarters of fiscal year 2013. GAO is not making recommendations in this report. In written comments, DOD concurred with GAO's findings and noted that it remains committed to balancing conference spending oversight with the benefits of hosting and allowing personnel to attend conferences. The Department of Defense's (DOD) September 2012 policy on conferences and its November 2013 update are generally consistent with the requirements established by the Office of Management and Budget (OMB) in May 2012. The key elements of OMB's May 2012 requirements for agencies are the prohibition of conferences with costs in excess of $500,000 unless the agency head signs a waiver, establishment of a Deputy Secretary-level review process for conferences with estimated costs in excess of $100,000, and public reporting annually on the costs of these conferences. DOD adopted a tiered approval structure for the senior-level approval of waivers and all conference-related costs. DOD's policy, which cites the department's size and complexity, places the approval authority for conference waivers and for conferences costing less than $500,000 at lower levels than called for by OMB. For example, OMB requires that waivers approving conferences with costs in excess of $500,000 be signed by the head of an agency, while DOD's policy delegates this authority to 23 senior leaders throughout the department. DOD's policy is more expansive as it requires senior-level review and pre-approval of all conference-related costs, compared to OMB's requirement for senior-level review of conferences only when the estimated costs exceed $100,000. DOD's policy also fully addresses OMB's requirement to publicly report conference costs annually and adds a requirement for quarterly internal reporting of conference costs. In implementing DOD's September 2012 policy (the existing policy when GAO conducted the majority of its review), DOD components--including the military departments--have taken various approaches to reviewing and approving conference requests, all of which are consistent with the policy. For example, DOD's policy allows senior officials within each component to delegate certain approval authority to lower-level officials for DOD-hosted conferences costing $500,000 or less and non-DOD hosted conferences costing $100,000 or less, but the components have delegated approval authority to different degrees. A majority of the 563 conference requests that GAO reviewed addressed and documented key elements consistent with DOD and component-level guidance. In requests that were missing documentation of one or more key elements, GAO found that a specific element was not missing from a significant number of requests. While the components' implementation of the conference review and approval process has generally been consistent with DOD's policy, some officials within the components and military service commands have identified concerns, particularly with the lengthy approval process. The officials explained that requests to attend conferences have to pass through multiple offices and individuals, sometimes taking several months to be approved. In particular, officials raised questions about the efficiency of reviews for requests to attend conferences that incurred no cost or a low cost (under $20,000) to DOD, which at the time of GAO's review went through the same process as higher-cost conferences. Almost 94 percent of the 405 requests to attend non-DOD hosted conferences that GAO reviewed were for conferences with no cost or a low cost to DOD. DOD in November 2013 updated its policy to state that approval is not required for conferences incurring no cost for DOD. However, a DOD official involved in writing DOD's conference policy stated that components still have the option to review conferences with no cost to DOD to facilitate senior leaders' visibility over conference attendance by personnel within their component. |
The effort to develop the Airborne Laser is based on over 25 years of scientific development in the Departments of Defense and Energy. It evolved primarily from Airborne Laser laboratory research to develop applications for high-energy lasers. This research culminated in a demonstration that showed that a low-power, short-range laser was capable of destroying a short-range air-to-air missile. Although this demonstration was considered militarily insignificant because of the laser’s low power and short range, it did succeed in identifying technologies that were necessary for the development of an operational Airborne Laser system. The research showed that an operational system would need optics that could compensate for the atmospheric turbulence that weakens and scatters a laser beam, optical devices that could withstand the heat produced by a high-energy laser without the added weight of water-cooling devices, and a new chemical laser with higher energy levels that would produce a stronger laser beam. In 1996, the Air Force launched the Airborne Laser program to develop a defensive system that could destroy enemy missiles from a distance of several hundred kilometers. Engineers determined that if they were to meet this requirement, the system would need a 14-module oxygen iodine laser. They also determined that the system would need a beam control/fire control assembly that could (1) safely move the laser beam through the aircraft, (2) shape the beam so that it was not scattered or weakened by the atmosphere, and (3) hold the beam on target, despite the movement of the aircraft. In addition, engineers determined that the system would need a battle management and control system capable of planning and executing an engagement. The Air Force planned to have the science and technology community develop extensive knowledge about the laser and beam control/fire control technologies before it launched an Airborne Laser acquisition program. However, according to the retired manager of the science and technology project, the budgets for technology efforts were limited, and the science and technology community could not fund the technology maturation effort. The Air Force knew that a program office was more likely to command the large budget needed to fully mature technologies, so it launched an acquisition program and assigned the program manager responsibility for both technology and product development. The program manager planned to demonstrate critical Airborne Laser technologies by first building a six-module version of the oxygen iodine laser, installing it along with other system components aboard a Boeing 747 aircraft (see fig. 1), and testing the capability of this scaled system in system-level flight tests. The tests would conclude in 2003 with an attempt to shoot down a short-range ballistic missile target at a distance of 100 kilometers. If this final test were successful, the Airborne Laser would have moved into product development. The Air Force launched the Airborne Laser acquisition program and identified cost and schedule goals before officials had the knowledge to make realistic projections. In 1996, when the program was launched, Department of Defense regulation 5000.2 required, and still requires today, that when a military service initiates a major acquisition program, it must establish cost and schedule goals. However, the Air Force could not make realistic estimates when it began the program because it had no way of knowing how much engineering effort would be needed to complete the development of technology critical to the system. Even today, some critical technologies that the system’s design depends upon remain immature, making it very difficult for analysts to determine how long it will take and how much it will cost to develop and produce the system. At the time the Airborne Laser program was launched, the laser and beam control/fire control technologies needed to develop the Airborne Laser system was immature. The Department of Defense’s science and technology community was actively researching and developing the laser and had produced a weak beam in a laboratory setting—but this major component had not reached the level of maturity needed to proceed into product development. The technology necessary to develop the beam control/fire control was even less advanced. Most of the scientists’ work was limited to analytical studies, wherein a few tests of laboratory hardware were linked together to work somewhat like the intended component. Because technology development is a process of discovery, the Air Force soon learned that there were too many unknowns regarding the development of Airborne Laser technology to make good cost and schedule estimates. As the technology development progressed, unanticipated technical challenges affected the program’s cost and schedule. Department of Defense analysts reported that the Airborne Laser program experienced cost and schedule growth because the program and its contractors underestimated the complexity of (1) designing laser components, (2) the system’s engineering analysis and design effort, and (3) engineering the system to fit on board the aircraft. As system development progressed and the Air Force gained a better understanding of the technical complexity of the system, the Air Force increased its cost and schedule estimates. The Air Force has made some progress in developing the Airborne Laser’s critical technologies, but many remain immature. We asked the Airborne Laser program office to determine the technologies most critical to the Airborne Laser system and to use technology readiness levels to assess the maturity of each. The officials determined that if the Airborne Laser is to meet the requirements established by the war fighters, then engineers must mature technologies in six areas, all of which are needed to successfully design the system. These technologies are devices that stabilize the laser system aboard the aircraft so that the beam can be maintained firmly on the target, optics—mirrors and windows—that focus and control the laser beam and allow it to pass safely through the aircraft, optical coatings that enhance the optics’ ability to pass laser energy through the system and to reflect the laser energy, hardware that works in tandem with computer software to actively track devices that measure atmospheric turbulence and compensate for it so that it does not scatter or weaken the laser beam, and safety systems that automatically shut down the high energy laser in the event of an emergency. At our request, the program office also assessed the maturity of the oxygen iodine laser. As figure 2 shows, program officials assessed the optical coatings at level five and the safety systems, atmospheric compensation, and target- tracking components at level six. At technology readiness level five, the technology being tested is incorporated into hardware whose form and fit are coming closer to that needed for an operational component and integrated with reasonable realistic supporting elements so that the technology can be tested in a simulated environment. At level six, the technology is incorporated into a prototype and tested in a high-fidelity laboratory environment or in a simulated operational environment. The program officials identified the optics and stabilizing devices as the least mature—at level four. At this level, engineers have shown that a technology is technically feasible but have not shown whether the technology will have the form, fit, or function required in the operational system. We agreed with all but one of the program officials’ assessments for these technologies. Our one disagreement centered on the maturity of the laser component of the system. While the program office assessed it at a technology readiness level of six, we consider the laser technology to be at level four because tests have been conducted only for a one-module laser in a controlled laboratory environment using surrogate components. For example, the tests used a stable laser resonator, rather than the unstable resonator that will be used in system-level flight tests. We also found that during tests of the one-module laser, the resonator was operating in multimode rather than single-mode. The resonator in the operational system will operate in single mode. Furthermore, the chemical storage and delivery subcomponents used in these tests were not representative of those that will be incorporated into the system’s design. According to program office officials, conducting a more realistic test would have cost time and money that were not available. Documents summarizing the tests of the one-module laser stated that the tests were successful in reducing the technical risks associated with the one-module system but that a new set of technical risks linked with developing a multimodule system must still be addressed during testing of the six-module system. In our opinion, the program office will demonstrate the laser technology in a relative environment (technology readiness level six) when the six-module system is integrated and successfully tested at full power within the high-fidelity laboratory environment of the Airborne Laser Systems Integration Laboratory, currently under construction at Edwards Air Force Base, California. According to the program office, this type of demonstration will not occur until February 2003. The Missile Defense Agency’s new strategy for developing the Airborne Laser incorporates some of the knowledge-based practices that characterize successful programs, but the agency would benefit from adopting another that would add greater discipline to its acquisition process. The new strategy allows more flexibility in setting requirements, makes time and facilities available to mature and test the critical technologies, and collects information needed to match the war fighters’ requirements to demonstrated technology. However, the agency has not established decision points with associated knowledge-based criteria for moving forward from (1) technology development to system integration, (2) system integration to system demonstration, and (3) system demonstration to production. At each of these points, the agency would stop to assess its knowledge and decide whether investment in the program’s next phase is warranted. The first new practice allows the Missile Defense Agency to refine requirements on the basis of the results of system engineering. The Department of Defense ordinarily faces significant hurdles in matching requirements to resources. The fundamental problem is twofold. First, under the department’s traditional process, requirements must be set before a program can be approved and a program must be approved before the product developer conducts systems engineering. Second, the competition for funding encourages requirements that will make the desired weapon system stand out from others. Consequently, many of the department’s product development programs include unrealistic requirements set by the user before the product developer has conducted the system engineering necessary to identify the time, technology, and money necessary to develop a product capable of meeting requirements. A second practice that is likely to improve the Airborne Laser’s development is making the time and facilities available to mature and test critical technologies. To implement this practice, the agency increased the time available to test the six-module laser system and is building a new test facility. Instead of following the Air Force’s plan to complete system- level flight tests of the six-module system in the last quarter of fiscal year 2003, the agency has delayed the demonstration to the first quarter of fiscal year 2005. This delay will allow additional time to learn from and correct problems discovered during system-level tests that are scheduled to begin in the last quarter of fiscal year 2003 and end with the fiscal year 2005 demonstration. In addition, the agency plans to increase the Airborne Laser’s ground-testing capability by awarding a contract in 2003 for what the agency is calling an “iron bird,” which is essentially an aircraft hull with installed laser equipment. The “iron bird” is expected to allow testing of a fully integrated Airborne Laser system on the ground so that technologies for future blocks can be evaluated before being installed in an aircraft. The information gained from testing informs the requirements process. Because testing allows developers to gauge the progress being made in translating an idea into a weapon system, it enables the developer to make a more informed decision as to whether a technology is ready to be incorporated into a system’s design. With this knowledge, the developer can determine whether the technology is so important to the system’s design that additional time and money should be spent to mature the technology or whether the system’s initial performance requirements should be reduced. A third practice that the agency plans to adopt is matching requirements to available technology. According to the Missile Defense Agency’s Technical Director, the agency defines the war fighters’ requirement as a system that has the capability to destroy some threat ballistic missiles during their boost phase at a range representative of an operational scenario. The Technical Director told us that the agency will attain the knowledge to determine if it has the technology in-hand to meet this requirement by examining each block’s capabilities during simulated and system-level flight test and comparing those capabilities with data derived from intelligence sources on the likely launch points and types of missiles that the system could encounter. Our previous work with successful development programs shows that once the technology is in-hand to meet the customer’s requirements, the developer can make more accurate initial estimates of the cost and time needed to develop and produce an operational system. Successful developers have instilled discipline in their acquisition processes by requiring that certain criteria for attaining knowledge are met as an acquisition program moves forward. (See fig. 3.) They recognize that the focus and cost of activities change over time and that less rework is required if all activities with the same focus are completed before beginning other activities. In successful development programs, decisions are made when the knowledge is available to support those decisions. The first decision point, or knowledge point, occurs when the focus of a developer’s activities changes from technology development to system integration—the first phase of product development. The criterion for deciding to move forward is having the knowledge to match requirements and available resources (time, technology, and funds). The second knowledge point occurs between system integration and system demonstration when the developer has successfully integrated subsystems and components into a stable design that not only meets the customer’s performance requirements but also is optimized for reproducibility, maintainability, and reliability. The decision criterion used here is usually having completed about 90 percent of the engineering drawings. The third knowledge point separates system demonstration from production. The decision to invest in production is generally based on a determination that the product performs as required during testing and that the manufacturing processes will produce a product within cost, schedule, and quality targets. The cost of a program’s activities increases as it moves closer to production. In commercial acquisitions, product development is typically much more costly than technology development. During technology development, small teams of technologists work to perfect the application of scientific knowledge to a practical problem. As product development begins, developers begin to make larger investments in human capital, bringing on a large engineering force to design and manufacture the product. In addition, product development requires significant investments in facilities and materials. These investments increase continuously as the product approaches the point of manufacture. In fact, industry experts estimate that identifying and resolving a problem during product development can cost 10 times more than correcting that problem during technology development and that correcting the problem during manufacturing is even more costly. We examined the Airborne Laser’s acquisition strategy and determined that it does not include decision points at which officials would use knowledge-based criteria to determine if the program is ready to move from technology development to system integration, system integration to system demonstration, and system demonstration to production. We found that the agency’s process has three phases: development, transition, and production. Development includes all developmental activities and system-level demonstrations of military utility. Transition will involve preparation of the operational requirements document by the appropriate armed service and conducting operational testing. Production will involve producing and fielding the final weapon system. The agency’s strategy also calls for developing the Airborne Laser incrementally, rather than trying to initially develop a system with all desired capabilities. In the near term, the agency plans to complete the six- module laser system aircraft, now known as block 2004, and use it to demonstrate critical Airborne Laser technologies. Beginning in March 2003, the agency intends to begin developing another demonstration aircraft, known as block 2008, which will incorporate new capabilities and technologies. The Airborne Laser program manager told us that blocks 2004 and 2008 are primarily test assets for the purpose of technology demonstration. While some of the block 2008 activities are focused on improving subsystems and components, such as reducing the weight of laser components and improving optics, other activities are focused on the integration of these pieces into a block 2008 design. The agency expects to develop subsequent blocks, or system configurations to introduce additional capabilities. If system-level tests show that any one of these configurations performs at a level that merits fielding, the Air Force will prepare a requirements document based on the configuration’s demonstrated capabilities and make plans for operational testing and production. This “baseline” capability would be improved in subsequent blocks as more advanced technology becomes available and as the threat warrants. We did not find that the agency’s strategy includes a disciplined process that separates technology development, system integration, system demonstration, and production with decision points supported by knowledge-based criteria. Instead, the agency has put in place a decision point for moving from the development to the transition phase. According to the agency’s strategy, when the agency determines that it has the technology in-hand to produce a system that merits fielding, it will begin to transition the system over to the appropriate military service. Also, at the end of the transition phase, a system would enter the formal Department of Defense acquisition process at Milestone C—the point at which the decision is made to enter low rate initial production. We did not find, however, an established set of decision points with associated criteria that would enable the agency to make a knowledge-based decision on whether to invest in system integration and, subsequently, system demonstration and production. That is, even though the agency might know that it has the technology in-hand to develop a useful military capability, it has not established a first decision point where it would determine the cost and time needed to move the program forward and whether the program should proceed into a system integration phase during which the design would be matured and optimized for reproducibility, maintainability, and reliability. Neither does the agency’s strategy include a second decision point that would allow agency officials to use the knowledge they have attained regarding the design’s maturity to determine whether to invest further to demonstrate that the system meets requirements and that manufacturing processes are in place to repeatedly produce a quality product. Only after the agency successfully moves the program through all of these decision points and successfully demonstrates the system’s capabilities and manufacturing processes would the agency’s production decision be fully knowledge based. Without this disciplined process, the agency would be accepting greater cost and schedule risks and is much less likely to realize the full potential benefits of its new approach to developing missile defense systems. The revolutionary nature of missile defense weapon systems demands cutting-edge technology. Although there is no one approach that ensures that a developer can deal successfully with the unknowns inherent in developing a product from such technology, the knowledge-based process has proven to yield good results within cost and schedule estimates. The Missile Defense Agency has implemented practices that are part of the knowledge-based approach, and these practices are likely to improve the agency’s ability to gather the knowledge it needs to develop an Airborne Laser capability acceptable to the war fighter. However, the agency has the opportunity to make its acquisition process more disciplined. By establishing knowledge-based decision points at key junctures, the agency would be in a better position to decide whether to move from one development phase to the next. Also, the agency would be better able to hold system developers accountable for planning all of the activities required to develop a quality product, approaching those activities in a systematic manner so that no important steps are skipped and problems are resolved sooner rather than later, and making cost and schedule projections when they have the knowledge to make realistic estimates. With this disciplined process in place, the agency is much more likely to achieve a needed capability for the war fighter within established cost and schedule goals. To make its acquisition process more disciplined and provide better information for decision makers as additional investments in the Airborne Laser are considered, we recommend that the Secretary of Defense direct the Director of the Missile Defense Agency to establish decision points separating technology development from system integration, system integration from system demonstration, and system demonstration from production. For each decision point, we recommend that the Secretary instruct the Director to establish knowledge-based criteria and use those criteria to determine where additional investments should be made in the program. In commenting on a draft of this report, the Department of Defense partially concurred with our recommendations (see appendix II). The department stated that Secretary of Defense direction is not needed to implement our recommendations, the Missile Defense Agency’s acquisition process for ballistic missile defense already uses tailored versions of the knowledge-based practices recommended by us, and the agency intends to expand the use of knowledge-based criteria in the future. The Department of Defense has not fully implemented the knowledge- based process recommended in our reports. Effective product development depends on gaining sufficient knowledge about technology, design, and manufacturing processes at key points in a system’s development. At those points, using metrics--such as technology readiness levels to measure the maturity of technology--that are commonly understood allow informed trade-offs to be made between resources, including cost and time, and performance. We have found that product development activities, such as building engineering prototypes of an integrated system and then demonstrating that the system can be manufactured to acceptable cost and quality standards, are ineffective unless the technologies needed to meet the product’s intended capabilities are fully matured and ready for system integration. Virtually every world- class product developer we have spoken with agrees with this. The Airborne Laser program does not appear to have established this type of decision-making process. The Missile Defense Agency appears to have set up a development phase that combines maturing technologies with establishing a stable design. It does not include any visible decision points or standards to clearly indicate when technology development is concluded and system integration work to establish a design begins. Thus, it appears to us that this acquisition process forces the agency to manage significant risk from immature technologies simultaneously with trying to build a stable product design during this phase. Further, separating system integration from system demonstration and system demonstration from production and using common metrics in deciding to move forward will enhance the future likelihood that decisions on the Airborne Laser will be cost-effective. Such a process will also enhance decision-makers’ ability across the range of missile defense elements by facilitating comparisons across elements. Therefore, we have retained our recommendations. To address our objectives, we reviewed the contractor’s monthly cost performance reports, Defense Contract Management Agency analyses of those reports, and Defense Acquisition Executive Summaries and Selected Acquisition Reports prepared by the Airborne Laser program office. We also discussed cost and schedule problems with Airborne Laser program officials, Kirtland Air Force Base, New Mexico; and contractor officials at the Boeing Company, Seattle, Washington; Lockheed Martin, Sunnyvale, California; and TRW, Los Angeles, California. In addition, we obtained a technology readiness level analysis of the system’s critical technologies from the Airborne Laser program office. We compared this analysis with information obtained during our prior review to determine if progress had been made in maturing the critical technologies to higher technology readiness levels. We obtained detailed briefings from program office personnel and Missile Defense Agency officials, Arlington, Virginia; and from the contractors about the status of critical technologies and the problems associated with maturing the technologies required for the laser, the beam control/fire control system, and the required aircraft modifications. We also obtained detailed briefings from program office and Missile Defense Agency officials regarding the new Missile Defense Agency acquisition process and the implementation of this process within the Airborne Laser program. We conducted our review from July 2001 through May 2002 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the congressional defense committees; the Secretary of Defense; the Director, Missile Defense Agency, the Secretary of the Air Force; and the Director, Office of Management and Budget. We will also make copies available to other interested parties upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Key contributors to this report are identified in appendix III. Description Lowest level of technology readiness. Scientific research begins to be translated into applied research and development. Examples might include paper studies of a technology’s basic properties. Invention begins. Once basic principles are observed, practical applications can be invented. The application is speculative, and there is no proof or detailed analysis to support the assumption. Examples are still limited to paper studies. Active research and development is initiated. This includes analytical studies and laboratory studies to physically validate analytical predictions of separate elements of the technology. Examples include components that are not yet integrated or representative Basic technological components are integrated to establish that the pieces will work together. This is relatively “low fidelity” compared with the eventual system. Examples include integration of “ad hoc” hardware in a laboratory. Fidelity of breadboard technology increases significantly. The basic technological components are integrated with reasonably realistic supporting elements so that the technology can be tested in a simulated environment. Examples include “high fidelity” laboratory integration of components. Representative model or prototype system, which is well beyond the breadboard tested for technology readiness level five, is tested in a relevant environment. Represents a major step up in a technology’s demonstrated readiness. Examples include testing a prototype in a high-fidelity laboratory environment or in simulated operational environment. Prototype near or at planned operational system. Represents a major step up from technology readiness level six, requiring the demonstration of an actual system prototype in an operational environment, such as in an aircraft, vehicle, or space. Examples include testing the prototype in a test bed aircraft. Technology has been proven to work in its final form and under expected conditions. In almost all cases, this technology readiness level represents the end of true system development. Examples include developmental test and evaluation of the system in its intended weapon system to determine if it meets design specifications. Actual application of the technology in its final form and under mission conditions, such as those encountered in operational test and evaluation. In almost all cases, this is the end of the last “bug fixing” aspects of true system development. Examples include using the system under operational mission conditions. In addition to the contact named above, Christina Chaplain, Marcus Ferguson, Tom Gordon, Subrata Ghoshroy, Barbara Haynes, Matt Lea, Hai Tran, Adam Vodraska, and John Warren made key contributions to this report. | The Air Force launched an acquisition program to develop and produce a revolutionary laser weapon system, known as the Airborne Laser, in 1996. Being developed for installation in a modified Boeing 747 aircraft, it is intended to destroy enemy ballistic missiles almost immediately after their launch. The Air Force originally estimated development costs at $2.5 billion and projected fielding of the system in 2006. However, by August 2001, the Air Force determined that the development cost estimate rose 50 percent to $3.7 billion, and the fielding date slipped to 2010. The Department of Defense transferred responsibility for the Airborne Laser in October 2001 to the Ballistic Missile Defense Organization. Subsequently, the Defense Secretary designated the Ballistic Missile Defense Organization as the Missile Defense Agency and granted the agency expanded responsibility and authority. The Air Force was unable to meet the Airborne Laser's original cost and schedule goals because it did not fully understand the level of effort that would be required to develop the critical system technology needed to meet the user's requirements. The Missile Defense Agency's new strategy for developing the Airborne Laser incorporates some knowledge-based practices that characterize successful programs. However, the agency has not established knowledge-based decision points and associated criteria for moving forward from technology development to product development and on to production. Without decision points and criteria, the agency risks beginning new and more costly activities before it has the knowledge to determine the money and time required to complete them and whether additional investment in those activities is warranted. |
GSA’s existing FTS2001 program is the successor to a line of programs that have provided long-distance telecommunications to the federal government. Made up of two large governmentwide contracts—one awarded to Sprint in December 1998 and one awarded to MCI in January 1999—the program is designed to meet agency needs for various telecommunication services. It also includes contractors that had been awarded local telecommunications contracts for selected metropolitan areas. GSA allowed these contractors to also offer long-distance services on the FTS2001 contracts—termed “crossover contracts.” The original terms of the two FTS2001 contracts were set to expire in December 2006 and January 2007. However, to give itself time to finalize the contracts intended to succeed the FTS2001 contracts and to provide its customer agencies additional time to complete their transitions once the Networx contracts were awarded, GSA negotiated sole-source contracts (termed FTS2001 bridge contracts) with Sprint and MCI to provide continuity of service for agencies. These bridge contracts, which extend the terms of the FTS2001 contracts for no more than 42 months, began in December 2006 and January 2007 and are to expire at the end of May and June 2010, respectively. In October 2003, GSA announced its plans for the Networx program. In conjunction with a group of senior federal information resource officials known as the Interagency Management Council (IMC), GSA identified eight strategic goals for the program: Service continuity—Contracts should include all services currently available under FTS2001 to facilitate a smooth transition. Competitive prices—Prices should be better than those available elsewhere in the telecommunications marketplace. High-quality service—Contracts should ensure a high quality of service throughout the life of the contracts using enforceable agreements. Full service vendors—Vendors should be capable of providing a broad array of services and provide follow-on services to avoid duplication of administrative and contracting costs. Alternative services—Agencies should be able to choose from a greater number of competing vendors that provide new, enhanced services and emerging technologies. Transition support—Contracts should include provisions that facilitate transition coordination and support. Performance-based contracts—Contracts should be performance based and include service-level agreements where possible. Operations support—GSA should provide fully integrated ordering, billing, and inventory management. In addition, GSA identified goals specific to the Networx transition and indicated that the ability of GSA and the Networx contractors to deliver against these goals is essential to the overall success of the transition effort. These goals include transitioning telecommunications services before the FTS2001 contracts expire, expediting the availability of new services, and minimizing transition expenses. Under the Networx program, GSA awarded two multiple-award task and delivery order contracts—Networx Universal and Networx Enterprise— having a combined estimated value of $20 billion. The contracts were awarded in March and May 2007, respectively. GSA awarded Networx Universal contracts to AT&T, Verizon Business Services, and Qwest Government Services. Networx Universal offers voice and data services, wireless services, and management and application services, including video and audio conferencing, as well as mobile and fixed satellite services, with national and international coverage. GSA awarded Networx Enterprise contracts to AT&T, Verizon Business Services, Qwest Government Services, Level 3 Communications, and Sprint Nextel. Networx Enterprise offers services similar to those of Networx Universal, with a focus on those that are Internet-based, and does not require coverage of as large a geographic area as does Networx Universal. Central to the successful transition from FTS2001 to Networx are transition planning and execution activities that involve GSA, the agencies, and FTS2001 and Networx contractors. GSA serves as a facilitator for all transition management activities and is using contracted support to assist in tracking transition activities in order to avoid delays and other problems that can arise throughout the process. GSA’s primary responsibility is program management of both the FTS2001 and Networx programs. As part of this, GSA is responsible for providing guidance and assistance to agencies for the transition to Networx to ensure that unnecessary delays in agency transitions are avoided; developing an overall Networx transition strategy, minimizing agency transition costs, and ensuring that all telecommunications services are transitioned in a timely manner; and tracking daily progress of transition efforts, performing program-level analysis to support transition goals and objectives, and resolving transition issues. The GSA organization carrying out these responsibilities is the Federal Acquisition Service, an organization formed in 2006 from the merger of GSA’s Federal Technology Service, which had managed the FTS2001 program, and GSA’s Federal Supply Service. To assist agencies with their transitions from the FTS2001 contracts, GSA is working with representatives of federal agencies, both directly and through the IMC. A subgroup of the IMC, the Transition Working Group (TWG), was established in May 2004 to assist with developing a consensus on common transition issues that affect multiple agencies. The TWG coordinates with GSA, agencies, and industry partners to ensure thorough advance planning and preparation efforts for the transition to Networx. The TWG also serves as a conduit for communications among GSA and its customer agencies. GSA’s customer agencies—those federal agencies acquiring services through the FTS2001 program—have principal responsibility for the transition. These agencies are responsible for coordinating transition efforts with the incumbent and Networx contractors to ensure that existing services under FTS2001 are disconnected and that new services are ordered. GSA and the IMC have requested each of the customer agencies to appoint a transition manager and establish a transition team that will manage the agency’s internal transition planning, preparation, and be responsible for interfacing with GSA, the IMC, and officials within the agency. Both the Networx contractors and incumbent FTS2001 contractors are responsible for supporting agencies in their transition planning and execution efforts: Networx contractors will be responsible for delivering services ordered, developing program-level and agency-level transition plans, and communicating the status of transition activities with scheduled notices and reports. Incumbent FTS2001 contractors are expected to complete all FTS2001 service disconnect orders requested by agencies and assist agency efforts to prepare for the transition by, for example, helping to identify inventory information and system requirements. The previous transition of federal telecommunications services was a large and complex task that underscored the importance of proper transition management practices. In 2001, we reported that the transition to the current FTS2001 federal telecommunications contracts encountered delays and took more than 24 months, which hindered the timely achievement of program goals. We also reported that transition delays resulted in raised telecommunications costs. In total, an estimated $74 million in savings was lost due to delays in completing the transition to FTS2001. Subsequently, the TWG, in conjunction with GSA, identified 27 lessons learned from the previous transition. For example, lessons learned include (1) the need for GSA and agencies to identify funding for the transition early to ensure that resources are available and (2) the need to ensure that local agency sites are not responsible for delays due to access issues. Of the 27 lessons learned, 13 related to transition planning, 11 to transition execution, and 3 to transition monitoring. Together, the lessons learned affirmed that applying adequate transition practices—including planning, executing, and monitoring the transition—increases the likelihood of a successful transition from FTS2001 contracts to Networx. GSA and representatives of its customer agencies have taken actions to address these lessons learned. For example, to address funding for the transition, GSA and the TWG developed a Taxonomy and Allocation of Transition Costs document, which the IMC approved, that describes each type of transition cost and whether GSA or the agency would be responsible. And to help ensure that local agency sites are not responsible for delays, GSA has provided guidance to agencies on creating staffing and training plans to better ensure that those involved are prepared for the transition effort. GSA has also developed numerous guidance documents and presentations related to the transition, as well as several tools. Much of this information is maintained by GSA in two locations on the Internet—its public Web site at www.gsa.gov/networx and a Web site accessible only to agency transition managers and TWG members. Documentation developed includes, for example, a guide to assist agencies in selecting the vendor best suited to provide required services while giving all vendors fair opportunity to be considered for each order—known as the fair opportunity process. GSA has also developed numerous presentations on the transition from FTS2001 and briefings presented to agency transition managers. Further, GSA has developed tools specifically designed to aid agencies as they transition to Networx, such as a transition inventory application to help agencies identify and validate their transition inventories and a tool that agencies can use to price their services against the various Networx contract offerings. With GSA’s FTS2001 contracts set to expire by June 2010—within the next 2 years—agencies have a limited time frame within which to complete their transitions (see fig. 1). As mentioned earlier, the FTS2001 bridge contracts expire in May and June 2010. In addition, GSA’s FTS2001 crossover contracts with Qwest, Verizon, AT&T, Winstar Communications, and SBC will expire between January 2008 and May 2010. Therefore, agencies have approximately 2 years to transition all FTS2001 services before all FTS2001 contracts expire. Figure 1 depicts these expiration dates. To address the approaching expirations, GSA is taking several actions. First, to provide an incentive to transition early, GSA and the IMC agreed upon milestones and associated criteria that, if met, would allow agencies to be reimbursed by GSA for certain transition-related costs. Second, in meetings with agency Chief Information Officers, GSA has emphasized the importance of conducting an efficient and timely transition as well as garnering executive-level buy-in for transition support. Third, GSA’s Technology Service Managers have been in contact with agencies to ensure that they are working toward transitioning their FTS2001 services. Fourth, the collection of GSA documents, presentations, and tools is geared toward assisting agencies in planning and executing their transitions. Specifically, to qualify for reimbursements, an agency must comply with the following milestones (fig. 2 depicts these milestones against the transition time line): By September 30, 2008, agencies are to complete “fair opportunity” decisions—that is, select their vendors—for all services to be transitioned from FTS2001 telecommunications contracts. By January 1, 2010, agencies must submit all transition orders that will incur costs related to parallel operations. GSA will not reimburse any costs for parallel operations an agency orders after this date. By April 1, 2010, agencies must submit all transition orders. GSA will not reimburse any costs for transition orders an agency places after this date. We have issued several reports on issues surrounding GSA’s FTS2001 and Networx telecommunications programs. Specifically, we reported on difficulties encountered during the previous transition, agency preparation for the transition to Networx, sound transition planning practices, and GSA’s cost estimation for the transition to Networx. In 2001, we reported on difficulties encountered during the transition to the FTS2001 program. We found that the collective effect of delays encountered during this complex transition jeopardized the timely achievement of FTS2001’s program goals. Delays occurred for several reasons. For example, delays occurred because agency efforts to order services were impeded by the inability of GSA and the long-distance contractors to rapidly add, through a contract modification process, transition-critical services to the FTS2001 contracts. Other identified reasons for transition delays included that agencies were slow to place orders for transition services and that contractors had issues with staffing and billing that impaired their efforts to support agencies’ transition activities. We also reported that encountered delays would, among other things, cause agency telecommunications costs to rise. In 2006, we reported on sound transition planning practices that agencies could use to improve the likelihood of a smooth transition. These planning practices are to establish a telecommunications inventory, perform a strategic analysis of telecommunications requirements, establish a structured transition management approach, develop a transition plan. Each of these sound planning practices consists of various components (for example, developing a transition plan consists of (1) identifying and documenting objectives and measures of success; (2) determining risks that could affect success; and (3) defining transition preparation tasks and developing a time line for these tasks). We assessed the progress of six agencies in preparing for the transition and reported that although agencies were early in the planning process, they were generally planning to employ sound transition planning practices in their transition management efforts. However, officials at two of the agencies stated that they did not plan to fully identify necessary resources. Specifically, officials at the Department of Justice indicated that they would not need additional financial resources, even though they could not provide an analytical basis for their decision, and officials from the Department of Energy believed that because the agency’s transition would be straightforward, identifying human capital needs would not be necessary. We also reported that GSA had provided agencies with guidance on performing some but not all of the sound transition planning practices we identified. As a result, we recommended that the Attorney General ensure that the Department of Justice’s planning efforts include an analysis of the extent to which current financial resources would be sufficient to conduct an effective transition; the Secretary of Energy ensure that the department’s planning efforts included identification of human capital resources needed to conduct an effective transition; and the Administrator of General Services, in working with the IMC, develop and distribute guidance to ensure that our identified sound practices for transition planning were used. In response, the three agencies took action or indicated that they planned to take action to implement our recommendations. The Department of Justice’s Chief Information Officer indicated that the department intended to analyze and determine its financial and other resource requirements for transition in the near future. However, as of April 1, 2008, it had not yet done so. The Department of Energy provided a transition plan that indicated that the need for human capital resources for the transition would be dependent on the Networx contractor or contractors chosen; once contractors were selected, the agency planned to re-examine its human capital needs to ensure that adequate support would be provided for transition execution. Finally, GSA provided guidance to agencies that addresses our identified sound transition planning practices. In 2007, we reported on GSA’s development of cost estimates for the transition to Networx, stating that while it had adequate funding to support its anticipated transition costs, it did not use sound analysis when developing its estimate. Accordingly, to ensure that future cost estimates by GSA were sound and could be used as a reliable basis for decisions, we recommended that the Administrator of General Services establish an agencywide policy requiring that cost estimates be developed using best practices. In addition, we recommended that the Administrator revise the transition cost estimate for Networx using best practices after the award of contracts under the Networx program. To address these recommendations, GSA established an agencywide policy requiring that its cost estimates be developed using best practices. Regarding the revision of its transition cost estimate, GSA officials indicated that once a significant number of agencies have made their fair opportunity decisions, it will recalculate the transition cost estimate, brief the IMC, and provide the results to us. Officials stated that GSA will brief the IMC in June 2008 on the revised transition estimate. The selected agencies are generally following the sound telecommunications transition planning practices that we identified in our 2006 report. For example, all have established telecommunications inventories for conducting their transitions, and all have ensured that identified telecommunications needs and opportunities are aligned with their respective missions, long-term IT plans, and enterprise architecture plans. However, key practices are not being fully implemented at three agencies: Commerce, Homeland Security, and the U.S. Nuclear Regulatory Commission. Officials of these agencies provided various reasons for not following these practices, including reliance on other entities and processes to carry them out. For example, for the key practice of establishing a structured transition management approach, one of the practice components is identifying key local and regional transition officials and points of contact who are responsible for disseminating information. Homeland Security did not plan to identify such local and regional points of contact; officials stated that when telecommunications changes occur, the department will rely on processes already in place to convey information through departmental channels to local contacts. However, in view of the potentially large number of locations and short time frames involved in the transition, relying on the standard process could be risky. If Homeland Security does not identify all of its local points of contact before it begins transitioning services, communication difficulties could produce delays in providing the required site access for vendors (such delays occurred during the previous transition). Agencies that do not address such gaps in transition planning and follow through on their plans risk delaying their transitions and increase the likelihood that the government will incur unnecessary costs. As described in our 2006 report, sound transition planning practices include establishing an accurate inventory of current telecommunications assets and services. First, agencies should have a detailed and complete transition inventory that represents all of their facilities, components, field offices, and any other managed sites. It should include information such as telecommunications services, traffic volumes, equipment, and applications being used. Second, agencies should have a documented inventory maintenance process that can be used to ensure that inventories remain current and reflect changes leading up to, during, and after the transition. Once established, an inventory maintenance process can ensure that changes are captured and allow agencies to audit vendor bills against their inventories throughout the life of the contract. Agencies should begin efforts to establish a telecommunications inventory early because the development of an accurate and reliable inventory is important to ensuring that the agency will be prepared to transition quickly. Agencies can use their transition inventories to identify opportunities for optimizing their current technology during strategic planning and to help determine areas for optimization and/or sharing of IT resources across the agency. Table 1 summarizes the extent to which transition planners have established telecommunications inventories at the U.S. Army Corps of Engineers (ACE), Department of Homeland Security (DHS), Department of Commerce (DOC), U.S. Nuclear Regulatory Commission (NRC), Small Business Administration (SBA), and U.S. Department of Agriculture (USDA). As the table shows, all agencies have addressed the first of the two components of this practice. All six identified telecommunications inventories that are sufficient for conducting their transitions. Those agencies with established telecommunications transition inventories are likely to be better prepared to address strategic considerations and avoid unnecessary transition delays associated with inventory identification. However, four of the six agencies had not documented a process to maintain their inventories to ensure that they remain current, although three had developed plans to do so: Agriculture and Commerce have drafted inventory maintenance processes. NRC’s transition manager stated that the agency plans to develop a maintenance process as part of its efforts to establish an expense management system. Homeland Security does not plan to develop such a process. Homeland Security’s transition manager stated that the department did not have a documented inventory maintenance process or policy at its headquarters or any of its components. The transition manager stated that the department has instructed its components to maintain their inventories. However, there was no documentation of this instruction, and the department did not have plans to document a maintenance process. Without a documented inventory maintenance process, agencies may not consistently and accurately capture the changes to their telecommunications inventories during and after transition, hindering their ability to ensure that they are billed appropriately by the vendor or to determine areas for optimization and sharing of telecommunications and IT resources across the agency. Sound transition planning practices, as described in our earlier work, include identifying strategic telecommunications requirements and incorporating them into transition planning. To accomplish this, agencies should use an inventory of existing services to determine current and future telecommunications needs. Agencies should also use the transition as an opportunity to identify areas for optimization or sharing of telecommunications and IT resources across the agency. The costs and benefits of introducing new technology and alternatives for meeting the agency’s telecommunications needs should be evaluated. Further, the identified needs and opportunities should be aligned with the agency’s mission, long-term IT plans, and enterprise architecture plans. The agency’s telecommunications requirements should shape the agency’s management approach to the transition and guide other efforts, such as identifying and allocating resources and developing a transition plan. Table 2 summarizes the extent to which the six agencies have performed a strategic analysis of telecommunications requirements. As the table shows, all six agencies have addressed the second of the two components of this practice: all have determined that needs and opportunities are aligned with their missions, long-term IT plans, and enterprise architecture plans. However, only half (Agriculture, ACE, and SBA) have fully implemented the other component: identifying current and future telecommunications needs, areas for optimization and sharing, and the costs and benefits of any options. One agency (Commerce) has plans to fully implement this component. That is, Commerce has determined its current and future telecommunications needs and, according to officials, plans to identify areas for optimization and sharing, as well as costs and benefits, before completing the fair opportunity process. However, two agencies (NRC and Homeland Security) do not have plans to fully implement this practice: NRC had identified current and future needs and established long-term plans to meet those needs, but it does not plan to evaluate the costs and benefits of alternatives to meeting its telecommunications needs for this transition. NRC officials stated that they plan to transition only existing services, and alternatives would not be evaluated until after transition. Although Homeland Security’s transition plans address strategic needs, the department did not evaluate the costs and benefits of new technology or alternatives for meeting its telecommunications needs. Homeland Security officials stated that they felt this activity was not appropriate because they did not have the choice not to transition to Networx. Without assessing the costs and benefits of alternatives for meeting their needs, NRC and Homeland Security may not be taking full advantage of the transition as an opportunity to optimize their telecommunications services, such as by upgrading and optimizing their telecommunications services, or shifting service to more cost-effective technology. Further, if agencies do not incorporate strategic requirements into their planning, they risk making decisions that are not aligned with their long-term goals. The sound transition planning practices that we identified in our earlier work include establishing a structured transition management approach. This entails establishing a transition management team involved in all phases of the transition and clearly defining responsibilities for key transition activities, such as project management, asset management, contract and legal expertise, human capital management, and information security management. The agency should also ensure a comprehensive understanding of the transition by identifying those who will be involved and how transition plans, including transition objectives, will be communicated. This also involves communicating what is going to happen and when, such as the frequency of status updates and meetings, and should include alerting and educating end users to changes or disruptions. Key local and regional transition officials and points of contact should be identified who are responsible for disseminating information to employees and working with the vendor to facilitate transition execution. In addition, the agency should ensure that it uses established project management, configuration management, and change management processes during the transition. Project management processes can be used to plan and manage transition-related activities, providing a structure that incorporates performance measurement and project-level control. Configuration management processes help ensure integrity and traceability as change occurs. Change management processes help employees prepare for the procedure and technology changes that may accompany a transition, reducing the risk that improvement efforts will fail. Table 3 summarizes the extent to which the six agencies have established a structured transition management approach. With regard to the first component of this practice, one agency (ACE) established a transition management team and defined all key transition roles and responsibilities; the remaining five agencies have established management teams, but have yet to define all roles and responsibilities. Specifically, three agencies had not yet defined responsibilities for certain roles, but planned to do so: Agriculture had not defined the role of legal expertise in its transition efforts, but it has requested support and was awaiting a response from its Office of General Counsel. SBA had yet to define responsibility for asset management, but officials indicated that they plan to do so. NRC had yet to define responsibility for information security management, but officials indicated that they planned to do so. The remaining two agencies did not plan to fully implement this sound practice component: Commerce officials stated that the responsibilities for asset and human capital management will rest with the department’s transition manager and each individual component; therefore, the department did not plan to define responsibilities for these roles. Homeland Security officials stated that roles such as asset management, legal expertise, human capital management, and information security management would not be assigned by name because expertise in these areas would be available as needed. However, by not defining key roles and responsibilities for the transition, these agencies risk extending their transition period as they attempt to assign appropriate personnel and update them on transition progress and issues. With regard to the second component of this practice, one agency (SBA) identified communications plans and local and regional points of contact. Four additional agencies plan to fully address this sound practice component. Specifically: Agriculture developed a communications plan, and its transition plans indicated that it will identify transition points of contact by the end of fiscal year 2008. Commerce officials stated that they plan to develop transition and communications plans that will include transition points of contact. A contractor supporting ACE’s transition is required to develop a communications plan, and the ACE transition plan indicates that the contractor is in the process of identifying transition points of contact. NRC officials stated that they plan to develop a communications plan as part of the agency’s transition plan, which is to include transition points of contact. However, one agency (Homeland Security) does not plan to fully implement this sound practice component. Specifically, although it has established lines of communication, it had not identified local and regional points of contact to facilitate transition execution, because, according to department officials, when telecommunications changes occur, the department has a process in place to convey information through departmental channels to local contacts, and officials believe that this process will be adequate for any changes that are part of the transition. However, in view of the potentially large number of locations and short time frames involved in the transition, relying on the standard process could be risky. If Homeland Security does not identify all of its local points of contact before it begins transitioning services, communication difficulties could produce delays in providing the necessary site access for vendors (such delays occurred during the previous transition). With regard to the third component of this practice, ACE is the only agency currently using all three key management processes—project management, configuration management, and change management processes—in the management of its transition, but the other five agencies were using at least one of these management processes and planned to use all three. Officials at the five agencies generally provided policies or other documents indicating that all three processes would be used or stated that they planned to implement those not yet in use. Agencies that do not use a sound management approach risk additional financial costs, extended time lines, and disruptions to the continuity of their telecommunication systems. Further, without establishing lines of communication and identifying local and regional points of contact, agencies may lack the quality of information that is necessary for comprehensive understanding, accountability, and shared expectations at all levels. Our sound transition planning practices include ensuring that the resources required to successfully plan for the transition are identified. To do so, the agency should identify any funding requirements for its transition planning efforts to ensure that resources needed are available. The organizational need for investments should be identified and the agency should assess benefits versus costs to justify any resource requests. Cost-benefit analyses and return-on-investment calculations are common methods used to justify requests. Transition planning costs that should be considered include transition project management, software and hardware upgrades, and establishing reliable inventories. The agency should also determine staffing levels that may be required throughout the transition effort, as well as ensure that personnel with the right skills are in place to support the transition effort. As mentioned earlier, some of the skills needed are project management, asset management, contract and legal expertise, human capital management, and information security expertise. Further, the agency should require training for those carrying out the transition or operating and maintaining newly transitioned technology. Identifying the need for resources early in the planning process is likely to help to avoid unnecessary spending and delays during the transition. Further, the resources allocated to the transition effort should reflect the level of change identified in the agency’s strategic analysis of telecommunications requirements; that is, if the agency chooses to implement new technology, it must budget resources accordingly. Table 4 summarizes the extent to which the six agencies have identified resources for their transitions. As table 4 shows, three agencies addressed the first component of this practice, having identified the level of funding needed to support transition planning efforts and justified organizational resource requests. However, three did not: Homeland Security, NRC, and ACE did not address funding requirements for their transition planning efforts before planning their transitions and, among other things, identifying inventories. Instead, the three agencies moved forward with performing transition planning using existing resources without having analyzed the sufficiency of these resources. At this late point in the planning process, performing such an analysis is no longer feasible. With regard to the second component, two agencies (SBA and Agriculture) have identified staffing levels that will be needed throughout the transition, and three plan to do so. ACE and Commerce provided evidence of efforts under way to identify staffing resources that will be needed, and NRC officials stated that they plan to address staffing levels in the agency’s transition plan. Homeland Security indicated that although staffing specific to the transition effort was not identified, staffing for the transition was taken into consideration as part of the department’s acquisition for a wide-area network under Networx. However, Homeland Security did not provide documentation to demonstrate that this sound practice component had been addressed. Without determining staffing needs for its transition effort, Homeland Security risks underestimating the complexity and demands of the transition, which may lead to delays and unexpected costs. As the table shows, three agencies have fully implemented the third component: Homeland Security, ACE, and SBA have required training for those involved in the transition. Of the remaining agencies, Commerce has a draft policy requiring those involved with the transition to meet certain training requirements, and a draft Agriculture transition plan indicated that training requirements will be addressed. NRC officials stated that they plan to identify training requirements in the agency’s transition plan. As illustrated by lessons learned from the previous transition, agencies that do not fully analyze their transition-related resource needs may be underestimating the complexity and demands of the transition effort. Further, unexpected costs may arise that lead to delays and unnecessary spending that could have been avoided. The sound transition planning practices we identified include developing a transition plan that identifies transition objectives, measures of success, and risks, and that approaches the transition planning process as a critical project with a detailed time line. To facilitate this practice, agencies’ transition management teams should undertake the following three activities: The agency should identify transition objectives and measures of success. Transition objectives should be based on the agency’s strategic analysis of telecommunications requirements and aligned with the agency’s overall mission and business objectives. Measures of success should be based on these transition objectives. They are a key tool to help managers assess progress. The agency should identify agency-specific risks that could affect transition success. The importance of the risks should be evaluated relative to the agency’s mission-critical systems and continuity of operations plans. Knowing what risks exist and how to mitigate them appropriately will lessen problems and delays during the transition. This risk assessment should also include an analysis of information security risks to determine what controls are required to protect networks and what level of resources should be expended on controls. The agency should develop a transition plan that depicts a management strategy with clearly defined transition preparation tasks and includes a time line that allows for periodic reporting. This time line should take into account priorities relative to the agency’s mission-critical systems, contingency plans, and identified risks. Table 5 identifies the extent to which the agencies have developed plans for the transition. Four of the agencies have plans to fully implement the first component of this sound practice, with three having documented agency-specific transition objectives and the remaining planning to do so. And while none had yet established measures of success, officials at all four stated that they plan to do so. However, NRC and Homeland Security do not plan to fully address this component. Although NRC officials stated that they plan to establish transition objectives, they do not plan to establish measures of success. Instead of establishing measures to assess progress toward agency goals, NRC officials stated that they plan to use GSA-established measures related to governmentwide transition progress. Homeland Security officials stated that transition goals were discussed, but evidence was not provided, and the department had no plans to establish measures of success. Without documenting objectives for the transition, Homeland Security may find it difficult to provide those involved in the transition with clear expectations. Those agencies that do not establish measures of success based on documented objectives will lack information that could be used to track progress toward transition objectives and inform management decisions. Five agencies plan to fully implement the second component of this sound practice: identifying agency-specific risks that could affect transition success. Specifically, for ACE, Agriculture, and Commerce, the agencies’ transition plans indicate that agency-specific transition risks will be identified. For SBA, a memorandum indicated that a formal risk assessment will be performed before the transition to Networx. For NRC, officials stated that risks will be addressed in the agency’s transition plan and that information security risks will be addressed during the agency’s fair opportunity process. One agency, however, did not have plans to fully address this sound practice component. Homeland Security performed a high-level risk assessment, but this assessment did not address risks to mission-critical systems, continuity of operations plans, or information security risks, which are key components of this practice. Homeland Security officials stated that information security risk assessments will be performed in accordance with federal requirements, but they do not intend to identify information security risks specific to their transition effort. If they do not analyze risks relevant to the transition, agencies may encounter problems and delays during the transition because they are not adequately prepared to mitigate risks. Four of the agencies fully implemented the third step of this practice, having transition plans that depicted a management strategy with clearly defined transition preparation tasks and included a time line that allowed for periodic reporting. The remaining two agencies’ transition plans indicate that they will fully implement this sound practice component. Agencies that do not document measurable objectives and clearly define transition tasks that take into account agency priorities and risks may find it difficult to provide those involved in the transition with clear expectations or gauge transition success. Specifically, without measurable objectives, managers will lack information that could be used to track progress toward transition objectives and inform management decisions. GSA is working with agencies and various forums to identify and resolve transition challenges facing agencies in making the transition to the Networx contracts. In working with agencies and vendors through such forums as the Interagency Management Council’s Transition Working Group, and a transition help desk, GSA has identified challenges related to incumbent contractor support during the transition, defining responsibilities of agencies during the transition to ensure information security compliance, and use of a transition inventory application developed by GSA. To resolve the challenges, GSA has, among other things, modified incumbent FTS2001 contracts to help ensure contractor support during the transition, developed guidance to clarify agencies’ information security responsibilities, and established support teams to assist agencies in using the inventory application developed by GSA. As the lead agency for the Networx transition, GSA is responsible for ensuring that unnecessary delays in agency transitions are avoided, as well as minimizing agency transition costs and ensuring that all telecommunications services are transitioned in a timely manner. As part of its efforts to address its transition responsibilities, GSA is using various forums to identify transition challenges: Transition Working Group (TWG)—A subgroup of the Interagency Management Council, TWG was created in May 2004 and serves as the primary avenue through which common transition challenges affecting agencies are identified. TWG is a bi-weekly forum for agency representatives. It promotes collective government planning related to the transition and assists with developing a consensus on common issues that affect multiple agencies. Direct interaction with individual agencies—GSA interacts directly with agencies to provide them with individual assistance related to its various contract offerings, including FTS2001 and Networx. GSA has Technology Service Managers who are assigned to specific agencies to serve as single points of contact for GSA’s contract offerings and provide support to agencies for, among other things, selection, ordering, implementation, and maintenance of FTS2001 and Networx services. GSA indicated that agencies can contact their Technology Service Managers to raise challenges specific to their agency. In addition to the Technology Service Managers, GSA’s Director of Network Services Programs has been meeting individually with agency Chief Information Officers and other executive- level leadership to educate them on the benefits of Networx and prepare for the transition from FTS2001. Regular interaction with vendors—GSA interacts with vendors in a number of ways, including regular meetings, vendor-required reporting to GSA, and GSA-initiated information requests. Specifically, GSA meets regularly with FTS2001 and Networx vendors (as often as weekly) to facilitate information sharing and to identify and resolve concerns or challenges. Vendors are also required to submit monthly status reports to GSA as well as provide quarterly program reviews. GSA has also requested information from its vendors to address specific issues. For example, GSA recently sent a request for information to the vendors to solicit strategies for enabling agency compliance with a recent initiative by the Office of Management and Budget (OMB) to improve governmentwide information security by reducing the number of Internet connections. Networx Help Desk—The help desk is a resource for agencies and GSA to track and resolve agency-reported issues such as transition planning concerns, assistance with GSA tools, and identification of transition inventories. This help desk is part of GSA’s Transition Coordination Center, a GSA-established team of GSA personnel and contractors tasked with facilitating the transition to Networx. The help desk addresses individual agency concerns or questions and develops weekly reports of help desk tickets that are reviewed and tracked by GSA. Using these tickets, GSA has created a knowledge database and identified frequently asked questions that are available for review by agencies. GSA officials stated that through the help desk they could likely identify vendors who deliver services late or provide inadequate support during the transition. As a result of GSA’s efforts, a number of challenges have been identified: Incumbent contractor cooperation—The FTS2001 contracts lacked requirements for the incumbent vendors to provide a certain level of support to meet agencies’ needs during the transition to Networx. Organizational conflicts of interest—Agencies found that they were unable to use current contractors providing telecommunications support to assist with the transitions to Networx if the particular contractors were also subcontractors of a Networx vendor. Information security compliance—Agencies did not have a clear understanding of their responsibilities during the transition related to existing information security requirements. GSA transition inventory application—Agencies encountered difficulties using an application developed by GSA to assist agencies in identifying their transition inventories. Agencies’ statements of work—Delays in the transition process could result from statements of work developed by agencies that include unclear requirements. Contract modification process—Modifications to the Networx contracts require time and effort of both GSA and the vendors and may extend the amount of time required for an agency to transition. OMB security initiative—The OMB initiative to reduce the number of government Internet connections (mentioned previously) may require agencies to revisit their Networx transition planning efforts. Expansion of protest rights—Recent legislation permits protests of orders above $10 million under multiple-award task and delivery order contracts such as Networx; if an order is protested, it may delay an agency’s transition. More detail on these challenges is presented in the discussion following. GSA has taken various actions to resolve the identified common transition challenges. In September 2006, TWG members expressed concern that FTS2001 incumbent vendor contracts did not include certain transition-related provisions. Specifically, the contracts did not require FTS2001 incumbent vendors to assist in the transition process by providing the ability for agencies to “fall back” on the incumbent vendors’ services if a specific transition effort encountered difficulties. Agencies requested clarification on the level of effort required of the incumbent vendor to reestablish agency telecommunications services until transition issues could be remedied. GSA modified the FTS2001 contracts, including the FTS2001 crossover contracts, to address these issues. Specifically, all but two FTS2001 crossover contracts were modified to include requirements for incumbent vendors to restore agency services in the event of problems with transition to new services. (GSA officials indicated that the remaining two contracts already included language to address this concern.) Modifications included provisions for the incumbent contractors to make a reasonable effort to promptly reactivate service if there was a problem with the successor contractor’s service and it was necessary to fall back to the incumbent’s service. In addition, modifications state that the incumbent contractor’s point of contact should be available during scheduled cutovers to handle fallback requests. The inclusion of these terms in the FTS2001 contracts should help to reduce the risk that agencies’ telecommunications transitions will be disrupted by the lack of cooperation by incumbent contractors, as well as help to ensure that unnecessary delays are avoided if agencies encounter difficulties in transitioning to a new contractor. During a September 2007 meeting, TWG members identified a concern regarding contractor organizational conflicts of interest. Specifically, agencies found that they were unable to use certain current contractors providing telecommunications support to assist with the transition to Networx because these contractors were also subcontractors of Networx vendors, and the agencies’ use of such a subcontractor could give a Networx vendor an unfair competitive advantage. The Federal Acquisition Regulation (FAR) calls for the exercise of good judgment to resolve a potential organizational conflict of interest and requires appropriate action to avoid, neutralize, or mitigate the potential conflict. To address this challenge, GSA has modified Networx contracts to allow agencies to use their existing contractor support within defined boundaries. For example, the modification requires contractors supporting an agency to (1) avoid situations with the risk of unauthorized disclosure of information, (2) refuse to divulge information about the agency’s program, and (3) report conflicts of interest. The modification also calls for contractors to train their employees on the Procurement Integrity Act and its penalties. Thus, GSA has established a framework for agencies and contractors to follow that is intended to address potential or actual organizational conflicts of interest. Agencies remain responsible for taking steps to avoid, neutralize, and mitigate conflicts of interest in using contractors. The TWG expressed concern that responsibilities related to the Federal Information Security Management Act of 2002 were unclear. Specifically, agencies were unsure of their responsibilities for information security under Networx versus those of GSA and the vendors. For example, agencies requested clarification on government responsibility to certify and accredit the public network during transition and GSA’s information security responsibilities as the agency providing the contract vehicle for telecommunications services. GSA, in consultation with OMB, has provided guidance to agencies that addresses information security concerns for transition. Specifically, a GSA briefing to agencies clarifies that agencies are responsible for determining the impact of the transition on the certification and accreditation of their systems. In addition, GSA clarified that its responsibilities, as the manager of the contract vehicle, includes, among other things, reviewing contractor security plans and reports in accordance with the provisions of the contract; monitoring and resolving security issues during the life of the contract; conducting post-award certification and accreditation of contract awardees’ support systems; and conducting certification and accreditation on GSA’s billing system related to Networx. GSA’s actions should help ensure that information security during the transition will be adequately addressed. The TWG indicated that agencies were having difficulties using an application developed by GSA to validate their telecommunications inventories for the transition. In January 2007, GSA created an initial governmentwide inventory using FTS2001 vendor billing reports, with the intention of using it to track transition status and aid agencies in planning for their transitions. To assist in this effort, GSA required agencies to validate their inventory using a GSA inventory application. As agencies worked to validate these inventories, the TWG indicated that agencies encountered difficulties with the application and that the process for validating their inventories was not clearly defined. To address this challenge, GSA has taken several actions. GSA has issued user guidance for its inventory application and has briefed the TWG on the inventory validation process. GSA has also established inventory assistance teams to work with agencies to identify and validate their inventories. These inventory assistance teams are assigned at the request of an agency and include GSA personnel and contracted support staff. From September to December 2007, inventory assistance teams worked with 43 agencies to provide assistance with validating their inventories. As a result, when GSA established a baseline in January 2008 of the government’s inventory to be used to measure transition progress, federal agencies had validated about 92 percent of the almost 4.1 million records in the inventory. As a result of its actions, GSA has increased the chances of a successful transition by helping to ensure that agencies have available to them accurate inventory information. GSA and several of the Networx vendors identified concerns about the quality of agency statements of work and possible delays as a result of unclear statements of work. An agency will develop a statement of work when its telecommunications requirements cannot be met using existing offerings in the Networx contract. Since statements of work are particular, those with unclear requirements could extend the time required for GSA to review and determine whether a modification is necessary. According to Networx vendors, an unclear statement of work may also require additional time as they review it to clarify and understand agency requirements. Lack of clarity may also result in an agency receiving disparate proposals from vendors, which may not all meet the agency’s particular needs. Finally, GSA officials stated that there are fewer contracting staff (the personnel responsible for reviewing agency statements of work) assigned to Networx than were assigned to FTS2001. A limited number of staff may increase the amount of time needed for GSA’s review of agency statements of work. GSA is taking action to address concerns related to the quality of statements of work. First, GSA has developed a “Fair Opportunity and Statement of Work Guide,” intended to provide agencies with a set of uniform ordering guidelines to obtain services under the Networx contacts. This guide addresses the definition and documentation of agency requirements, describes how to determine if a statement of work is needed, and states that GSA has advisory and consulting services available to agencies. Second, GSA officials stated that after an agency submits its finalized statement of work to GSA, it is reviewed for possible legal, pricing, contracting, management, and technical issues, as well as to determine whether there are opportunities for the agency’s needs to be met using existing Networx service offerings. If concerns or errors are identified, the statement of work is rejected, the agency is briefed on the cause of rejection, and the agency must revise its statement of work. Finally, to address the limited number of contracting staff, GSA officials stated that they plan to add additional staff to better facilitate the contract review process. The actions being taken by GSA should help address issues regarding the quality of statements of work developed by agencies and submitted to vendors. Contract modifications require time and effort, from both GSA and the vendors, to negotiate the terms of the modification and eventually extend the amount of time required for an agency to transition. In addition to its responsibility for overseeing the transition, GSA has administrative responsibility for processing and authorizing contract modifications. Modifications to the Networx contract are essential to allow agencies to place orders against requirements that are within the scope of the Networx contract, but that are not currently available as fixed price contract items. Contract modifications can also be initiated (1) by a vendor desiring to add or change specific service offerings or (2) as a result of a Networx program need determined by GSA. Also, as previously discussed, GSA officials stated that they have fewer personnel assigned to Networx who are responsible for reviewing and incorporating contract modifications than were assigned to the transition to FTS2001. To address concerns with the contract modification process, GSA identified existing and planned actions. First, the initial review of agencies’ statements of work is, in part, designed to identify whether a modification is necessary. Second, GSA developed a contract modification guide to inform those involved of the process for modifying contracts. Third, in April 2008, it took steps to automate certain aspects of the contract modification process. For example, contractors can now draft, submit, and update contract modifications using an Internet-based application. In addition, according to GSA officials, contractors can also use this application to track the modification throughout the process. Last, the previously mentioned planned increase in contract review staff will also be used to facilitate the processing of contract modifications. As a result of actions taken, GSA is making progress in meeting its goals for processing contract modifications. Its “Fair Opportunity and Statement of Work Guide” indicates that the majority of modifications should be completed within 30 business days. As of May 2008, the time to complete a contract modification varied from 1 business day to more than 106 business days; about 49 percent of its modifications had been made within 30 days. However, many of these took place before GSA had implemented its automated contract modification tools. These tools and the other actions GSA has taken have the potential to minimize contract modification delays. In November 2007, OMB issued a memorandum to improve governmentwide information security. This initiative, called the Trusted Internet Connections initiative, seeks to lessen information security risks by reducing the number of Internet connections maintained by the government. OMB has asked agencies to analyze and resolve any effects of this initiative on, among other things, planning related to the agencies’ use of the Networx contracts. Therefore, agencies may have to revisit their Networx transition planning efforts if, for example, they find it necessary to reconfigure their networks to enable the use of fewer Internet connections. In response to this initiative, GSA asked Networx vendors to identify (1) how they can help agencies to meet the goals of the initiative and (2) any concerns. GSA summarized the vendors’ feedback and on February 25, 2008, it presented the results to OMB, which is leading the initiative in conjunction with Homeland Security. The summary indicated multiple areas of support that vendors are willing to provide agencies, such as assisting agencies in performing a complete inventory and discovery of all agency Internet connections. In addition, it indicated that the Networx contracts may need to be modified to allow vendors to offer several of these services. GSA stated that detailed requirements for this initiative have yet to be fully developed by Homeland Security and that, as of May 2, 2008, no specific modifications to existing Networx contract offerings have been identified as necessary. GSA is, however, working with Homeland Security to define detailed requirements for a new service offering under Networx to provide a trusted Internet portal service; it expects this service to be available to the agencies by November 2008. The actions GSA is taking and has planned should help to ensure that the Networx contracts can be used by agencies to address OMB’s Trusted Internet Connections initiative. Recent legislation permits protests of orders above $10 million under multiple-award task and delivery order contracts such as Networx. Beginning May 27, 2008, the recently enacted National Defense Authorization Act for Fiscal Year 2008 authorizes bid protests of such orders; previously, protests were authorized only when an order increased the scope, period, or maximum value of the contract under which the order was issued. The protest of an agency’s order may affect the time available to the agency to complete its transition. Although officials stated that the impact of this legislation on agency transitions cannot be known at this time, GSA has briefed IMC members, TWG members, and agency transition managers on this legislation. The briefing provided information on the terms of the legislation, and informed agencies of their expected responsibilities as well as GSA’s expected role. For example, the briefing indicated that GSA may be asked to provide input in the event of a protest, but the agency that issued the order would have primary responsibility to defend the protest. In addition, GSA revised its “Fair Opportunity and Statement of Work Guide” to reflect this new legislation. Further, officials stated that they are responding to agency questions, through the Networx help desk, regarding the bid protest process. GSA’s actions have helped to inform agency transition officials of their responsibilities and the impact this legislation may have on their ordering process. Transitioning federal telecommunications services is a large and complex undertaking. The previous transition resulted in significant delays and increased costs, taking more than 2 years to complete, which underscores the importance of making necessary preparations before starting such an effort. For the current transition, selected agencies are generally following our sound transition practices, which should help them avoid some of the delays experienced previously. However, Homeland Security, Commerce, and NRC are not planning to fully implement key sound practices. Because the period to conduct their telecommunications transitions is limited, agencies will be better prepared if they consistently implement all of the sound practices. If they do not, they risk being unable to complete their transitions before the expiration of the FTS2001 contracts and increase the likelihood that the government will incur unnecessary costs. In managing its $20 billion Networx program, GSA has taken actions to identify and resolve common transition challenges, including developing guidance for agency statements of work and creating teams to assist agencies in establishing transition inventories. These actions should help to reduce the risk that challenges will lead to unnecessary transition delays and costs for agencies. Going forward, GSA’s responsibility as facilitator for the Networx transition will continue to require it to proactively identify and resolve common transition challenges, complete actions planned to resolve already identified challenges, and monitor transition progress. To reduce the risk that transition delays could lead to disruptions in service and increased costs, we are making the following 10 recommendations: We recommend that the Secretary of Commerce direct the department’s Chief Information Officer to define the roles of asset and human capital management for the department’s transition. We recommend that the Chairman of the U.S. Nuclear Regulatory Commission direct the commission’s Chief Information Officer to establish measures of success based on the transition objectives that the agency plans to develop and evaluate the costs and benefits of new technology or alternatives to meeting its telecommunications needs. We recommend that the Secretary of Homeland Security direct the department’s Chief Information Officer to address the gaps in its transition planning. Specifically, the Chief Information Officer should document the department’s processes for maintaining evaluate the costs and benefits of new technology or alternatives to meeting its telecommunications needs; clearly define the roles of asset management, legal expertise, human capital management, and information security expertise for the department’s transition; identify local and regional points of contact; include in the department’s planning efforts the identification of human capital resources needed to conduct an effective transition; establish goals and measures of success for the department’s transition efforts to help managers assess progress; and perform a transition risk assessment that addresses risks to mission- critical systems, continuity of operations plans, and risks to information security. In commenting on a draft of our report, three of the seven agencies reviewed generally agreed with our report, and two agencies partially agreed. GSA, Commerce, NRC, and Homeland Security provided written comments (which are reproduced in apps. II through V), and SBA provided comments via e-mail. Two agencies, Agriculture and U.S. Army Corps of Engineers, indicated via e-mail that they had no comments. Officials from GSA, Commerce, and SBA generally agreed with our findings: The Acting Administrator of GSA concurred with the information pertaining to GSA and expressed appreciation for our acknowledgment of the actions the agency had taken. Commerce’s Chief Information Officer indicated that the report provided a fair assessment of the department’s progress and status to date. A program manager in SBA’s Office of Congressional and Legislative Affairs indicated that SBA was satisfied with our findings regarding the agency. NRC and the Department of Homeland Security partially agreed with our report. NRC’s Executive Director for Operations indicated that our report generally reflects the issues surrounding agency preparedness for transition. However, the official suggested that we remove our recommendation that the Commission evaluate the costs and benefits of new technology or alternatives because such an evaluation had been and would be conducted as part of the agency’s normal planning processes. However, our recommendation remains because the Commission did not perform this activity specifically for the transition to Networx. Performing such an analysis would provide the Commission with the opportunity to optimize its telecommunications services in the light of its present and projected needs. The Executive Director also provided technical comments, which we incorporated into our report as appropriate; our assessment of these comments is contained in appendix IV. The Acting Director of Homeland Security’s Departmental Audit Liaison Office indicated partial agreement with our report. In particular, regarding our recommendations that Homeland Security establish goals and measures of success and perform a transition risk assessment, the department agreed that a more structured communication of transition objectives and a specific risk management process for transition would be beneficial. However, this official indicated that the department disagreed with five of our recommendations and with a finding regarding its transition communications planning. The department’s comments reiterated information on actions that it had taken in these areas that it considered to meet the goals of the sound practices. However, these actions are already reflected in our assessment. The specific areas of disagreement are as follows: Regarding our recommendation that the department document its processes for maintaining telecommunications inventories, the official acknowledged that the department does not have a documented inventory maintenance process, but stated that our observation was in conflict with our finding that it had identified a complete telecommunications inventory. The official added that the department has instructed its components to maintain their inventories using a GSA tool and documented GSA procedures. However, our finding that the department had established an inventory for transition is not in conflict with the recommendation. While the department had addressed one component of this sound practice by establishing an inventory for transition, it had not taken the necessary action to address the other component; it had not documented the process to be used by its components for inventory maintenance. Specifically, this sound practice component calls for a documented inventory maintenance process to lessen the risk that changes to the inventory during and after transition would not be consistently and accurately captured. Regarding our recommendation that the department evaluate the costs and benefits of new technology or alternatives to meeting its telecommunications needs, the official indicated that this was in conflict with our related finding that the department had aligned needs and opportunities with its mission, long-term IT plans, and enterprise architecture plans. The official added that its fair opportunity efforts will include service and cost analyses. However, our recommendation is not in conflict with the identified finding. Specifically, although the department’s transition plans addressed strategic needs, it had not performed an analysis of costs and benefits of new technology or alternatives for meeting those needs. Regarding decisions made during the fair opportunity process, our recommendation refers to the sound transition practice of performing a strategic analysis based on agencywide telecommunications needs, with the results of this analysis being used to shape the agency’s transition management approach, transition plan development, and allocation of resources. In contrast, the fair opportunity process involves selecting a vendor for the agency’s service orders; at that point in the process, the agency should have already identified services to order. Therefore, to be effective, an agency’s evaluation of costs and benefits of new technology and alternatives would need to take place before the department’s fair opportunity efforts. Regarding our recommendation that the department clearly define the roles of asset management, legal expertise, human capital management, and information security expertise, the official indicated that the department can call upon these specialty disciplines as needed. However, by taking this approach, Homeland Security risks encountering delays as officials attempt to assign personnel in a time of need and bring them up to date on transition progress and issues. Defining such roles at the outset, as advocated by sound transition planning practices, would help avoid such delays. Regarding our recommendation that the department identify local and regional points of contact, the official stated that we had suggested that the department should identify all personnel that might be involved in any kind of telecommunication change and stated that such an effort would include thousands of individuals across the department and all IT field support personnel. Rather than contacting all these personnel, the Acting Director indicated that the department had taken steps to alert key managers at each component. However, this sound practice does not involve identifying all personnel that might be involved in any telecommunications change, but rather only identifying those contacts that will be responsible for facilitating the transition. For example, a contact is needed for each location where service is provided to facilitate physical access to equipment during a transition. Homeland Security’s decision to not identify all contacts responsible for facilitating the transition does not follow sound transition planning practices and increases the risk that it will experience delays in providing the necessary site access for vendors. Regarding our recommendation that the department identify human capital resources needed to conduct an effective transition, the official indicated the department did identify funding and staffing for transition planning. However, our recommendation is that Homeland Security determine human capital resources needed throughout the entire transition effort—not simply the planning effort. The official acknowledged that Homeland Security had not published a Networx transition communications plan, but stated that the charter for its transition work group defined essential communications and activities. Our report indicates that the department has established lines of communication in its charter, but as previously discussed, it had not identified local and regional points of contact. Thus, the department’s communications planning is incomplete. If Homeland Security does not identify all of its local points of contact before it begins transitioning services, communication difficulties could produce delays in providing the necessary site access for vendors. As agreed with your staff, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will send copies of this report to other interested congressional committees, the Administrators of General Services and the Small Business Administration; the Chairman of the U.S. Nuclear Regulatory Commission; and the Secretaries of Agriculture, Commerce, Defense, and Homeland Security. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6240 or by e-mail at koontzl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. Our objectives were to determine (1) the extent to which federal agencies are following sound transition planning practices and (2) the actions the General Services Administration (GSA) is taking to identify and resolve common transition challenges affecting agencies. To determine the extent to which agencies are following sound transition planning practices, we selected six agencies for review. Using FTS2001 billing data provided by GSA, we identified total charges for each agency for fiscal year 2006. These totals ranged from over $145,000,000 to as low as $28 for 127 separate entities. We then reduced the number of entities under consideration to a more manageable number by identifying agencies with total charges in excess of $1 million for fiscal year 2006. From this group of agencies, we made a judgmental selection of six agencies that were representative of (1) varying types of organization, including executive departments, subagencies, and independent agencies; (2) varying levels of attendance in the Transition Working Group, an agency forum that is assisting GSA in its efforts to plan for the transition; and (3) the entire range of agency charges in excess of $1 million. The departments and agencies selected for review were the Department of Homeland Security; Department of Commerce; U.S. Department of Agriculture; Small Business Administration; U.S. Army Corps of Engineers, a component of the Department of Defense; and U.S. Nuclear Regulatory Commission. Because we judgmentally selected the agencies in our review, we cannot conclude that our results represent the entire federal government’s level of preparation. However, the six cases studied illustrate various challenges that agencies may face in planning for the transition to Networx. To determine the extent to which the selected agencies have made adequate preparations for their upcoming transitions, we obtained and reviewed agency documentation, including but not limited to strategic plans, telecommunications inventories, and transition-related plans, and interviewed agency officials. We then assessed this information against the five sound transition planning practices identified in our prior report on agency transition planning. These practices are (1) establish a telecommunications inventory, (2) perform a strategic analysis of telecommunications requirements, (3) establish a structured transition management approach, (4) identify resources, and (5) develop a transition plan. Each of these sound planning practices consists of various components (for example, developing a transition plan consists of (1) identifying and documenting objectives and measures of success; (2) determining risks that could affect success; and (3) defining transition preparation tasks and developing a time line for these tasks). Based on our assessment, we classified the status of agency transition planning efforts to address each sound practice component as “fully implemented,” if the agency has fully implemented the sound practice component; “plans to fully implement,” if the agency has plans to fully implement the component; or “no plans to fully implement,” if the agency does not have plans to fully implement it. We discussed our assessments with agency officials and made adjustments as appropriate. To evaluate one of the sound practices, establishing a telecommunications inventory, we developed criteria to assess the extent to which agencies had identified complete transition inventories. First, based on data provided by GSA, we determined whether each agency had validated 90 percent or more of its inventory. Second, we administered a questionnaire to determine whether each agency had adequate quality control mechanisms in place to identify and maintain its inventory. If these two criteria were met, we considered the inventory to be sufficient for a telecommunications transition. To determine the actions that GSA is taking to identify and resolve common transition challenges affecting agencies, we reviewed transition guidance and other Networx documentation developed by GSA and the Transition Working Group (TWG) of the Interagency Management Council (IMC), including presentations, meeting minutes, projected time lines, GSA’s “Fair Opportunity and Statement of Work Guide,” and the TWG’s “Networx Transition Guide (Pre-Award)”; interviewed FTS2001 incumbent vendors and Networx vendors (AT&T, Level3 Communications, Qwest, Sprint, and Verizon Business) and the six agencies selected for review; and interviewed GSA officials to identify challenges, guidance, and GSA current and planned actions for the Networx transition. We assessed GSA’s efforts to resolve identified challenges by analyzing documentation and testimonial evidence from GSA on any actions taken to address them. We performed our work at the Washington, D.C., area offices of the Department of Homeland Security, Department of Commerce, Department of Defense, Small Business Administration, U.S. Army Corps of Engineers, U.S. Department of Agriculture, U.S. Nuclear Regulatory Commission, and the General Services Administration. We conducted this performance audit from September 2007 through June 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The following is GAO’s response to the U.S. Nuclear Regulatory Commission’s letter dated June 13, 2008. 1. We clarified our report to better reflect the role of the IMC. 2. NRC’s comment references our statement that it did not plan to evaluate the costs and benefits of alternatives to meeting its telecommunications needs. The official stated that, as its requirements mature, the agency will evaluate the Networx advanced offerings that may prove beneficial. However, sound transition planning calls for performing a cost benefit and analysis specifically for the agency’s transition effort as part of a strategic analysis that should be used to shape the agency’s transition management approach, transition plan development, and allocation of resources. NRC has not performed this activity for the transition. 3. NRC’s comment references our statement that it did not plan to establish measures of success to assess progress toward its goals. NRC indicated that it plans to use GSA-established measures related to transition progress and identified various tracking tools. However, NRC has not established agency-specific objectives for its transition and, by limiting measures of success to those established by GSA, NRC may lack information that could be used to track its progress in achieving its own goals and to inform its own management decisions. 4. We disagree with NRC’s statement that the introduction of the Office of Management and Budget’s Trusted Internet Connection (TIC) initiative should not be characterized as a transition issue. As NRC goes on to state, agencies that take time to address considerations relative to TIC may experience delays in their efforts to transition. We consider this a challenge that may affect agency transitions. 5. We do not agree with the suggested modification to our recommendation. NRC’s suggestion would limit its measures of success to those emphasized by GSA, such as measures of transition progress. However, sound practices call for agencies to establish measures for each of its transition objectives to help managers assess the extent to which those objectives are achieved. In addition to the individual named above, key contributions were made to this report by James R. Sweetman, Jr., Assistant Director; Gerard Aflague; Barbara Collier; Jamey A. Collins; Eric Costello; Joel Grossman; Amos Tevelow; Hai V. Tran; and Merry Woo. | The General Services Administration (GSA) is responsible for ensuring that federal agencies have access to the telecommunications needed to meet mission requirements. GSA's current telecommunications program, called FTS2001, has contracts in place that will expire by June 2010. Thus, agencies face the difficult task of transitioning their services to a successor program, known as Networx. GAO was asked to determine (1) the extent to which agencies are following sound transition planning practices and (2) the actions GSA is taking to identify and resolve common transition challenges affecting agencies. In performing this work, GAO selected six agencies based on, among other things, their FTS2001 charges; reviewed transition planning at these agencies and GSA; and analyzed GSA documentation of actions to address transition challenges. Selected agencies--the Departments of Homeland Security, Commerce, and Agriculture and the Small Business Administration, U.S. Army Corps of Engineers, and the U.S. Nuclear Regulatory Commission--are generally following sound transition planning practices previously identified by GAO. For example, all have established telecommunications inventories, and most have established transition plans that include transition preparation tasks and time lines. However, other key practices are not being fully implemented at three agencies. For example, Commerce does not plan to clearly define all key transition roles and responsibilities, Homeland Security does not plan to identify local and regional points of contact, and the Nuclear Regulatory Commission does not plan to establish measures of success based on its transition objectives. With limited time available to finalize planning and begin transitions, agencies that do not address gaps in their planning or follow through on plans risk delaying their transitions and increase the likelihood of incurring unnecessary costs. As facilitator for all transition management activities, GSA has identified numerous common challenges that agencies face in making the transition to Networx, and it is taking action to resolve them. GSA uses various forums to identify these challenges, which include ensuring cooperation from incumbent contractors, defining agencies' responsibilities for information security during the transition, and the use of a transition inventory application developed by GSA. To resolve these challenges, GSA has, among other things, modified FTS2001 contracts to help ensure contractor cooperation, developed guidance to clarify information security responsibilities, and established support teams to assist agencies in using the inventory application developed by GSA. GSA's actions should reduce the likelihood that these challenges will hinder transition efforts. |
Universal service traditionally has meant providing residential customers with affordable, nationwide access to basic telephone service. The Telecommunications Act of 1996, however, extended universal service support to eligible schools and libraries. The new program (often referred to as the “e-rate” program) is designed to improve schools’ and libraries’ access to modern telecommunications services. Generally, educational institutions that meet the definition of “schools” laid out in the Elementary and Secondary Education Act of 1965 are eligible to participate, as are libraries that can receive assistance from a state’s library administrative agency under the Library Services and Technology Act. Schools and libraries do not receive direct funding from the program. Instead, support comes in the form of discounts on the costs of telecommunications services. FCC’s orders provided for discounts ranging from 20 to 90 percent on all commercially available telecommunications services, Internet access, and internal connections. The act specifies that every telecommunications carrier providing interstate telecommunications services must contribute to a universal service fund, unless exempted by FCC. This fund is used to reimburse vendors for the discounted services that they provide to program participants. The act did not prescribe a structure for administering the program. However, in 1997, FCC directed the establishment of the Schools and Libraries Corporation to carry out this function. The Corporation works within the framework of the FCC’s orders and rules to administer certain program functions. The Corporation, with a 14-member staff based in Washington, D.C., contracted out most of its application-processing, client support, and review functions to the National Exchange Carrier Association (NECA), located in New Jersey. NECA’s key responsibilities include reviewing applications to ensure compliance with the program’s requirements and processing invoices from telecommunications vendors to reimburse them for the cost of discounts they provide. NECA, in turn, has subcontracted with two other organizations to help answer applicants’ questions, process and enter applications into the Corporation’s database, and establish and maintain the Corporation’s public web site, which contains important information about program operations and application procedures. FCC changed this administrative structure in November 1998 in response to the Congress’s directive that a single entity administer universal service support for schools and libraries and rural health care providers. FCC appointed the Universal Service Administrative Company (USAC) as the permanent administrator of the universal service fund and directed the Corporation to merge with USAC by January 1, 1999. Under this merger, the Corporation’s staff will become part of USAC’s Schools and Libraries Division, carrying out essentially the same functions as before. Since our review ended prior to the reorganization, we continue to refer to “the Corporation” in this report. In order to receive universal service support, each applicant completes a two-stage application process. During the first stage, the applicant submits a form that lists the services for which discounts are being requested. These forms are posted on the Corporation’s web site so that vendors can provide applicants with competitive bids on requested services. The second stage begins after the applicant accepts a bid and enters into a contract with a vendor. The applicant submits a second form that details the types and costs of the services being contracted for and the amount of the discount being requested. The Corporation checks these forms using its application review procedures, which are designed to ensure that support goes only to eligible entities, for eligible services, at appropriate discount levels. It then issues commitment letters to successful applicants informing them of the amount of discount they can expect to receive. We found that the Corporation has taken actions to implement the key recommendations we believed should be completed before issuing any funding commitment letters to applicants. Specifically, the Corporation has sampled applications that were already processed to identify and correct any systemic weaknesses in its program integrity review procedures; finalized the program’s procedures, automated systems, and internal controls; and obtained a report from its independent accountants that the Corporation had suitably designed its internal controls to prevent or detect material departures from program objectives, as of November 4, 1998, in conformity with criteria set forth by the Corporation in its “Management’s Statement of Universal Service Discount Mechanism Program Objectives and Internal Control Objectives.” In addition, the Corporation is following our recommendation to complete its special reviews of high-risk applications before issuing funding commitment letters to these applicants. One recommendation, however, still needs to be implemented: FCC needs to develop adequate goals, performance targets, and measures for the program. One of the Corporation’s primary responsibilities is to ensure that funding goes only to eligible applicants, for eligible services, at the appropriate levels of discount—as specified by FCC orders. During our initial review in June and July 1998, we found several areas of potential weakness in the Corporation’s program integrity procedures that could result in funding being directed to applicants for ineligible services or at inappropriately high levels of discount. FCC’s Chairman accepted our recommendation to delay issuing funding commitment letters until the Corporation randomly selected applications to assess how well its review procedures were actually working. One of the Corporation’s automated tests is designed to determine whether an applicant is eligible for support under the program. A computer program compares the name of the applying school or library against a database of eligible schools and libraries. Although we did not identify a weakness with this test approach during our initial review, we recommended that the Corporation verify the approach’s effectiveness as part of its review of a random sample of processed applications. The verification showed that only one application in a sample of 100 was from an ineligible applicant. This application, however, had already been flagged by the Corporation’s automated test for eligible applicants. This result indicates that the Corporation’s procedures for preventing ineligible schools and libraries from participating in the program appear to be working effectively. As noted earlier, FCC provides discounts for telecommunications services, Internet access, and internal connections. Checking on the eligibility of requested services is not easy, however, because of the variety and technical nature of many of these services—especially those related to internal connections. The Corporation’s review procedures for eligible services use both manual inspections and an automated system for flagging problem applications. An important internal control document in this review process is a checklist of ineligible items, which is used during the initial screening of applications. If a clerical staff member using this checklist finds an ineligible item on an application, the application is flagged in the application processing system for a second, more detailed review by a professional staff member who checks the eligibility of each requested service. We found, however, that as the Corporation processed applications and gained experience in the types of services being requested, it added items to its checklist of ineligible services. As a result, different criteria were applied to applications, depending on when they were first screened. In our early discussions with Corporation officials, we learned that they did not intend to recheck applications that had been processed before the checklist was updated. This raised our concern that some early applications may have cleared the screening process that should have been flagged for detailed review. The results of the Corporation’s review of a random sample showed that weaknesses indeed existed in its procedures for ensuring that only eligible services receive funding. At least 19 of the 100 applications in the sample contained requests for ineligible items as defined by FCC orders, totaling approximately $106,000 in inappropriately requested funding. Of these 19 applications, 7 had been classified as “clean” (that is, containing no ineligible items) by the Corporation’s earlier review and contained approximately $6,000 in inappropriately requested funding. The Corporation’s independent accountants, PricewaterhouseCoopers, subsequently requested the Corporation to conduct a further sample of 300 applications that had been classified as “clean.” This review found that 4.6 percent, or approximately $314,000, of the discount funding requested in these applications would have gone to ineligible items. Given the error level revealed by these two samples, Corporation officials concluded that their test had to be strengthened. Accordingly, they changed their review procedures to require staff to perform a complete manual review of every requested service item in all 32,000 applications, regardless of whether these applications had been flagged during the initial screening. To implement these new procedures in a timely manner, the Corporation’s contractor augmented its permanent staff with temporary staff to perform the reviews. Training and supervising new staff is, of course, important in ensuring that the new review procedures are carried out effectively. FCC orders state that the level of discount that each school or library can receive should be determined by the applicant’s economic need and location. Discounts range from 20 to 90 percent of the costs of the services to the applicants, with higher discounts going to those in low-income and rural areas. Applicants calculate the discount level to which they are entitled by following instructions and criteria on the application form and certify that their discount calculations are correct. When the Corporation processes an application, it uses an automated test to check the requested discount level. This test compares the applicant’s requested discount with a discount level calculated from data on schools in the Corporation’s database. If the applicant is requesting a higher discount than indicated by the Corporation’s database, the test can flag the application for special review. As part of this review, a program official contacts the applicant and gathers information to determine whether the requested discount level is in fact correct. It is possible for the automated system to flag every application that shows a variance from the Corporation’s own calculation. However, the Corporation decided that such a stringent approach was not warranted because of limitations in the database it uses to make its calculations. For example, the database contains the number of students actually participating in the National School Lunch Program, rather than the number eligible to participate, which is the measure adopted by FCC. Moreover, the data are about a year old. Mindful of these limitations, the Corporation decided to establish some latitude in its review procedures for eligible discounts. Thus, the Corporation allows applications to pass unchallenged through its automated discount review if the requested discount level does not exceed a certain threshold of variance from the Corporation’s own calculation. Applications that cross this threshold are flagged for manual review by a program official. Corporation officials stated that adopting this procedure was a reasonable business decision because the cost of manually reviewing all applications that showed any variance from the Corporation’s own calculations would exceed the benefits gained. We found in our initial review, however, that the Corporation had not performed a sound benefit-cost analysis to justify this business decision. We were concerned about this situation not only because of the need to enforce program rules for the sake of equity but also because the total amount of funding available during the program’s first year was not enough to cover all of the applicants’ requests for support. Providing funding for ineligible services or allowing inappropriate discount levels could result in some applicants’ proper requests for support being denied. The Corporation’s review of a sample of 100 processed applications showed that 57 of them requested discount levels that varied from the Corporation’s own calculation. After obtaining additional information for these 57 applications, the Corporation determined that at least 9 could not support their requested level of discounts. The dollar amount of these inappropriate discount requests totaled about $14,000 out of the approximately $4.5 million in requested funding. At the request of its independent accountants, the Corporation conducted a review of an additional sample. The Corporation selected 50 applications that requested $100,000 or more in support. In this second sample, 39 of the 50 processed applications contained discount levels that varied from the Corporation’s own calculation. The Corporation found that 6 of the 39 applications requested discounts that could not be validated. The funding that would have been awarded for these inappropriate discount levels totaled about $35,000 out of approximately $28.5 million in requested funding. Having considered these results, Corporation officials decided that they did not need to change their procedures for reviewing requested discount rates for the first funding year. As before, they maintained that the amount of inappropriate funding in question was not large enough to warrant the time and cost of performing follow-ups on every application that showed any variation from the discount level calculated by the Corporation’s automated check. We remain concerned, however, that the amount of inappropriate discounts passing unchallenged through the review process, though relatively low now, could grow larger in subsequent funding years. We therefore believe that the Corporation needs to explore methods for mitigating this risk in a cost-beneficial manner. Aware of our continuing concern, the FCC Chairman directed the Corporation in November 1998 to work with FCC staff “to establish a method for improving the procedures for ensuring that discounts are provided in accordance with the discount levels set forth in the Commission’s rules.” At the time of our initial review in June and July 1998, the Corporation had not yet finalized all the procedures, automated systems, and internal controls needed to make funding commitments and approve vendors’ compensation for the discounted services provided to applicants. Nevertheless, the Corporation was planning to issue funding commitment letters before the remaining procedures were finalized. We maintained, however, that this approach would have put the Corporation at risk of being unable to process nearly $2 billion in vendors’ invoices in a timely manner. Corporation officials themselves estimated that in cases where services were already being provided to applicants, invoices for payment could be sent in by vendors as soon as 15 days after commitment letters were sent out, thereby triggering the reimbursement process. Therefore, we recommended in our July 1998 testimony that the Corporation make no funding commitments until it had finalized all of its operating procedures and automated systems. FCC and the Corporation accepted this recommendation. The Corporation needed until early November 1998 to finalize its operating procedures, complete the testing of the automated systems supporting these procedures, and secure the Office of Management and Budget’s approval of the applicant and vendor forms needed for the reimbursement process. This delay occurred in part because on June 22, 1998, FCC released a reconsideration order that significantly altered the program. Specifically, the program’s funding year was changed from a calendar year cycle to a fiscal year cycle, and the period for the first round of funding was changed from 12 months to 18 months. The order also adjusted the maximum amounts that could be collected and spent during 1998 and the first 6 months of 1999, directing the Corporation to commit no more than $1.925 billion for the schools and libraries program during this time frame. Because this amount was not expected to cover all of the applicants’ requests, FCC directed the Corporation to give funding priority to applicants’ requests for telecommunications services and Internet access. Once these requests are satisfied, the remaining funds are to be used for internal connections, with priority given to applicants eligible for higher discounts. To implement these new priority rules, the Corporation had to significantly revise its funding award process and automated support systems. In addition, the Corporation found that some established procedures needed to be modified as it learned lessons from reviewing the first round of applications. For example, the Corporation initially cautioned schools and libraries that they would not receive discounts on any items in their funding requests that had included ineligible services mixed with eligible services. However, when the Corporation began reviewing applications, it found some cases in which applicants included an ineligible service that accounted for only a small percentage of the total cost of the service item being requested. As a result, the Corporation, with FCC’s concurrence, modified its procedures so as to provide funding for items that were substantially correct even though they contained some ineligible services. Specifically, if the ineligible services accounted for less than 50 percent of the total dollar amount of the item requested, the Corporation would separate out the cost of the ineligible services and provide discount funding for the remaining eligible services. In December 1997, FCC’s Chairman directed the Corporation to contract with an independent accounting firm to assess—before any program disbursements were made—whether the program’s processes and procedures provided the controls needed to mitigate against fraud, waste, and abuse. In December 1997, with the approval of the Corporation’s Board of Directors, the Corporation engaged the services of Coopers & Lybrand, LLP (which became PricewaterhouseCoopers, LLP, on July 1, 1998). The independent accountants were to examine the Corporation’s assertions that internal controls over the processing of funding requests from applicants were suitably designed to detect material departures from the Program Objectives set forth in the Corporation’s document, “Management’s Statement of Universal Service Discount Mechanism Program Objectives and Internal Control Objectives.” At the time of our initial review during June and July 1998, the Corporation planned to issue funding commitment letters to applicants before the independent accountants had completed their review but not disburse any funds until the review was complete. We were concerned, however, that setting the funding commitment process in motion before the underlying control design has been fully reviewed would undercut the purpose and value of the independent review. Therefore, we recommended that the Corporation refrain from making funding commitments until it had obtained a report from its independent accountants stating that an appropriate set of internal controls was in place. Both FCC and the Corporation accepted this recommendation. On November 4, 1998, the independent accountants’ report was issued stating that the Corporation had suitably designed internal controls to prevent or detect material departures from its Program Objectives as of November 4, 1998. The Corporation engaged the independent accountants to determine whether the internal controls over its processing of funding requests from applicants were in accordance with these six Program Objectives: All applications are processed in accordance with FCC’s priority rules. Only eligible schools and libraries receive discounts. Only eligible services as defined by FCC’s orders are funded. Discount percentages are approved in accordance with the criteria specified under FCC’s orders and rules. Payments to vendors are authorized in a timely manner. Funding commitments do not exceed the program’s funding limits. The independent accountants’ work included reviewing the Corporation’s procedures and documentation related to its control environment, application controls, computer controls, and monitoring controls. In addition, the independent accountants discussed control issues with the Corporation’s management and closed them out, as appropriate, when satisfied with the documentation and the suitability of the design. Before issuing a final report, the independent accountants briefed the Corporation’s Board of Directors, the FCC’s Common Carrier Bureau, and the FCC Chairman. Because the Corporation was in a start-up phase during 1998, the independent accountants were not engaged to examine and report on the actual operating effectiveness of these internal controls. During the course of its review, the independent accountants became concerned, as we were, about the efficacy of the Corporation’s review procedures for ensuring that only eligible services receive support at the appropriate level of discount. The weakness in the service review procedures, discussed earlier, was addressed to the independent accountants’ satisfaction when the Corporation changed them to require a complete review of all requested services on all applications before committing funds. The independent accountants’ concern with the discount review focused on the Corporation’s decision to allow some applications to go through the review process unchallenged even though they were requesting a higher discount than calculated by the Corporation in its review process. Near the end of the independent accountants’ review in November 1998, the Corporation modified its written program objective for discounts to reflect its practice of accepting and approving discounts that are higher than its own discount calculation, provided that they are within a certain threshold of variance. The Corporation cited limitations in its verification sources, discussed earlier, as the reason for adopting this procedure. With this modification, the independent accountants concluded that the Corporation’s internal controls were suitably designed to prevent or detect material departures from the Program Objectives, as amended by management. As an extra quality control step, the Corporation planned to conduct special reviews of applications that it considered to be high risk. The Corporation designates applications as high risk on the basis of several criteria, including the size of the request, evidence from external sources of possible program compliance issues, and indications that a school has an endowment of more than $50 million. The Corporation estimated that about 1,600 of the approximately 32,600 applications were high risk. These represent about $1.2 billion of the $2 billion requested by all applicants for the program’s first year. As part of its high-risk reviews, the Corporation plans to require these applicants to submit additional material to support their funding requests. This material is then to be reviewed by program staff to check for conformity to program rules. Because these high-risk reviews are an important internal control, we were concerned about their timing. The Corporation originally planned to wait until after the applicants had received their funding commitment letters before doing their high-risk reviews. Under this scenario, if the Corporation found a problem with a high-risk application during its special review, it might have to reduce or withdraw the funding commitment that it had already made. In such cases, applicants who decided to begin receiving contracted services on the basis of their funding commitment letters could find themselves responsible for paying more than they had planned. Accordingly, in our July 1998 testimony, we recommended that the Corporation complete these special reviews before sending funding commitment letters to high-risk applicants. The Corporation agreed to change its procedures and in October 1998 began conducting its first special reviews of the high-risk applications. In October 1998, Corporation officials stated that none of these approximately 1,600 applications would receive funding commitment letters until their selective reviews were completed. Performance measurement is critical for determining a program’s progress in meeting its intended outcomes. During our initial review, we noted that FCC’s combined “Strategic Plan for Fiscal Years 1997-2002 and Annual Performance Plan for Fiscal Year 1999” provided no specific strategic goals, performance measures, or target levels of performance for the program. Without clear goals and measures, the Congress, FCC, and the Corporation would have a difficult time assessing the effectiveness of the program and determining whether operational changes are needed. Accordingly, we recommended that the FCC Chairman direct responsible FCC staff to develop goals and measures for the program before the end of fiscal year 1998 so that the Congress and others would be able to assess the results of the program’s first year of operations. This recommendation still needs to be implemented. FCC’s February 1999 “Annual Performance Plan for Fiscal Year 2000” still fails to provide well-defined goals, performance targets, and measures. For example, it is unclear whether FCC intends to use “schools” or “classrooms” as the unit of measurement in tracking access to advanced telecommunications services—a point of major significance. In our subsequent discussions with FCC and Corporation officials, we found that FCC did not coordinate with program officials when developing its revised plan. As we noted in our previous testimony, we have issued guidance on developing effective strategic plans. One of the key practices in developing these plans is to involve stakeholders—such as school and library officials—in the goal-setting process. The involvement of the Congress is also indispensable to defining goals, as are the agency’s customers—in this case, the schools and libraries themselves. Corporation officials have already identified a number of data sources that could be used to develop baseline data and measure trends in areas such as Internet connections. They are also posting the results of their funding decisions on the Corporation’s web site, broken down by states, types of services funded, and the percentage of funding going to rural/low-income areas. In addition, Corporation officials are currently exploring ways to measure the efficiency of their work processes. While these efforts are useful, it is important that FCC take the lead as part of its policy-making and oversight responsibilities to define specific goals and measures for the program, particularly as they relate to the outcomes being achieved by the expenditure of funds. When we completed our audit in early December 1998, the Corporation was finishing its review of applications and starting to make funding decisions, a process that was going much more slowely than expected. As a result, our review did not include certain key activities that the Corporation had not yet completed or begun. These include implementing the newly revised review procedures, especially for high-risk applications; setting priorities for funding commitments in accordance with FCC’s orders dealing with applicants’ appeals on commitment decisions, including establishing a funding reserve to cover those that are successful; and reviewing and authorizing vendors’ requests for reimbursement. These are challenging activities in themselves and will be even more challenging because they can overlap in time. For example, the reimbursement activity will involve processing tens of thousands of forms submitted by successful applicants and their vendors. While this activity is occurring, applications for the second funding cycle will be coming in. This application period began on December 1, 1998, and was originally scheduled to close in mid-February. However, the Corporation extended the deadline to mid-March 1999 because of the delay in getting out the first year’s commitment letters. The closing date was extended again, to April 6, 1999, because commitment letters were still going out in February 1999. This extension, together with the added workload of vendor reimbursements, raises the question of whether the program staff and contractors will have enough time to carefully review and process all the new applications by July 1999—the start of the next funding period. Given these issues, FCC’s role in overseeing the program will be more important than ever. In many ways, the Corporation is still in a start-up mode and continues to need help in resolving operational problems. FCC’s oversight will also be important to ensure that the program’s transition from the Schools and Libraries Corporation to USAC goes smoothly and that USAC management is appropriately engaged in maintaining and improving the overall integrity of the program’s operations. To track the progress being made in implementing our recommendations, we held ongoing discussions with FCC and Corporation officials. We reviewed draft and final operational procedures, documentation for the automated systems, and other material related to internal controls. We also visited with the Corporation’s contractor in New Jersey, which has major responsibilities for developing and implementing program procedures and automated information systems. In addition, we met with PricewaterhouseCoopers to discuss the scope and results of its independent review of the suitability of the design of the Corporation’s internal controls. We performed our review from June 1998 through December 1998 in accordance with generally accepted government auditing standards. We provided a draft of this report to the Federal Communications Commission, the Schools and Libraries Corporation (now the Schools and Libraries Division of the Universal Service Administrative Company), and PricewaterhouseCoopers for their review and comment. We subsequently met with officials from the Schools and Libraries Division, the Common Carrier Bureau of the Federal Communications Commission, and PricewaterhouseCoopers. All three concurred with our findings and provided several points of clarification, which we incorporated into our final report. Appendix I contains the Schools and Libraries Division’s letter commenting on our draft report. The President of the Division stated that our report captures fairly the work undertaken to provide for effective internal controls. She added that using the experience gained in processing the first year’s applications, the Division will implement new and tighter procedures for evaluating discounts in response to direction from the Chairman of the Federal Communications Commission. Regarding the need to establish adequate performance goals and measures for the program, Federal Communications Commission officials told us that they recognize the importance of the recommendation in our July 1998 testimony and intend to address it, but they did not indicate a time frame for doing so. We are sending copies of this report to interested congressional committees, the Chairman and Commissioners of the Federal Communications Commission, the Chief Executive Officer of the Universal Service Administrative Company, and the President of the Schools and Libraries Division of the Universal Service Administrative Company. Copies of this report will also be made available to others upon request. If you have any questions about this report, please call me at (202) 512-7631. Major contributors to this report are listed in appendix II. John P. Finedore Teresa R. Russell James R. Sweetman, Jr. Michael R. Volpe Mindi Weisenbloom The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Schools and Libraries Corporation's progress in implementing GAO's July 16, 1998, recommendations for improving its procedures and internal controls. GAO noted that: (1) the Corporation has taken actions to implement the key recommendations that GAO believed needed to be completed prior to issuing any funding commitment letters to applicants; (2) these included: (a) sampling processed applications to identify and correct any systemic weaknesses in program integrity review procedures; (b) finalizing the program's procedures, automated systems, and internal controls; and (c) obtaining a report from its independent accountants on the suitability of the Corporation's internal controls to prevent or detect material departures from its program objectives; (3) the Corporation is taking action on GAO's recommendation to complete special reviews of high-risk applicants before issuing commitment letters to these applicants; (4) the Federal Communications Commission (FCC) has not yet implemented GAO's recommendation to develop adequate goals, performance targets, and measures for the program; (5) with GAO's key operational recommendations implemented, the Corporation began issuing its funding commitments for the first year to applicants in late November 1998; (6) the program still faces major challenges as it moves into new operational areas, such as reviewing and authorizing reimbursements to vendors; and (7) given the fact that the program is still essentially in a start-up mode, close oversight by FCC will be especially important in helping to identify and resolve operational problems. |
Dramatic growth in the volume and speed of international travel and trade in recent years have increased opportunities for diseases to spread across international boundaries with the potential for significant health and economic implications. International disease control efforts are further complicated by, for instance, the emergence of previously unknown zoonotic diseases, such as Ebola hemorrhagic fever and avian influenza. Surveillance provides essential information for action against infectious disease threats. Basic surveillance involves four functions: (1) detection, (2) interpretation, (3) response, and (4) prevention. (See fig. 1.) Global efforts to improve disease surveillance have historically focused on specific diseases or groups of diseases. For example, as we reported in 2001, the international community has set up surveillance systems for smallpox, polio, influenza, HIV/AIDS, tuberculosis, and malaria, among others, with the goal of eradicating (in the case of smallpox and polio) or controlling these diseases. In 2006, the United States adopted a national strategy to prepare for pandemic influenza outbreaks both domestically and internationally, which included planned funding by U.S. agencies to support influenza surveillance and detection. Such disease-specific efforts can build capacity for surveillance of additional diseases as well. The United States acknowledged the need to improve global surveillance and response for emerging infectious diseases in 1996, when the President determined that the national and international system of infectious disease surveillance, prevention, and response was inadequate to protect the health of U.S. citizens. Addressing these shortcomings, the 1996 Presidential Decision Directive NSTC-7 enumerated the roles of U.S. agencies—including CDC, USAID, and DOD—in contributing to global infectious disease surveillance, prevention, and response. Enhancing capacity for detecting and responding to emerging infectious disease outbreaks is also a key focus of the revised International Health Regulations (IHR). For many years, the IHR required reporting of three diseases—cholera, plague, and yellow fever—and delineated measures that countries could take to protect themselves against outbreaks of these diseases. In May 2005, the members of WHO revised the IHR, committing themselves to developing core capacities for detecting, investigating, and responding to other diseases of international importance, including outbreaks that have the potential to spread. The regulations entered into force in June 2007; member states are required to assess their national capacities by 2009 and comply with the revised IHR by 2012. U.S. agencies operate or support four key programs aimed at building overseas surveillance capacity for infectious diseases: Global Disease Detection (GDD), operated by CDC; Field Epidemiology Training Programs (FETP), supported by CDC and USAID; Integrated Disease Surveillance and Response (IDSR), supported by CDC and USAID; and Global Emerging Infections Surveillance and Response System (GEIS), operated by DOD. USAID also supports additional capacity-building projects. In 2004-2006, the U.S. government obligated about $84 million for these four programs (see table 1). Funding for these programs is obligated to support the ability of laboratories to confirm diagnosis of disease as well as the training of public health professionals who will work in their countries to improve capacity to detect, confirm, and respond to the outbreak of infectious diseases. Collectively, these four programs operate in 26 developing countries. (See fig. 2.) To limit duplication and leverage resources in countries where some or all of the capacity-building programs operate, CDC, DOD, and USAID coordinate their efforts by colocating activities, detailing staff to each other’s programs, participating in working groups, and communicating by phone. GDD is CDC’s primary effort to build public health capacity to detect and respond to existing and emerging infectious diseases in developing countries, according to CDC officials. In 2004-2006, CDC obligated about $31 million to support GDD capacity-building efforts. GDD’s goals are to enhance surveillance, conduct research, respond to outbreaks, facilitate networking, and train epidemiologists and laboratorians. Established in 2004, GDD aims to set up a total of 18 international centers that would collaborate with partner countries, surrounding regions, and WHO to support epidemiology training programs and national laboratories and conduct research and outbreak response around the world. Two GDD centers were established in Kenya and Thailand in 2004, and three centers are currently under development in Egypt, China, and Guatemala. In addition, CDC established a GDD Operations Center in Atlanta to coordinate information related to potential outbreaks. According to CDC officials, GDD capacity-building activities consist of strengthening laboratories, providing epidemiology training, and conducting surveillance activities. CDC aims to establish laboratories with advanced diagnostic capacity—for example, in Kenya, CDC established several laboratories with biosafety levels 2 and 3. GDD centers conduct formal, 2-year training programs in analyzing epidemiological data, responding to outbreaks, and working on research projects. The centers also conduct short-term training—for example, in 2006, GDD centers trained more than 230 participants from 32 countries to respond to pandemics. In addition, the centers provide opportunities for public health personnel in host countries to work with CDC to evaluate existing surveillance systems, develop new systems, write and revise peer- reviewed publications, and use surveillance data to inform policy decisions. Assisted by USAID and WHO, and at the request of national governments, CDC has helped countries establish their own FETPs to strengthen their public health systems by training epidemiologists and laboratorians in infectious disease surveillance. CDC and USAID obligated approximately $19 million to support these programs in 2004-2006. Each FETP is customized in collaboration with country health officials to meet the country’s specific needs, emphasizing applied epidemiology and evidence-based decision making for public effective communication with the public, public health professionals, and the community; and health program design, management, and evaluation. CDC and USAID collaborate with host-country ministries of health in Brazil, Central America, Central Asia, China, Egypt, Ghana, India, Jordan, Kenya, Pakistan, South Africa, Sudan, Thailand, Uganda, and Zimbabwe to build surveillance capacity through the FETPs. In addition to receiving formal classroom training in university settings, FETP students and graduates participate in surveillance and outbreak response activities, such as analyzing surveillance data and performing economic analysis, and publish articles in peer-reviewed bulletins and scientific journals. At the end of the 2-year program, participants receive a postgraduate diploma or certificate. According to CDC, these programs graduated 351 epidemiologists and laboratorians in 2004-2006. As of February 2007, according to CDC, six programs established between 1999 and 2004 tracked their graduates and found that approximately 92 percent continued to work in the public health arena after the training. For example, in Jordan, 21 of 23 graduates of its FETP are working as epidemiologists at the central and governorate levels. USAID has supported CDC in (1) designing and implementing IDSR, with WHO/AFRO, in 46 African countries and (2) providing technical assistance to 8 of these countries. In 2004-2006, USAID obligated approximately $12 million to support IDSR, transferring about one-quarter of this amount to CDC through interagency agreements and participating agency service agreements. IDSR’s goal is to use limited public health resources effectively by integrating the multiple disease-specific surveillance and response systems that exist in these countries and linking surveillance, laboratory confirmation, and other data to public health actions. CDC has collaborated with WHO/AFRO in developing tools and guidelines, which are widely disseminated in the region to improve surveillance and response systems. CDC’s assistance has included developing an assessment tool to determine the status of surveillance developing technical guidelines for implementing IDSR, working to strengthen the national public health surveillance conducting evaluations of the cost to implement IDSR in several African countries. In addition, CDC is providing technical assistance to eight countries in Africa, which CDC and USAID selected as likely to become early adopters of surveillance best practices and therefore to be models for other countries in the region. With funding from USAID, CDC has undertaken activities in these countries such as evaluating the quality of national public health laboratories in conjunction with WHO, developing a district-level training guide (published in English and French) for analyzing surveillance data, and developing job aids for laboratories to train personnel in specimen-collection methods. DOD established GEIS in response to the 1996 Presidential Decision Directive NSTC-7 on emerging infectious diseases, which called on DOD to support global surveillance, training, research, and response to infectious disease threats. In 2005-2006, DOD obligated approximately $8 million through GEIS to build capacity for infectious disease surveillance. GEIS, as part of its mission, provides funding to DOD research laboratories in Egypt, Indonesia, Kenya, Peru, and Thailand as well as to other military research units for surveillance projects located in 36 countries, according to DOD officials,. GEIS conducts many projects jointly with host-country nationals, providing opportunities to build capacity through their participation in disease surveillance projects. GEIS officials noted that they view its primary goal as providing surveillance to protect the health of U.S. military forces and consider capacity building a secondary goal that occurs as a result of surveillance efforts. GEIS funded more than 60 capacity-building projects in 2005 and 2006, supporting activities such as establishing laboratories in host countries, training host-country staff in surveillance techniques, and providing advanced diagnostic equipment. For example, in Nepal, GEIS funded surveillance of febrile illnesses, such as dengue fever, and through this project provided a field laboratory with training and equipment to conduct advanced diagnostic techniques. GEIS has also funded more direct training; for example, the laboratory in Peru conducted an outbreak- investigation training course for public health officials from Peru, Argentina, Chile, and Suriname in 2006 with GEIS funding. Funding provided by USAID’s Bureau for Global Health and USAID missions has supported additional activities to build basic epidemiological skills in developing country health personnel. In 2004-2006, USAID obligated about $14 million for these activities. For example, USAID funded a WHO effort to assist the government of India in improving disease surveillance, including strengthening laboratories, developing tools for monitoring and evaluating surveillance efforts, and creating operational manuals for disease surveillance. The U.S. agencies operating or supporting the disease surveillance capacity building programs collect data to monitor the programs’ activities. CDC and USAID also recently began systematic efforts to evaluate program impact, but it is too early to assess whether the evaluations will demonstrate progress in building surveillance capacity. GDD. Since 2006, CDC has monitored the number of outbreaks that GDD has investigated, the numbers of participants in GDD long-term and short-term training, and examples of collaboration among GDD country programs. In addition, in 2006, CDC developed a framework for evaluating progress toward GDD’s five goals and collected data for 8 of 14 indicators. (Fig. 3 shows the GDD evaluation framework.) However, as of July 2007, the agency had not collected data on the two surveillance indicators to evaluate the program’s contribution to improved surveillance. FETP. CDC has collected data such as the numbers of FETP trainees and graduates, the numbers of FETP graduates hired by public health ministries, the number of outbreak investigations conducted, and the number of surveillance evaluations conducted. In 2006, CDC developed a framework for monitoring and evaluating FETPs’ impact on countries’ health systems, with 13 indicators related to FETP activities (see fig. 4 for the FETP indicators). CDC hopes to implement the framework fully by 2009, but because FETPs are collaborations between CDC and the host countries, the framework’s implementation depends on country cooperation. IDSR. Since 2000, CDC has collected data on activities completed under its IDSR assistance program, including the number of job aids developed, the training materials adopted, and the number of training courses completed, and it reports on these activities annually to USAID. In 2003, WHO/AFRO adopted 11 indicators, developed with input from CDC and USAID, to monitor and evaluate progress in implementing IDSR in Africa (see fig. 5 for the IDSR indicators). According to WHO/AFRO, 19 of 46 African countries reported data in 2006 for at least some of these indicators, showing some success in IDSR implementation; however, U.S. agencies cannot require the collection of data in the remaining countries that did not report on the indicators, because IDSR is a country-owned program. Separately, in 2005, CDC completed an evaluation of IDSR implementation in 4 of the 8 countries where it assists with IDSR—Ghana, Tanzania, Uganda, and Zimbabwe—and, using a set of 40 indicators based on WHO guidance, found that these countries had implemented most of the elements of IDSR. GEIS. Since 2005, DOD has monitored GEIS capacity-building activities through individual project reports that detail each activity completed, such as training for staff involved in surveillance studies and development of laboratory diagnostic capabilities. According to GEIS officials, DOD does not plan to develop a framework to monitor and evaluate the impact of GEIS on countries’ surveillance capacity, because capacity building in host countries is not GEIS’s primary purpose. Rather, GEIS’s goal is to establish effective infectious disease surveillance and detection systems with the ultimate aim of ensuring the health of U.S. forces abroad. However, GEIS has reviewed some of its surveillance projects, and GEIS officials stated that the program’s activities in the host nations have led to improved surveillance capacity for infectious diseases. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact David Gootnick at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Audrey Solis, Julie Hirshen, Reid Lowe, Diahanna Post, Elizabeth Singer, and Celia Thomas made key contributions to this testimony and the report on which it was based. David Dornisch, Etana Finkler, Grace Lui, Susan Ragland, and Eddie Uyekawa provided technical assistance. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The rapid spread of severe acute respiratory syndrome (SARS) in 2003 showed that disease outbreaks pose a threat beyond the borders of the country where they originate. The United States has initiated a broad effort to ensure that countries can detect outbreaks that may constitute a public health emergency of international concern. Three U.S. agencies--the Centers for Disease Control and Prevention (CDC), the U.S. Agency for International Development (USAID), and the Department of Defense (DOD)--support programs aimed at building this broader capacity to detect a variety of infectious diseases. This testimony describes (1) the obligations, goals, and activities of these programs and (2) the U.S. agencies' monitoring of the programs' progress. To address these objectives, GAO reviewed budgets and other funding documents, examined strategic plans and program monitoring and progress reports, and interviewed U.S. agency officials. GAO did not review capacity-building efforts in programs that focus on specific diseases, namely polio, tuberculosis, malaria, avian influenza, or HIV/AIDS. This testimony is based on a report (GAO-07-1186), which is being released with this testimoy. GAO did not make recommendations. The agencies whose programs we describe reviewed our report and generally concurred with our findings. We incorporated their technical comments as appropriate. The U.S. government operates or supports four key programs aimed at building overseas surveillance capacity for infectious diseases. In fiscal years 2004-2006, U.S. agencies obligated approximately $84 million for these programs, which operate in developing countries around the world. Global Disease Detection is CDC's main effort to help build capacity for infectious disease surveillance in developing countries. The Field Epidemiology Training Programs, which CDC and USAID support, are another tool used to help build infectious disease surveillance capacity worldwide. Additionally, USAID supports CDC and the World Health Organization's Regional Office for Africa in designing and implementing Integrated Disease Surveillance and Response in 46 countries in Africa, with additional technical assistance to 8 African countries. DOD's Global Emerging Infections Surveillance and Response System also contributes to capacity building through projects undertaken at DOD overseas research laboratories. USAID supports additional capacity-building projects in various developing countries. For each of the four key surveillance capacity-building programs, the U.S. agencies monitor activities such as the number of epidemiologists trained, the number of outbreak investigations conducted, and types of laboratory training completed. In addition, CDC and USAID recently began systematic efforts to evaluate the impact of their programs; however, because no evaluations had been completed as of July 2007, it is too early to assess whether these evaluation efforts will demonstrate progress in building surveillance capacity. |
Among other missions, USDA manages benefit programs that support farm and ranch production, natural resources and environmental conservation, and rural development. FSA is one of three USDA service center agencies that manage benefit programs for farmers and ranchers. Currently, FSA manages 23 farm benefit programs identified by, among other legislation, the Agricultural Act of 2014 (commonly referred to as the 2014 Farm Bill).assistance for livestock, honeybees, and farm-raised fish to providing incentives for resource conservation. Appendix II provides a brief description for each of the 23 farm benefit programs. FSA benefit programs fall into four core categories: farm loan programs, which are to provide direct loans or loan guarantees to family farmers who could not otherwise obtain agricultural credit; income support and disaster assistance programs, which are to provide farmers and ranchers with an economic safety net to help them maintain their operations during difficult times; commodity operations programs, which are to expand market opportunities for farmers; and conservation programs, which are to help maintain and enhance the nation’s natural resources and environment. Over the last two decades, FSA has provided services to customers supporting the farm benefit programs at its approximately 2,100 local offices. To participate in FSA programs, customers may need to visit local service center offices multiple times throughout the year because certain transactions cannot be done electronically via e-mail or the Internet. A new customer would typically go through several steps to enroll in a benefit program: At first, a customer needs to establish a relationship with the agency by providing certain basic information about his operation that will be used in determining eligibility. Based on this information, an FSA agent is to create a master farm record for the customer. The farm record is to include specific information about the farm such as identification numbers for fields and tracts (a tract is one or more contiguous fields), location information, and a list of commodities that the farm is able to produce. Once a customer has established a relationship, customers learn about available FSA programs, receive information on eligibility and estimated benefits under a particular program, and generate a draft agreement for participation in a particular program. The next step is for the customer to submit a final agreement to FSA for their participation. Subsequently, throughout the year, the customer documents information about crops in an acreage report, which must be prepared for each applicable tract and growing season. The customer brings acreage reports and other forms to the FSA service center in person. Because different crops have different reporting deadlines, a customer may need to visit the service center multiple times to fill out reports for different crops. In addition to establishing relationships and administering benefits programs, there are two other key activities that service centers perform: handling acreage reports and printing maps. Handling acreage reports. This is one of the most critical functions for a service center. The FSA agent verifies that a customer is eligible for a benefit and compares the acreage amount in the acreage report against the acreage amount in the master farm record. The agent then computes the payment amount and authorizes the payment to be made to the customer. Printing maps. Customers also often request maps of their tracts from FSA service centers to help plan for the next growing season because the maps can only be produced in hard copy. According to FSA service center officials, this is one of the customer’s most requested services. In order to provide these services, FSA staff use a variety of computing environments and software applications, including a central “web farm,” consisting of an array of interconnected computer servers that exchange data in support of data storage and web-based applications; a central IBM mainframe that hosts non-Web applications and data; a distributed network of IBM Application System 400 computers and a common computing environment of personal and server computers at each local office. In early 2004, FSA began planning the MIDAS program to streamline and automate farm program processes and to replace obsolete hardware and software. FSA identified these goals for the program: Replace aging hardware: Replace Application System 400 computers, which date to the 1980s and are obsolete and difficult to maintain, with a hosting infrastructure to meet business needs, internal controls, and security requirements. Reengineer business processes: Streamline outmoded work processes by employing common functions across farm programs. For example, determining benefits eligibility could be redesigned (using business process reengineering) as a structured series of work steps that would remain consistent regardless of the benefits requested. Improve data management: Make data more readily available to FSA personnel and farmers and ranchers—including online self- service capabilities—and increase data accuracy and security. Improve interoperability with other USDA and FSA systems: Integrate with other USDA and FSA modernization initiatives, including the Financial Management Modernization Initiative for core financial services that meet federal accounting and systems standards, the Geospatial Information Systems to obtain farm imagery and mapping information, and the Enterprise Data Warehouse to provide enterprise reporting. From 2004 through 2010, FSA went through several changes in direction before selecting a technical solution for MIDAS: FSA drafted initial requirements for MIDAS in January 2004. FSA halted requirements development in early 2006 when program officials decided that the proposed customized solution would not meet future business needs. FSA subsequently changed its approach in the Summer of 2006 from acquiring customized software to acquiring commercial off-the-shelf enterprise resource planning software. The program estimated that it would cost $305 million to implement MIDAS, but this estimate had a high degree of uncertainty. In February 2008, FSA analyzed how its farm program functions would map to functions available in a commercial off-the-shelf enterprise resource planning software suite from vendor SAP, which had been selected for two other USDA modernization initiatives—the Financial Management Modernization Initiative and the Web Based Supply Chain Management program. This analysis concluded that MIDAS processes generally mapped to the SAP software. Based on that analysis and a software alternatives analysis conducted in mid-2008, FSA decided to proceed with SAP enterprise resource planning software as the solution for MIDAS. FSA also decided to accelerate the time frame for implementing the solution from the 10 years originally planned to 2 years. To accomplish this, FSA planned to compress the requirements analysis phase from 4 years to 5 months, and reduce the analysis and design phase from 3.5 years to 9 months. A request for quotations for the MIDAS system integrator contract was released in July 2009, and a contract based on this request was awarded to SRA International in December 2009. After a short delay due to a bid protest, the system integrator began work in May 2010 with an initial firm fixed price task order for $4.4 million through December 2010. By this point, FSA had also awarded six other contracts for services to support additional aspects of this initiative, including software licenses, project management support, and technical support. As of October 2010, FSA planned to spend $169 million—more than half of the program’s $305 million estimate—on the system integrator contract through fiscal year 2012. Figure 1 depicts a timeline of key milestones for MIDAS from its inception through the initiation of work by the system integrator. In the years after the system integrator began to work on developing MIDAS, the program ran into cost, schedule, and technical problems. These issues ultimately resulted in a July 2014 decision to halt further development on the MIDAS program. We discuss the events that led to this decision later in this report. In September 2007, FSA established a MIDAS executive program manager and a program office to oversee the program and its supporting contracts. According to FSA officials, the program office reported to a Senior Management Oversight Committee on a regular basis. The committee was chaired by the USDA Under Secretary for Farm and Foreign Agricultural Services and included the USDA Chief Information Officer, USDA Chief Financial Officer, and Administrator of the Farm Service Agency as additional board members. The committee had the following responsibilities, among others, in providing departmental oversight and support for the MIDAS program: communicating and providing strategic direction for FSA’s enterprise modernization; approving the MIDAS acquisition strategy; approving the program’s cost, schedule, and requirements baseline; ensuring MIDAS integration with departmental requirements and related initiatives and significant interdependencies; approving updates to business cases; and addressing issues escalated by a program-level review board. At the department level, USDA had an IT governance process that was overseen by the Executive Information Technology Investment Review Board, which was chaired by the department’s Chief Operating Officer and included the department’s Under Secretary for Farm and Foreign Agricultural Services, Chief Information Officer, Chief Financial Officer, and other senior executives. The board was to approve IT investments that aligned with USDA’s mission and enterprise IT goals; provide executive management oversight, approval, and commitment to selected IT investments; and recommend to the Secretary a ranked group of IT investments proposed for funding. In addition to USDA governance, the Office of Management and Budget (OMB) was involved in providing routine oversight for this program. OMB requested monthly status briefings on MIDAS’s progress after USDA’s Office of the Chief Information Officer conducted a TechStat review of the program in November 2012. These monthly briefings continued until October 2014, when the program was preparing to deploy its second and final software release. In May 2008, at the request of the House and Senate Committees on Appropriations, we reported that MIDAS was in the planning phase and that FSA had begun gathering information and analyzing products to integrate its existing systems.adequately assessed the program’s cost estimate, in that the estimate had been based on an unrelated USDA IT investment. Moreover, the agency had not adequately assessed its schedule estimate because business requirements had not been considered when FSA reduced the implementation time frame from 10 years to 2 years. We determined that the agency had not As a result, we reported that it was uncertain whether the department could deliver the program within the cost and schedule time frames it had proposed and recommended that FSA establish effective and reliable cost estimates using industry leading practices and establish a realistic and reliable implementation schedule that was based on complete business requirements. USDA generally agreed with our recommendations and implemented our recommendation to improve its tracking of user problems and clarifying roles and responsibilities between FSA and USDA’s Information Technology Services. However, it did not implement our other recommendations to establish reliable cost and schedule estimates based on complete business requirements. Subsequently, in July 2011, we reported that MIDAS was in the proof-of- concept and system design phase, and noted that the scope included modernization of FSA’s systems for all of its (at that time) 37 farm programs by March 2014. We determined that the program’s cost estimate had a large degree of uncertainty. In particular, it did not yet reflect decisions that had occurred since the estimate was developed in 2007 and that the completion date of its current development phase was uncertain because of delays to key system design milestones. In addition, we found that FSA had plans in place for MIDAS that incorporated selected leading practices and had defined governance bodies to provide oversight, but it had not implemented other key management practices, including forming an integrated team with representatives from IT programs that MIDAS depended on for its success, developing a schedule that reflected dependencies with relevant IT programs, and tracking the status of risks as planned. Moreover, it had not clearly defined the roles and coordination among the program’s governance bodies. We recommended that USDA update cost and schedule estimates, address management weaknesses in plans and program execution, and clarify the roles and coordination among the governance bodies. The department agreed with our recommendations and identified plans to address them. However, the agency did not complete efforts to address these recommendations before the decision was made to halt the program. In a July 2014 memo, the Secretary of Agriculture decided to halt the MIDAS program after deploying minimal functionality due to performance challenges in the early months after the system became operational, and delays in determining the remaining scope, schedule, and cost for the program. Our analysis similarly found that the key factors that led to this decision were poor program performance—characterized by rising costs, schedule overruns, reduced functionality, and problems with the system after it was deployed—as well as uncertainty regarding future plans for MIDAS. Poor program performance: FSA experienced significant cost and schedule delays in developing MIDAS, which led it to defer or remove expected functionality and to eliminate key system tests prior to deploying the system. Once the initial MIDAS functionality was deployed, FSA employees encountered serious problems in using the system. A timeline of key events and decisions that factored into MIDAS’s poor program performance include: In December 2011, MIDAS was envisioned to deliver significant functionality in phases, with the majority of functions to be delivered in the first phase. In further designing the system in March 2012, FSA decided to remove selected functionality from the first phase, and to deliver the remaining functionality in two deployments. As of June 2012, FSA estimated that development costs would be $330 million. As FSA began to develop the system, however, it experienced cost and schedule overruns. For example, by August 2012, FSA had overrun its cost estimates by 11 percent and schedule estimates by 10 percent. These overruns were due, in part, to delays in completing customization of the commercial software, redesign work on interfaces, delays in testing individual system components as a result of including more customization than planned, and delays in data conversion and remediation efforts. In order to help meet cost and schedule demands, in September 2012, FSA decided to split the two deployments into three deployments and to focus primarily on the first deployment. After continuing to experience schedule delays as it moved into system testing, FSA decided to remove additional functionality from the first deployment (including acreage reporting and customer records functions). To try to stay on schedule, the MIDAS program also obtained approval from senior USDA and FSA management in early 2013 to defer key testing activities—including performance testing and user acceptance testing—until after the system became operational. These tests were not performed after deployment. When FSA implemented its first software release in April 2013, MIDAS experienced significant technical problems, which is not surprising given its lack of testing. For example, users experienced significant problems with the system such as the geospatial information system (GIS) functionality, accuracy of farm record data, and system response time. Also, within 3 months after the deployment, there were 62 critical, 172 major, 236 average, and 69 minor defects that needed to be addressed. As a result, the time allotted to fix problems doubled in length—from 3 to 6 months—to accommodate the fixes required by the system. Uncertainty regarding future plans: FSA was unable to establish a revised baseline for the program after experiencing cost and schedule overruns in developing the initial system release because the proposals were too costly or not aligned with the department’s budget and IT plans. A timeline of key events include: After conducting a TechStat review in November 2012, USDA’s Office of the Chief Information Officer (CIO) directed FSA to establish a new program baseline by January 2013. However, FSA did not deliver a new baseline by the deadline. According to FSA officials, the agency made three different attempts to salvage what it could from MIDAS: In May 2013, the program submitted a proposed baseline to FSA management that included delivering the full set of envisioned MIDAS functionality by late 2016 at an increased cost. At $659 million, this new cost estimate was almost twice as expensive as the earlier baseline estimate of $330 million. FSA management did not approve the proposed baseline due to the cost. In August 2013, FSA submitted a proposal to USDA for delivering less than the full set of MIDAS functionality at a reduced cost to implement and with a shorter development schedule. Specifically, the program’s scope no longer included applications for the 2014 Farm Bill programs, which FSA decided to transfer to its web farm. The cost estimate was reduced to $583 million through fiscal year 2015 and development was to be completed by mid-2015. However, USDA’s Office of the CIO rejected this rebaseline request because it required revisions in order to align with the department’s budget plans. In February 2014, FSA submitted a proposal for the same functionality as the prior proposal at roughly the same cost and with a shorter development schedule. Under this new proposal, development was to be completed in mid-2015 at a cost of $584 million. This proposal also included a life cycle cost estimate for MIDAS of $1.026 billion through fiscal year 2021. However, in June 2014, the department’s Executive Information Technology Investment Review Board placed the program’s third rebaseline request on hold. The board wanted FSA to build the remaining functionality in smaller increments and to work in partnership with other agencies to develop an enterprisewide solution for acreage reporting and customer portal tools consistent with the 2014 Farm Bill and department priorities. After the third rebaseline proposal was not approved, the department’s review board recommended to the Secretary of Agriculture that MIDAS halt development after the completion of the customer records release. In July 2014, the Secretary decided to approve the board’s recommendation. FSA deployed its customer records release in December 2014. As of March 2015, FSA had spent about $423 million on MIDAS, which was $93 million higher than the 2012 baseline estimate of $330 million. Of the $423 million, about half was spent on the system integrator contract. Moving forward, FSA estimates that it will cost roughly $50 million to $60 million to continue to operate and maintain the system each year. As a result, MIDAS could cost approximately $825 million through the end of its useful life in 2021. Figure 2 illustrates the key events and decisions affecting MIDAS that led to the decision to halt further development, and table 1 identifies changes in MIDAS cost and schedule estimates over time. FSA has delivered a fraction of what was originally planned for MIDAS. FSA first documented high-level plans for the functionality that MIDAS was to deliver when it completed a system requirements review in December 2011. At that time, MIDAS was envisioned to provide a single SAP platform to host data, applications, and business processes for administering farm program benefits, and advanced tools for customers and FSA employees.seamlessly with other USDA systems, including USDA’s financial system, In addition, it was expected to integrate geospatial information system, and enterprise data warehouse. Figure 3 provides an overview of FSA’s planned key features for MIDAS. However, as the program ran into problems, FSA continued to remove planned features. Specifically, in June 2013, the MIDAS Senior Management Oversight Committee decided to develop applications for administering farm program benefits on FSA’s web farm rather than on the SAP platform, as originally intended, because it could no longer wait to transition from legacy systems. In addition, the ability for FSA employees to use critical acreage reporting tools with the data—a function that affects 85 percent of tasks—was removed from the program’s scope. Other key features were also removed from MIDAS, such as an online portal for farmers and other customers as well as integration with USDA’s financial system and enterprise data warehouse. As a result of removing key features from MIDAS, FSA delivered a fraction of the originally envisioned functionality. MIDAS currently provides farm and customer record data on a SAP platform that is integrated with USDA’s geospatial information system. As a result of this partial implementation, FSA employees currently access, visualize, and edit data in MIDAS. They then turn to the web farm to run acreage reporting, administer benefits, and process payments. FSA did not quantify what percentage of the originally envisioned MIDAS functions were delivered, and this task is complicated by the fact that there is not a complete set of requirements. However, if one were to weigh the key features equally, MIDAS has delivered about 20 percent of what FSA planned. That figure would be lower if one were to include the comparative importance of the functionality. For example, FSA has cited acreage reporting as a key feature affecting 85 percent of what FSA employees do and this is not included in MIDAS. In addition, integration with the financial system was one of the key reasons for going with the SAP solution, and this, too, was not delivered. Figure 4 compares the functionality planned for MIDAS in 2011 to what has been delivered. FSA did not adequately implement program management disciplines on MIDAS in four key areas—requirements development and management, project planning and monitoring, system testing, and executive-level governance—and lacks the demonstrated capacity to manage successor programs. Leading government and industry organizations call for best practices such as obtaining commitment to a requirements baseline and ensuring requirements are prioritized and traceable; managing changes to project plans and conducting progress monitoring; testing the system to determine whether it is acceptable to users; and implementing executive- level governance to include comparing performance against expectations and assessing maturity at key checkpoints based on predefined criteria. USDA and FSA policies are consistent with these best practices. However, in developing MIDAS, FSA did not adequately develop and manage requirements, effectively manage project plan changes, conduct meaningful progress monitoring, execute critical tests before the system became operational, and implement effective executive-level governance to prevent MIDAS from falling short of expectations. FSA and contractor officials explained that key practices were not always implemented because, among other things, the program’s scope was not well- understood, USDA and FSA did not follow its own policies, and management allowed the program to continue despite known weaknesses. Moreover, while FSA officials have acknowledged weaknesses in each of these management disciplines, the agency has not established plans to improve its management of successor programs. Until FSA addresses shortfalls in key program management disciplines on successor programs to MIDAS, the agency will be at an increased risk of producing additional projects with cost overruns and schedule slippages while contributing little to mission-related outcomes. Further, until FSA establishes improvement plans, it will be difficult for the agency to demonstrate that it has the capacity to effectively manage IT acquisitions and it will be at a higher risk of failure for any new or ongoing IT initiatives. Requirements establish what the system is to do, how well it is to do it, and how it is to interact with other systems. Leading industry organizations such as the Software Engineering Institute have recommended practices for the effective development and management of requirements such as eliciting stakeholder needs, ensuring that requirements are complete and unambiguous, prioritizing them, obtaining formal commitment to them, assessing any gaps with the proposed solution, and ensuring that each requirement traces back to the business need and forward to its design and testing. FSA has established policies and guidance for developing and managing requirements that are consistent with these recognized practices. Of six key practices in requirements development and management, FSA implemented one practice, partially implemented two practices, and did not implement three practices. Specifically, FSA documented requirements for MIDAS based on needs gathered from stakeholders prior to a system requirements review in December 2011 and throughout the development of the system. The agency also identified its process for addressing software gaps with the SAP solution and documented workarounds for certain capabilities. However, FSA did not adequately develop and manage MIDAS requirements because the agency did not always develop complete requirements, prioritize its requirements, obtain commitment on a requirements baseline, document solutions to gaps with SAP software that had been known for years and were required for the program’s success, and ensure that requirements were traceable to development products. Table 2 identifies the extent to which FSA implemented key practices for developing and managing requirements for MIDAS. FSA officials and supporting documentation show several reasons for the lack of requirements development and management discipline on MIDAS. For example: FSA officials noted that problems with the completeness and specificity of requirements persisted because guidance on how to ensure requirements completeness and specificity was not implemented until shortly before the system requirements review and it took time for changes to be made to the requirements. Also, officials cited challenges in the complexity of writing requirements for business processes related to GIS capabilities. For selected key milestone reviews and decision points, the program’s executive governance board did not verify that key requirements artifacts and processes were mature enough to proceed because USDA and FSA did not establish a governance process that required the board to perform such reviews. In August 2012, the IV&V contractor reported that the program’s gap analysis lacked specific details to fully understand activities for identifying, reviewing, assessing, and validating gaps. In addition, GIS was not part of the system integrator’s initial scope and additional resources and expertise had to be acquired during MIDAS’s development. FSA and contractor staff had ongoing trouble getting access to one of the program’s two requirements management tools because system access rights were controlled by a different USDA agency. While FSA worked on this issue, it continued to be a problem throughout the development of release 1. The IV&V contractor reported in March 2012 that this lack of access limited their ability to perform requirements traceability. This made it more difficult to manage the baseline scope and configuration of the release. In addition, the IV&V contractor reported in February 2014 that the program office did not follow adequate document configuration management processes to control changes, thereby making it difficult to maintain traceability between requirements and design documents. FSA officials noted that the program did not obtain a requirements baseline approval or prioritize its requirements because the program lacked the necessary discipline and rigor for requirements management activities during the first software release. FSA’s lack of requirements development and management discipline on MIDAS impacted the program in several ways. For example, by not establishing a requirements baseline the agency did not have a firm commitment on the mission-related outcomes MIDAS would satisfy. In addition, not having prioritized requirements limited the agency’s ability to make decisions on which scope to defer or remove from the program when faced with cost and schedule overruns. Both FSA and IV&V contractor officials noted that the program had demonstrated improvements in practices associated with requirements management for the second software release in December 2014. For example, an official for the IV&V contractor stated that requirements traceability was significantly better and that a requirements baseline was established for the second release. Unless FSA ensures that successor programs to MIDAS are fully implementing key requirements development and management practices, the agency will not have reasonable assurance that its IT modernization efforts will meet stakeholder needs and contribute to mission-related outcomes. Leading organizations such as the Project Management Institute and Software Engineering Institute have recommended best practices for project planning and monitoring. FSA also has policies and guidance that are consistent with recognized practices. Project planning maintains plans as the basis for managing the project’s activities. Recommended best practices call for documenting and evaluating changes to established project plans to determine whether they require updates to initial planning estimates for cost, schedule, and scope. Project monitoring provides an understanding of the project’s progress by comparing actual work completed to a plan consisting of predefined expectations for cost, schedule, and deliverables. Best practices state that monitoring progress is important because it helps project managers take timely corrective actions when performance deviates significantly from plans. Of three key practices in project planning and monitoring, FSA partially implemented one practice and did not implement two practices. The agency established a project plan for MIDAS with predefined expectations for cost, schedule, and scope based on its integrated baseline review in March 2012. For several months following this review, the program executed to these plans and tracked certain technical and programmatic changes in its change control log. However, the agency did not effectively manage plan changes or monitor progress. For example, FSA did not update its baseline plans when it revised the solution architecture and when it deferred planned testing activities before the initial software release. In addition, FSA continued to develop deferred functionality for approximately 20 months without an approved rebaseline for these efforts. Also, FSA’s initial monitoring of contractor performance lacked insight into the progress of deliverables and contractor performance reporting was halted from December 2012 through October 2014. Table 3 identifies the extent to which FSA implemented key practices for project planning and monitoring for MIDAS. USDA and FSA officials provided several explanations for the agency’s shortfalls in project planning and monitoring. FSA officials acknowledged that they did not update baseline project plans to reflect changes in the solution architecture and testing phases prior to the initial software release, but noted that they briefed the Senior Management Oversight Committee on these changes. The USDA CIO noted that MIDAS halted progress monitoring of contractors in December 2012 because managers were already aware that the program was performing poorly and was in need of a rebaseline. Also, the Director of the MIDAS business management office stated that while the program’s cost baseline was not at a detailed level, the contractors’ cost estimates included additional details on work products and deliverables. However, the program was not monitoring progress based on those details. By not revising the project plan after making significant revisions to its approach, the program’s cost, schedule, and scope were no longer effective benchmarks for measuring performance. Without meaningful progress monitoring initially and as the program shifted its focus, program managers and executive stakeholders had less insight into the deliverables being produced by contractors and less control over the program’s outcomes. According to FSA and IV&V contractor officials, the program provided a baselined cost, schedule, and scope for its second software release and executed improved discipline in managing plan changes. However, until FSA ensures that successor programs to MIDAS are fully implementing key project planning and monitoring practices, the agency will be at an increased risk that future projects will experience cost and schedule overruns and achieve less than expected outcomes. According to relevant leading industry practices and government guidance, system testing should be progressive, meaning that it should consist of well-defined test plans and a series of test events that build on and complement previous events in the series. Testing should first focus on the performance of individual system components, then on the performance of integrated system components, followed by system-level tests that focus on whether the system (or major system increments) is acceptable, interoperable with related systems, and operationally suitable to users. FSA established policies and guidance for system testing on MIDAS that are consistent with recognized practices. Of four key practices in system testing, FSA implemented one practice, partially implemented two, and did not implement one. FSA defined test plans for MIDAS, but the agency did not execute critical performance and user testing before the system became operational. FSA had test plans in place that generally defined key elements, such as the roles and responsibilities of groups that were to conduct testing, hardware and software to support testing, and a schedule that defined how long and in what order test events were to occur. In addition, FSA conducted testing on individual and integrated components. However, MIDAS’s test plans were missing a key element—traceability between system test events and requirements. Also, integration testing took longer than planned and the program decided to defer testing that was to validate whether system performance met requirements and was acceptable to users until after the system went live. Table 4 identifies the extent to which FSA implemented key system testing practices for MIDAS. FSA’s shortfalls in system testing were due in part to technical problems and delays in developing GIS capabilities and a desire by department and agency management to keep the target deadline for the initial release of MIDAS. Early in the development of the GIS capabilities, FSA ran into technical problems that required additional time and resources to address. Since GIS development had been delayed, integration testing with the GIS capabilities also had to be delayed. By April 2013, integration testing was still ongoing and FSA had to make a decision whether to delay the implementation of MIDAS or allow the system to go live while accepting the risk of not conducting performance/stress, regression, and user acceptance testing. While the program warned of the risks of deploying MIDAS with outstanding defects and incomplete testing, senior department and agency officials decided to accept these risks in order to deploy the system by April 2013. Incomplete testing on MIDAS did not provide users an opportunity to identify key problems with the system and whether it met their needs before it went live. After the system went live, users experienced significant problems such as GIS functionality, accuracy of farm record data, and system response time. Within 3 months after the initial MIDAS release, there were 62 critical, 172 major, 236 average, and 69 minor defects that needed to be addressed. The program had a plan in place to address performance problems after the system went live, but, due to the number of problems, it had to extend the contract for addressing system defects from 3 months to 6 months. FSA officials and the program’s IV&V contractor have acknowledged the shortfalls in system testing practices and stated that the program has taken steps to improve system testing on the second and final MIDAS release. For example, FSA and IV&V contractor officials noted that the program conducted user acceptance testing prior to deploying functionality for managing customer records (also called business partner functionality). While the agency recognized the need to improve its testing on the second MIDAS release, it has not demonstrated that it has institutionalized sound system testing practices. Until it does so, the agency will be at higher risk of delivering systems that have performance issues and do not fully meet users’ expectations. We assessed best practices used in industry, academia, and government to develop the IT Investment Management Framework to provide a method for evaluating and assessing how well an agency is selecting and managing its IT resources. Efforts to build a foundation for IT governance involve establishing specific critical processes, such as instituting investment boards, selecting investments, controlling investments as they are developed and deployed, and reviewing investments after they are deployed. Instituting investment boards. Successful organizations establish an IT investment board comprised of senior executives who are responsible for operating according to documented guidance, policies, and procedures that align with existing IT governance processes, identify decision gates to be reviewed and approved by the board, and establish entry/exit criteria to be reviewed at each decision gate. The board is also responsible for ensuring that investment decisions address stakeholder needs and are made in the best interest of the organization. Selecting IT investments. Successful organizations identify, use, and store comprehensive data—including a business case that defines the life cycle cost estimate and benefits to be realized—in order to support investment decision making. Reselecting ongoing projects is an important part of this critical process; if a project is not meeting established goals and objectives, the organization must make a decision on whether or not to continue to fund it. Controlling IT investments. Organizations should have a documented, well-defined process for overseeing ongoing investments once they have been selected. Effective investment oversight and evaluation involves, among other things, (1) comparing actual performance against cost and schedule estimates; and (2) assessing whether projects are meeting expectations against developmental milestones using predefined criteria and decision gates, and taking corrective actions when expectations are not being met. Reviewing IT investments after deployment. Once the project has transitioned from the development phase to the operations and maintenance phase, organizations should conduct a post- implementation review to compare actual investment results with decision makers’ expectations for cost, schedule, performance, and mission improvement outcomes. The lessons learned from these reviews can be used to modify future investment management decision making. In 2013, USDA issued updated policies and guidance that are generally consistent with these practices. Of five key practices in executive-level IT governance, FSA partially implemented two practices and did not implement three practices. Specifically, FSA partially implemented steps to institute a governance board. It established a governance structure and process for MIDAS; however, its governance process was ineffective in preventing MIDAS from falling short of expectations. Specifically, FSA did not implement key steps for selecting and controlling investments, including establishing a comprehensive business case or life cycle cost estimate and comparing actual performance against estimates. Also, FSA partially implemented post-implementation review practices. The agency tasked a contractor with assessing the results and lessons learned from portions of MIDAS that were implemented; however, it did not conduct a comprehensive review of the lessons learned on the program as a whole. Table 5 identifies the extent to which USDA and FSA implemented key executive governance practices for MIDAS. The governance of MIDAS was ineffective, in part, because USDA’s Office of the CIO did not ensure that MIDAS followed its policies and guidance for IT governance. In 2011, we reported that governance boards had not been reviewing MIDAS at key decision points using criteria defined in department guidance and recommended that the department and agency collaborate to document how the department is meeting its policy for IT investment management for MIDAS, to include investment reviews.not address it while MIDAS was in development. According to FSA officials, USDA did not have guidance for IT governance providing defined decision gates with standard criteria and documentation While the department agreed with our recommendation, it did requirements. FSA officials noted that from 2011 until 2013, the agency used a governance process involving a program-specific gate review plan for MIDAS based on SAP’s system development methodology. USDA’s Under Secretary for Farm and Foreign Agriculture Services and the Chief Financial Officer stated that there was a breakdown in the governance process for MIDAS, particularly on its initial development. The Under Secretary noted that the Senior Management Oversight Committee made the best decisions it could based on the information it had, but the information that FSA had reported to the committee did not adequately portray the extent of the cost, schedule, and technical problems or decisions that had been made on scope changes. For example, the Under Secretary and the Chief Financial Officer stated that they were not informed that FSA had been developing key functions in both MIDAS and on the agency’s web farm—a key change in the original scope—until early 2013. In addition, the Under Secretary and the Chief Financial Officer noted that they were not informed until early 2013 that FSA had made decisions to remove or defer additional scope—including acreage reporting—from the first software release. Subsequently, in 2013, MIDAS began piloting USDA’s new IT governance process, called the Integrated IT Governance Framework. This framework required MIDAS to report its performance to and obtain approval from a department-level investment review board. In following this new governance framework, the investment review board approved the final decision to implement the second MIDAS software release and recommended to the Secretary of Agriculture to halt further development on MIDAS. While the recently updated governance framework established by USDA has potential for improving FSA’s IT modernization efforts, unless USDA and FSA take additional steps or develop a mechanism to help ensure that successor programs to MIDAS programs are fully implementing key executive IT governance practices—including practices for selecting, controlling, and reviewing investments—department and agency management will not have reasonable assurance that oversight is effective in preventing future IT investments from falling short of expectations. Required by law to automate, integrate, and modernize its farm program services, FSA has begun planning how it will do so. In an explanatory statement accompanying the 2015 appropriations act, Congress directed USDA to, among other things, deliver a modernized functional system that builds existing farm program applications into an integrated system, delivers increased efficiency and security, retires redundant legacy systems, eliminates the path of siloed legacy applications, capitalizes on the investment that USDA has already made in the enterprise platform, addresses the new requirements of the 2014 Farm Bill, and improves on the capabilities originally proposed to Congress and the nation’s farmers and ranchers. The appropriations act also mandated that FSA develop a plan for IT related to MIDAS and other farm program delivery systems prior to obligating more than 50 percent of the $132 million made available in fiscal year 2015. This plan is to identify each investment’s capabilities and mission benefits, estimated life cycle cost, key milestones, and alignment with FSA’s IT Roadmap. In addition, the 2014 Farm Bill includes provisions for streamlining acreage reporting to reduce the administrative burden on farmers and producers. This is to be done by, among other things, requiring the Secretary of Agriculture to ensure that producers may report information electronically (including geospatial data) and that improvements are made in the areas of coordination, information sharing, and administrative work with FSA, the Risk Management Agency, and the Natural Resources Conservation Service. FSA has begun planning how it will move forward in its modernization efforts to fulfill the functionality that was envisioned—but not delivered— by MIDAS. According to FSA officials, the agency plans to document its decisions for addressing acreage reporting tools, online customer tools, and other functionality that was removed from MIDAS in its IT Roadmap by the end of Spring 2015. Those plans may include decisions to partner with other USDA agencies, acquire new commercial off-the-shelf software, and/or develop and enhance functionality on the agency’s web farm. In its fiscal year 2016 budget request, FSA noted that, while the mix of investments may fluctuate based on its prioritization process and business requirements, the agency intends to pursue incremental, modular investments such as the following. Customer self-service tools: Expanding on existing online services and partnering with other USDA agencies (including the Acreage Crop Reporting Streamlining Initiative) to provide farmers and ranchers online access to relevant information, including remote and/or mobile access to their data and programs. Expanded customer service: Piloting a program to find new ways to deliver programs and service support through the agency’s repository of geospatial and farm information. Increased IT investments to support FSA process improvements: Delivering incremental improvements to address pain points and inefficiencies identified by field office staff as impacting their effectiveness in servicing customers. Improvements in the pipeline could range from simple items such as simplifying the printing of farm maps or customized reports to continuing the incremental integration of stove-piped systems through establishing or enhancing common eligibility, payment, and obligation frameworks. In addition, FSA officials stated that the agency is incorporating lessons learned into future plans, including building smaller, incremental releases with a defined scope, cost, and schedule and defined benefits for the customer; extending an organizational change agency network to provide input on pain points and process improvements; driving the prioritization of investments through business needs instead of technology; and integrating technology capabilities, including SAP, into decision- making processes and alternatives analyses, so the technologies for each project will be determined based on what best matches the business requirements. However, FSA has not established plans to improve its ability to successfully manage major IT investments. Specifically, FSA officials have not committed to improving agency practices in the four areas we reviewed because they believe that they have already addressed the problems. While agency officials acknowledge that mistakes were made on the first MIDAS release, they stated that they did a better job delivering the second release. For example, the MIDAS Program Executive reported that the agency established requirements for the second release, established a schedule for developing and deploying the release, performed adequate testing prior to deploying the release, and that oversight bodies were kept informed. While the second release was more successful than the first, it was much less complex. The second release involved a limited amount of functionality that had been in development for several years before it was deferred from the first release. Further, the relatively discrete amount of work involved and the establishment of baseline plans 3 months prior to the release allowed the project to deliver near cost and schedule estimates. These efforts, however, are not sufficient to demonstrate that FSA will adhere to departmental policy or that it has practices in place to successfully plan, develop, and oversee future complex IT investments. USDA’s Under Secretary for Farm and Foreign Agriculture Services and Chief Financial Officer agreed that plans are needed to improve FSA’s ability to successfully manage IT investments. Until FSA establishes and implements improvement plans, it will be difficult to demonstrate that it has the capacity to manage IT acquisitions and the agency will have a higher risk of failure in future IT initiatives. After spending about $423 million through March 2015, the MIDAS program was halted about 10 years after it was initiated. Key factors that led to the decision to halt the program included cost overruns totaling $93 million more than planned, schedule delays, performance issues, and management’s inability to decide on how to restructure the program for success. In deploying the two MIDAS releases, FSA delivered about one-fifth of the functionality it had planned to deliver. MIDAS was envisioned to provide a seamless, integrated system that would allow farmers and ranchers to submit information electronically and allow FSA employees to process farm program benefits with built-in tools and access to GIS and other enterprise systems. However, due to the limited functionality that MIDAS provided, farmers and ranchers continue to submit information to FSA service centers in person while employees continue to use separate systems for processing acreage reports, farm program applications, and payments. Even though USDA and FSA have system acquisition policies that are consistent with best practices in the areas of requirements development and management, project planning and monitoring, system testing, and executive-level governance, FSA did not implement the majority of these policies and practices in developing MIDAS and has not established plans to improve its approach. Until FSA establishes and implements a plan to adhere to agency policies and best practices, it will be difficult to demonstrate that it has the capacity to effectively manage IT acquisitions. Further, until the agency adheres to system acquisition policies and sound IT practices, it will have a higher risk of failure in future IT initiatives. In order to institutionalize sound IT management practices and build FSA’s IT management capacity while improving service to the Nation’s farmers and ranchers, we are making five recommendations to the Secretary of Agriculture to: Direct the FSA Administrator to establish and implement an improvement plan to guide the agency in adopting recognized best practices and following agency policy. Direct the FSA Administrator to adhere to recognized best practices and agency policy in developing and managing system requirements before proceeding with any further system development to deliver previously envisioned MIDAS functionality. Specifically, the Administrator should ensure that requirements are complete, unambiguous, and prioritized; commitment to requirements is obtained through a formal requirements baseline; differences (or gaps) between the requirements and capabilities of the intended solution (including commercial off-the-shelf solutions) are analyzed; strategies to address any gaps are developed; and requirements are traced forward and backward among development products. Direct the FSA Administrator to adhere to recognized best practices and agency policy in planning and monitoring projects. Specifically, the Administrator should ensure that project plans include predefined expectations for cost, schedule, and deliverables before proceeding with any further system development; updates to the project plan are made through change control processes; and progress against the project plan, including work performed by contractors, is monitored. Direct the FSA Administrator to adhere to recognized best practices and agency policy in system testing. Specifically, the Administrator should establish well-defined test plans before proceeding with any further system development, and ensure that testing of (a) individual system components, (b) the integration of system components, and (c) the end-to-end system are conducted. Direct the FSA Administrator to adhere to recognized best practices and agency policy in executive-level IT governance before proceeding with any further system development. Specifically, an executive-level governance board should review and approve a comprehensive business case that includes a life cycle cost estimate, a cost-benefit analysis, and an analysis of alternatives for proposed solutions that are to provide former MIDAS requirements prior to their implementation; ensure that any programs that are to accommodate former MIDAS requirements are fully implementing the IT program management disciplines and practices identified in this report; conduct a post-implementation review and document lessons learned for the MIDAS investment; and reassess the viability of the MIDAS technical solution before investing in further modernization technologies. We sought comments on a draft of this report from USDA. We subsequently received written comments from the FSA Administrator. While the agency did not explicitly agree or disagree with the recommendations, it cited steps it had taken and plans to take to implement best practices in the areas of requirements management, project planning and monitoring, system testing, and executive IT governance. However, the agency did not cite steps it would take to establish and implement an improvement plan to guide the agency in adopting recognized best practices and following agency policy. Because the agency is moving to implement best practices, we continue to believe that a plan—with steps, milestones, and performance measures—is warranted. Without such a plan, it will be difficult for the agency to demonstrate its progress and ensure that it has the capacity to manage IT acquisitions. In its overall comments, FSA noted the following: FSA stated that it has taken active steps to address the issues raised in the draft report by selecting a new CIO and initiating steps to acquire a third party assessor to holistically evaluate the technology solution for MIDAS and to make recommendations to inform a coherent IT strategy. We agree that selecting a CIO and obtaining recommendations on how to improve FSA’s IT strategy are sound steps. However, these steps are not enough to address the issues raised in this report. FSA must take additional steps to establish an improvement plan, and to implement practices and follow agency policy. FSA stated that the recommendation by the USDA Executive IT Governance Board and the July 2014 decision by the Secretary of Agriculture to halt MIDAS development beyond release 2 (which FSA established to deliver the residual portion of the customer records functionality) allowed the agency to (1) focus attention and resources on applying lessons learned from release 1 and (2) apply program management best practices across key disciplines such as planning, requirements management, cost and schedule management, and system testing. We agree that the decision to halt MIDAS was a sound one, and that it allowed the agency to focus on the residual deliverables provided by release 2. However, we identified several management shortfalls that continued to persist after release 1 was deployed in April 2013. For example, FSA did not update its baseline cost, schedule, and scope plans from March 2012 to October 2014, even though it made significant decisions affecting scope and schedule. Also, from November 2012 through October 2014, the program did not have a project plan for monitoring progress due to numerous scope and schedule changes and relied on status reporting from draft schedules. In addition, while the USDA CIO gave the investment a “red” (high-risk) rating on the Federal IT Dashboard in December 2012, the MIDAS Senior Management Oversight Committee allowed MIDAS to continue until July 2014 without any improvement to the CIO’s rating. These findings are discussed in this report. FSA stated that the organizational alignment around comprehensive improvement and quality of the MIDAS program (associated with release 2) is a clear demonstration of the agency’s capability to properly manage and deliver IT systems. However, until FSA establishes and implements a plan to adhere to agency policies and best practices, we believe the agency has not yet demonstrated that it has the capacity to effectively manage IT acquisitions. FSA noted that the MIDAS program demonstrated an improvement in testing practices on release 2. Specifically, FSA stated that the period of time for transitioning from deployment to steady state concluded with zero critical defects and five major defects. We agree and acknowledged the agency’s improvements on system testing associated with the development of customer records in the report. Specifically, we noted that the program conducted user acceptance testing prior to deploying functionality for managing customer records. However, it has been our experience that it takes time to change an organization’s culture to adopt best practices. The agency will need to build upon this experience to ensure it consistently implements sound practices and follows agency policies in all future IT initiatives. We continue to believe that establishing and implementing an improvement plan, as we recommended, will aid the agency in doing so. FSA stated that, since the first deployment of MIDAS functionality in April 2013, the agency implemented top-down organizational transformation to bolster FSA's ability to consistently deliver IT investments that provide their intended business value, within the targeted schedule and budget. The agency also stated that the MIDAS initiative identified a number of best practices that are being emulated to improve IT management agencywide. However, FSA did not provide supporting evidence for these efforts and our previously stated findings show that FSA did not sufficiently monitor project progress well beyond the first MIDAS release. FSA stated that while our report acknowledges some of its improvements, our assessment of the extent to which USDA and FSA had implemented each management discipline reflects findings based on MIDAS release 1 activities, and therefore is not truly representative of FSA’s capacity to more broadly manage IT initiatives. We believe our report accurately evaluates the implementation of key program management disciplines on the MIDAS acquisition. Our review assessed processes and practices over roughly 3 years (from December 2011 to October 2014), which included a significant amount of work on the customer records functionality. Specifically, the customer records functionality represented 1 of the 24 unique features FSA had originally planned for MIDAS as of December 2011. FSA had begun working on customer records in December 2011, and delivered about 30 percent of the customer records functionality with the initial MIDAS software release in April 2013. When faced with the firm commitment to deploy release 1 in April 2013, the agency decided to defer the remaining customer records functionality to release 2. Further demonstrating the limited scope of release 2, FSA established baseline project plans for release 2 in October 2014, just 3 months before deploying it in December 2014. While our report acknowledges that FSA improved selected practices in developing and deploying release 2, we do not believe that the scope or timeframe associated with this initiative provides sufficient evidence that FSA has established the capacity to manage large, complex acquisitions. In addition, FSA provided the following comments regarding our recommendations: With respect to our recommendation to establish and implement an improvement plan to guide the agency in adopting recognized best practices and following agency policy, FSA stated that the agency has undergone leadership transformation efforts over the last 12 months, including appointing a new Administrator, CIO, MIDAS Program Executive, and MIDAS Program Director. FSA noted that it gave additional reporting authority to the MIDAS Program Executive and moved the FSA CIO position from Kanas City, Missouri to Washington, D.C. to improve communication with the Administrator on agencywide initiatives. FSA stated that over the past year, FSA leadership placed additional emphasis, funding, and staff resources on ensuring that IT investments, decisions, dependencies, and operational plans are driven by business needs across the agency. The agency also stated that with its Business Strategy and IT Strategy, it is maturing IT planning and management capabilities needed for integrated IT solutions for Farm Programs and all of FSA’s lines of business. Finally, FSA noted that it is using a Strategic IT Roadmap to ensure IT programs are supporting the Business Strategy. We agree that FSA has taken steps over the past year to improve its IT management capabilities as we discuss in the report. However, these actions do not establish and implement an improvement plan to guide the agency in adopting recognized best practices and following agency policy. Until FSA does so, it will be difficult to demonstrate that it has the capacity to manage IT acquisitions. Thus, as previously discussed, we believe the agency should continue to establish and implement such an improvement plan. Regarding our recommendation to adhere to recognized best practices and agency policy in developing and managing system requirements before proceeding with any further system development to deliver previously envisioned MIDAS functionality, FSA stated that the MIDAS program implemented all of the key practices for release 2. As previously stated, our report acknowledges that FSA improved selected practices in developing and deploying release 2. However, we do not believe that the scope or timeframe associated with this initiative provide sufficient evidence that FSA has improved its capacity to manage large, complex acquisitions. Further, we identified selected shortfalls in requirements management for release 2, including weaknesses in requirements traceability and prioritization. Moving forward, FSA stated that it will improve the rigor and adherence to key requirements management processes for all IT projects. We will continue to monitor the agency’s efforts to implement our recommendation. Regarding adhering to recognized best practices and agency policy in planning and monitoring projects, FSA stated that the MIDAS program implemented all of the key practices for release 2. As previously stated, our report acknowledges that FSA improved selected practices in developing and deploying release 2. However, we do not believe that the scope or timeframe associated with this initiative provide sufficient evidence that FSA has improved its capacity to manage large, complex acquisitions. Further, our report identified shortfalls in program monitoring in the run up to deploying release 2, including weaknesses in updating project baselines to reflect program changes and in monitoring progress against a defined project plan. Moving forward, FSA stated that it would continue to mature and strengthen its project planning and monitoring practices through a partnership with a third-party capital planning center of excellence and through corrective action plans to address identified weaknesses. It also stated that it is implementing earned value management practices on MIDAS going forward. We will continue to monitor the agency’s efforts to implement our recommendation. With respect to our recommendation to adhere to recognized best practices and agency policy in system testing, FSA stated that it established renewed commitment to MIDAS testing efforts and implemented all of the key practices for release 2. As previously stated, our report acknowledges that FSA improved selected practices in developing and deploying release 2. However, we do not believe that the scope or timeframe associated with this initiative provide sufficient evidence that FSA has improved its capacity to manage large, complex acquisitions. Moving forward, FSA noted that it plans to adhere to recognized best practices and agency policy in pursuing consistent or increased rigor around system testing to demonstrate the agency’s testing capabilities are consistent and repeatable across all IT projects. We will continue to monitor the agency’s efforts to implement our recommendation. Regarding our recommendation to adhere to best practices and agency policy in executive-level IT governance before proceeding with any further system development, FSA stated that it is evaluating its governance structure to potentially include establishing work groups that would evaluate IT initiatives at a more granular level of detail. FSA also stated that it is working with USDA’s Office of the CIO to determine how MIDAS will align with the department’s governance framework and to identify the appropriate gate reviews, artifacts, and level of oversight. We will continue to monitor the agency’s efforts to implement our recommendation. Overall, FSA’s poor performance and lack of results for more than 2 years contributed to its inability to deliver most of the intended functionality and led the Secretary of Agriculture to direct the agency to halt further development after release 2. The efforts that continued after USDA decided to halt further development on MIDAS in July 2014 and through the delivery of release 2 in December 2014 were to salvage a feature (customer records) that was almost fully developed by the time the department made this decision. Our assessments of project planning and monitoring and executive IT governance practices already include FSA’s efforts to manage the overall program and to continue developing customer records through October 2014. Nonetheless, if we were to consider FSA’s efforts on release 2 beginning in October 2014, we would have altered just 1 of the 18 key practices (conducting user testing) due to weaknesses that persisted beyond the deployment of release 1 in April 2013. To its credit, FSA has (1) acknowledged that management improvements are needed and identified steps the agency plans to take; (2) made changes in key leadership positions; and (3) committed to delivering smaller, iterative IT projects going forward. However, our experience in reviewing federal IT acquisitions has shown that it takes time to build repeatable, robust processes. Implementing improvements during the last few months of a 3-year effort is not enough to demonstrate repeatable IT management capacity. As we recommended, FSA needs an improvement plan to guide the agency in adopting recognized best practices and following agency policy as well as a long-term institutional commitment to comprehensively build these processes going forward. Given the complexity and challenges in reengineering and improving FSA services, the agency also needs to demonstrate on an ongoing basis that it can follow policy, manage acquisitions, and deliver needed functionality. FSA’s comments are reprinted in appendix III. The agency also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to interested congressional committees, the Secretary of Agriculture, the Director of the Office of Management and Budget, and other interested parties. In addition, this report will be available on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions on the matters discussed in this report, please contact me at (202) 512-9286 or at pownerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to (1) describe what led to the recent decision to halt further development on MIDAS, (2) compare the functionality that MIDAS has implemented to its original plans, and (3) evaluate the adequacy of key program management disciplines in place for MIDAS and successor programs. To describe what led to the decision to halt further MIDAS development, we reviewed documentation such as program planning artifacts, status reports, key milestone reviews, and departmental or external reviews of MIDAS. We identified key events and decisions from the program’s December 2011 requirements review through the July 2014 decision to halt further development on MIDAS. We analyzed the impact of these events and decisions on MIDAS’s cost, schedule, scope, and performance. Based on our analysis of key events and decisions, we summarized the data in a timeline and identified key factors that led to the decision to halt further development. We compared our assessments with rationale provided by USDA for its decision to determine whether it was similar to the factors we identified. We also interviewed relevant agency and contractor officials to obtain their perspectives on what led to the decision to halt further development of MIDAS. We compared the functionality that MIDAS has implemented to its original plans by reviewing the program’s December 2011 requirements and identifying 24 unique features planned for MIDAS across 6 categories: architecture, data, employee tools, customer tools, system integration, and applications. We confirmed the delivered functionality by reviewing program artifacts—including system test reports; program design documentation; requirements traceability matrices; change request logs; system architecture illustrations; status reports to the program’s Senior Management Oversight Committee, the Office of Management and Budget, and Congress; Exhibit 300 updates; budget requests; assessments by the program’s independent verification and validation contractor; and proposals to rebaseline program scope—for evidence that the features had been implemented, deferred, or removed from scope. We also obtained a live demonstration of the MIDAS system in a FSA service center. We then compared the delivered functionality with what was originally planned and developed graphics to illustrate what was planned, delivered, and removed from the program. We also interviewed relevant agency officials to discuss the original plans for MIDAS and obtain clarification on functionality that FSA implemented. To evaluate the extent to which USDA and FSA implemented key IT program management disciplines, we assessed the implementation of key practices and standards identified by the Project Management Institute, the Software Engineering Institute at Carnegie Mellon University, and GAO in the areas of (a) requirements development and management, (b) project planning and monitoring, (c) system testing, and (d) executive governance. Specifically, we assessed the extent to which USDA and FSA had implemented each of the following 18 practices on the program from December 2011 through October 2014. Requirements development and management: elicit stakeholder needs and expectations, ensure requirements are complete and unambiguous, ensure requirements are prioritized, obtain commitment to requirements through a formal requirements analyze differences between the requirements and capabilities of the intended solution (including commercial off-the-shelf solutions) and address gaps, and ensure that requirements trace forward and backward among development products. Project planning and monitoring: establish a project plan with predefined expectations for cost, schedule, and deliverables; update the project plan through change control procedures; and monitor progress against the project plan, including work performed by contractors. establish well-defined test plans to include key elements such as roles and responsibilities, test environment and infrastructure, tested items and approach, a requirements traceability matrix linked to test cases, risk and mitigation strategies, a testing schedule, and quality assurance procedures; test individual system components; test the integration of system components; and perform end-to-end system testing to determine whether the system is acceptable, interoperable with related systems, and operationally suitable to users. establish a board and document a well-defined structure and process for investment oversight; ensure that investments have a comprehensive business case and use it to compare and select among alternative investments; compare actual performance against estimates; assess whether projects are meeting expectations using predefined criteria and checkpoints and take corrective action when expectations are not being met; and conduct post-implementation reviews to validate actual investment results as compared to decision makers’ expectations for cost, schedule, performance, and mission improvement outcomes and to identify lessons learned that can be applied to future investments. We reviewed relevant USDA and FSA policies and guidance to determine whether they were consistent with the best practices. We then assessed the extent to which USDA and FSA implemented, partially implemented, or did not implement the practices. To do so, we analyzed the following. Requirements development and management artifacts such as requirements traceability matrices, analyses of software gaps and needed workarounds, gate review documentation on the status of requirements, a USDA decision memorandum for the system requirements review, letters from the system integrator, and assessments of requirements practices by the program’s independent verification and validation contractor. Project planning and monitoring artifacts such as cost, schedule, and scope baselines defined at the program’s March 2012 integrated baseline review; earned value management reports from contractors, program office status reports, Federal IT Dashboard updates; Exhibit 300 updates; change request logs; an assessment of project management practices by the program’s independent verification and validation contractor; and a TechStat review by the USDA Office of the CIO. System testing artifacts such as the program’s testing strategy and more detailed test plans, program status reports on key phases of testing, the program’s independent verification and validation contractor’s assessment of integration testing adherence to best practices, the program’s risk and issue list, Senior Management Oversight Committee briefings that discussed deferment of performance and user testing, reports on system defects prior to and after the system was operational, and summary reports by USDA and contractor experts on key problems with the system after it became operational. Executive governance artifacts such as the program’s governance concept of operations; review board charters; program business cases and associated life cycle cost estimates; monthly status briefings to the Senior Management Oversight Committee on the program’s performance against estimates; documentation from the program’s system requirements review, critical design review, test readiness review, go-live (implementation) review for the first software release, including conditions and corrective actions identified in decision memoranda; a post-implementation review by the program’s independent validation and verification contractor; and draft plans to identify lessons learned. We also interviewed relevant agency and contractor officials to discuss the implementation of management disciplines on MIDAS. We performed our work at USDA, FSA, and contractor offices in Fredericksburg and Hanover, Virginia, and in the Washington, D.C. area. We conducted this performance audit from October 2014 to June 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: FSA Farm Programs Description Makes payments related to the difference between commodity crop market prices and farm program prices. Provides a financial incentive to produce bio-energy crops. Provides a financial incentive to environmentally conserve farm or ranch land. Provides a financial incentive to environmentally conserve farm or ranch land. Provides a financial incentive to environmentally conserve farm or ranch land. Provides a financial incentive to environmentally conserve farm or ranch land. Offers assistance for transferring environmentally conserved farm or ranch land to beginning, veteran, or socially disadvantaged producers. Makes payments related to transitioning certain cotton crops to other alternatives. Grants compensation for livestock, honeybee, and fish production losses related to weather, disease, or other emergencies. Furnishes payments and technical assistance to rehabilitate farmland damaged by natural disaster. Emergency Forest Restoration Program Makes payments to restore forest land damaged by natural disaster. Offers loans related to building or improving farm storage and handling facilities. Grants compensation for transportation costs related to disadvantaged farm or ranch geography. Implements voluntary practices taken to environmentally protect source water. Grants compensation for ranching losses due to drought or fire on grazing land. Grants compensation for livestock losses due to weather or certain predators. Makes payments in lieu of applying for loans for which the producer is eligible. Makes payments related to the difference in actual and threshold dairy margins. Offers loans using commodity crops as collateral. Makes payments related to uninsurable crops lost to natural disaster. Offers loans to processors of domestically produced sugarcane and sugar beets. Offers loans to construct or upgrade sugar cane and sugar beet storage facilities. Makes payments for replanting or rehabilitating eligible trees, bushes, and vines damaged by natural disaster. In addition to the contact named above, the following staff made key contributions to this report: Colleen Phillips (assistant director), Christopher Businsky, Claudia Fletcher, Nancy Glover, Joshua Leiling, Jamelyn Payan, and Edward Varty. | Since 2004, FSA has spent about $423 million to modernize IT systems through a program known as MIDAS. FSA planned for this program to replace aging hardware and software applications and to provide a single platform to manage all of the agency's farm programs. However, the agency experienced significant challenges in managing this program. In July 2014, the Secretary of Agriculture decided to halt MIDAS after the completion of a second software release. GAO was asked to review the MIDAS program. This report (1) describes what led to the decision to halt further MIDAS development, (2) compares the functionality that MIDAS has implemented to its original plans, and (3) evaluates the adequacy of key program management disciplines in place for MIDAS and successor programs. To do so, GAO analyzed agency policies and guidance; evaluated program management plans and related artifacts, program and contractor status reports, program milestone artifacts, and lessons learned; obtained a live demonstration of MIDAS; and interviewed agency and contractor officials. The key factors that led to the decision to halt the Modernize and Innovate the Delivery of Agricultural Systems (MIDAS) program were poor program performance and uncertainty regarding future plans. The Farm Service Agency (FSA) experienced significant cost overruns and schedule delays, deferred the majority of the envisioned features, skipped key tests, and deployed software in April 2013 that was slow and inaccurate. In addition, FSA struggled to establish a new program baseline as estimates grew from $330 million to $659 million and time frames were delayed from early 2014 to late 2016. The United States Department of Agriculture (USDA) and FSA did not approve three different baseline proposals by the time the program was halted. By March 2015, MIDAS had overrun its baseline cost estimate by $93 million. FSA has delivered about 20 percent of the functionality that was originally planned for MIDAS. FSA envisioned MIDAS as a single platform to host data, tools, and applications for administering farm program benefits that would be integrated with USDA financial, geospatial, and data warehouse systems. However, FSA delivered a platform that hosts data for administering farm program benefits and is integrated with USDA's geospatial system; it does not host tools and applications for administering benefits, and is not integrated with USDA's financial system or data warehouse. FSA did not have key program management disciplines in place for MIDAS, and lacks the capacity to effectively manage successor programs. Of 18 key practices associated with sound IT acquisition and investment management and required by USDA or FSA policy, FSA implemented 2, partially implemented 7 practices, and did not implement 9 others. For example, USDA and FSA did not establish a complete set of requirements, perform key tests before deploying the system, or provide effective oversight as the program floundered for 2 years. Moving forward, FSA has begun planning how it will continue to automate, integrate, and modernize its farm program services through additional system development initiatives. However, the agency has not yet established plans to improve its management capabilities. Until FSA establishes and implements such a plan, the agency will continue to lack the fundamental capacity to manage IT acquisitions. Further, until FSA addresses shortfalls in key program management disciplines on successor programs to MIDAS, the agency will be at an increased risk of having additional projects that overrun cost and schedule estimates and contribute little to mission-related outcomes. GAO is making five recommendations to FSA, including establishing and implementing a plan for adopting recognized best practices. GAO received written comments from the FSA administrator. While the agency did not explicitly agree or disagree with the recommendations, it cited steps it has taken or plans to take to implement best practices. |
The Army plans to develop and acquire FCS in at least two increments but, according to program officials, only the first one has been defined at this point. The first increment is an information network linking a new generation of 18 manned and unmanned ground vehicles, air vehicles, sensors, and munitions. The manned ground vehicles are to be a fraction of the weight of current weapons such as the Abrams tank and Bradley Fighting Vehicle, yet are to be as lethal and survivable. At a fundamental level, the FCS concept is replacing mass with superior information; that is, to see and hit the enemy first, rather than to rely on heavy armor to withstand attack. The ability to make this leap depends on (1) the ability of the network to collect, process, and deliver vast amounts of information such as imagery and communications and (2) the performance of the individual systems themselves. The concept has a number of progressive features. For example, it provides an architecture within which individual systems will be designed—an improvement over designing systems independently and making them interoperable after the fact. A decade after the cold war ended, the Army recognized that its combat force was not well suited to perform the operations it faces today and is likely to face in the future. The Army’s heavy forces had the necessary firepower but required extensive support and too much time to deploy. Its light forces could deploy rapidly but lacked firepower. To address this mismatch, the Army decided to radically transform itself into a new “Future Force.” The Army expects the Future Force to be organized, manned, equipped, and trained for prompt and sustained land combat, requiring a responsive, technologically advanced, and versatile force. These qualities are intended to ensure the Future Force’s long-term dominance over evolving, sophisticated threats. The Future Force will be offensively oriented and will employ revolutionary operational concepts, enabled by new technology. This force will fight very differently than the Army has in the past, using easily transportable lightweight vehicles, rather than traditional heavily armored vehicles. A key characteristic of this force is agility. Agile forces would possess the ability to seamlessly and quickly transition among various types of operations from support operations to warfighting and back again. They would adapt faster than the enemy, thereby denying it the initiative. In an agile force, commanders of small units may not have the time to wait on higher command levels; they must have the authority and high quality information at their level to act quickly to respond to dynamic situations. Thus, to be successful, the transformation must include more than new weapons. The transformation is extensive, encompassing tactics and doctrine, as well as the very culture and organization of the Army. Against that backdrop, today, I will focus primarily on the equipment element of the transformation, represented by FCS. FCS will provide the majority of weapons and sensor platforms that comprise the new brigade-like modular units of the Future Force known as Units of Action. Each unit is to be a rapidly deployable fighting organization about the size of a current Army brigade but with the combat power and lethality of a current (larger) division. The Army also expects FCS-equipped Units of Action to provide significant war-fighting capabilities to the Joint Force. The first FCS increment will ultimately be comprised of an information network and 18 various systems—which can be characterized as manned ground systems, unmanned ground systems, and unmanned air vehicles. While some systems will play a larger role in the network than others, the network will reside in all 18 systems, providing information to them as well as taking information from them. Figure 1 shows FCS Increment 1. The Joint Tactical Radio System and the Warfighter Information Network-Tactical are two programs outside of FCS that integrate all the various systems and soldiers together. As such, their development is crucial to the FCS network. The communications backbone of the Unit of Action will be a multi-layered mobile network centered on the Joint Tactical Radio System. According to program officials, all soldiers and FCS vehicles, including the unmanned vehicles, will employ these radios. Beyond being the primary communications component within the unit, the Joint Tactical Radio System also will assist with communications beyond the unit, to assets at higher echelons. Communications with those echelons will be enabled through the Warfighter Information Network-Tactical, which provides the overarching network background for the FCS network and is expected to conform to DOD’s interoperability and network architecture directives. Increment 1 began system development and demonstration in May 2003. Currently, only the network and 14 systems are funded. The remaining 4 systems will be introduced as funding becomes available. Current estimates are for the acquisition of Increment 1 to cost $92 billion (then- year dollars) and to achieve an initial operational capability by the end of 2010. Although the Under Secretary of Defense approved the Army’s request to begin the system development and demonstration phase, he directed the Army to prepare for a full program review in November 2004. Increment 1 is expected to replace roughly one-third of the active force through about 2020, when the first 15 Units of Action are fielded. According to program officials, the Army has not yet defined future FCS increments. However, it is important to note that the Army expects to eventually replace most of its current forces with the FCS. Much of the current Army heavy force is expected to remain in the inventory—needing to be maintained and upgraded—through at least 2020. We recently reported that costs of maintaining legacy systems would be significant, but funding is likely to be extremely limited, particularly given competition for funds from transformation efforts. We concluded that maintaining legacy equipment will likely be a major challenge, necessitating funding priorities to be more clearly linked to needed capability and to long-range program strategies. The Army intends to employ a single Lead Systems Integrator throughout the completion of Increment 1. The Lead System Integrator will be the single accountable, responsible contractor to integrate FCS on time and within budget. It will act on behalf of the Army throughout the life of the program to optimize the FCS capability, maximize competition, ensure interoperability, and maintain commonality in order to reduce life-cycle cost. In order to quickly transition into system development and demonstration and to manage the multitude of tasks associated with FCS acquisition, the Army chose the Lead System Integrator approach to capitalize on industry’s flexibility. The Army wants the FCS-equipped Unit of Action to have a number of features. These can be described in four characteristics: lethality, survivability, responsiveness, and sustainability. The Unit of Action is to be as lethal as the current heavy force. It must have the capability to address the combat situation, set conditions, maneuver to positions of advantage, and close with and destroy enemy formations at longer ranges and greater precision than the current force. To provide this level of lethality and reduce the risk of detection, FCS must provide high single-shot effectiveness. To be as survivable as the current heavy force, the Unit of Action is primarily dependent upon the ability to kill the enemy before being detected. This depends on unit’s ability to see first, understand first, act first, and finish decisively. The individual FCS systems will also rely on a layered system of protection involving several technologies that lowers the chances of a vehicle or other system being seen by the enemy; if seen, lowers the chances of being acquired; if acquired, lowers the chances of being hit; if hit, lowers the chances of being penetrated; and finally, if penetrated, increases the chances of surviving. To be responsive, Units of Action must be able to rapidly deploy anywhere in the world, be rapidly transportable via various transport modes, and be ready to fight upon arrival. To facilitate rapid transportability, FCS vehicles are being designed to match the weight and size constraints of the C-130 aircraft. The Unit of Action is to be capable of sustaining itself for periods of 3 to 7 days depending on the level of conflict. This sustainability requires subsystems with high reliability and low maintenance, reduced demand for fuel and water, highly effective offensive weapons, and a fuel-efficient engine. Meeting all these requirements will be a difficult challenge because the solution to meet one requirement may work against another requirement. For example, the FCS vehicles’ small size and lighter weight are factors that improve agility, responsiveness, and deployability. However, their lighter weight precludes the use of the traditional means to achieve survivability—heavy armor. Instead, the FCS program must use cutting-edge technology to develop systems, such as an active protection system, to achieve survivability. Yet such technology cannot be adopted if it impairs the new systems’ reliability and maintainability. Weight, survivability, and reliability will have to be kept in balance. The essence of the FCS concept itself—to provide the lethality and survivability of the current heavy force with the sustainability and deployability of a force that weighs a fraction as much—has the intrinsic attraction of doing more with less. The concept has a number of merits, which demonstrate the Army’s desire to be proactive in its approach to preparing for potential future conflicts and its willingness to break with tradition in developing an appropriate response to the changing scope of modern warfare. If successful, the architecture the program is developing will leverage individual capabilities of weapons and platforms and will facilitate interoperability and open systems. This architecture is a significant improvement over the traditional approach of building superior individual weapons that must be netted together after the fact. Also, the system of systems network and weapons could give acquisition managers the flexibility to make best value trade-offs across traditional program lines. This transformation of the Army, both in terms of operations and in equipment, is underway with the full cooperation of the Army warfighter community. In fact, the development and acquisition of FCS are being done using a collaborative relationship between the developer (program manager), the contractor, and the warfighter community. For example, the developer and the warfighter are using a disciplined approach to decompose the Unit of Action Organizational and Operational Plan and the FCS Operational Requirements Document into detailed specifications. This work is defining in detail the requirements for a Unit of Action to operate in a network-centric environment. This approach is in line with best practices to ensure that specific technical issues are understood before significant design work is done. The Army has established sustainability as a design characteristic equal to lethality and survivability. This is an improvement over past programs, such as the Apache helicopter and the Abrams tank. These programs did not emphasize sustainability, to less than desirable results, including costly maintenance problems and low readiness rates, which persisted even after the systems were fielded. FCS’ approach of emphasizing sustainability from the outset should allow operating and support costs and readiness to be evaluated early in development, when there is a greater chance to affect those costs positively. This approach is also in line with best practices. The FCS program has yet to—and will not—demonstrate high levels of knowledge at key decision points. It thus carries significant risks for execution. At conflict are the program’s technical challenges and limited time frame. The Army began system development and demonstration in May 2003 and plans to make its initial FCS production decision in November 2008—a schedule of about 5 ½ years. Seventy-five percent of the technologies were immature at the start of system development and demonstration and some will not be proven mature until after the scheduled initial production decision. First prototypes for all 14 funded systems and the network will not be demonstrated together until after the production decision and will serve both as technology demonstrators and system prototypes. They will represent the highest level of FCS demonstration before production units are delivered, as no production- representative prototypes are planned. Even this level of demonstration assumes complete success in maturing the technologies, developing the software, and integrating the systems—as well as the delivery and integration of the complementary systems outside of FCS. While the Army is embarking on an impressive array of modeling, simulation, emulation, and other demonstration techniques, actual demonstration of end items is the real proof, particularly for a revolutionary advance, such as FCS. If the lessons learned from best practices and the experiences of past programs have any bearing, the FCS strategy is susceptible to “late cycle churn,” a phrase used by private industry to describe the discovery of significant problems late in development and the attendant search for fixes when costs are high and time is short. FCS is susceptible to this kind of experience as the demonstration of multiple technologies, individual systems, the network, and the system of systems will all culminate late in development and early production. In the Army’s own words, FCS is “the greatest technology and integration challenge the Army has ever undertaken.” It intends to develop a complex, family of systems–an extensive information network and 14 major weapon systems—in less time than is typically taken to develop, demonstrate, and field a single system. The FCS Acquisition Strategy Report describes this scenario as a “dramatically reduced program schedule (which) introduces an unprecedented level of concurrency.” Underscoring that assessment is the sheer scope of the technological leap required for the FCS. For example: A first-of-a-kind network will have to be developed. The 14 major weapon systems or platforms have to be designed and integrated simultaneously and within strict size and weight limitations. At least 53 technologies that are considered critical to achieving critical performance capabilities will need to be matured and integrated into the system of systems. The development, demonstration, and production of as many as 157 complementary systems will need to be synchronized with FCS content and schedule. This will also involve developing about 100 network interfaces so the FCS can be interoperable with other Army and joint forces. An estimated 34 million lines of software code will need to be generated (5 times that of the Joint Strike Fighter, which had been the largest defense undertaking in terms of software to be developed). Some of these technical challenges are discussed below. The overall FCS capabilities are heavily dependent on a high quality of service—good information, delivered fast and reliable—from the network. However, the Army is proceeding with development of the entire FCS system of systems before demonstrating that the network will deliver as expected. Many developmental efforts will need to be successful for the network to perform as expected. For each effort, a product—whether software or hardware—must first be delivered and then demonstrated individually and collectively. The success of these efforts is essential to the high quality of service the network must provide to each Unit of Action. In some cases, an individual technology may be a linchpin—that is, if it does not work, the network’s performance may be unacceptable. In other cases, lower than expected performance across a number of individual technologies could collectively degrade network performance below acceptable levels. Some key challenges are highlighted below: System of Systems Common Operating Environment is a software layer that enables interoperability with external systems and manages the distribution of information and software applications across the distributed network of FCS systems. According to program officials, the System of Systems Common Operating Environment is on the critical path for most FCS software development efforts. The Joint Tactical Radio System and the Warfighter Information Network-Tactical, and several new wideband waveforms—all in development—are essential to the operation of the FCS network. It is vital that these complementary developments be available in a timely manner for the currently planned demonstrations of the network. The information-centric nature of FCS operations will require a great deal of bandwidth to allow large amounts of information to be transmitted across the wireless network. However, the radio frequency spectrum is a finite resource, and there is a great deal of competition and demand for it. An internal study revealed that FCS bandwidth demand was 10 times greater than what was actually available. As a result, the program initiated a series of trade studies to examine and reassess bandwidth requirements of various FCS assets. The results of these studies may have a dramatic effect on the FCS network. The Army has already made a number of changes to the network design to use available bandwidth more efficiently and to reduce bandwidth demand. After determining that Unmanned Aerial Vehicle (UAV) sensor missions would constitute the largest consumption of network bandwidth, the Army started a new wideband waveform development effort, using the higher frequency bands. This effort will also require new updated Joint Tactical Radio System hardware and new antennas in addition to a new waveform. Sophisticated attackers could compromise the security of the FCS network, which is critical to the success of the system of systems concept. Such an attack could degrade the systems’ war-fighting ability and jeopardize the security of Army soldiers. The Army is developing specialized protection techniques as there is only limited commercial or government software currently available that will adequately protect a mobile network like the one proposed for FCS. FCS Increment 1 includes four classes of UAVs that cover increasing areas of responsibility. According to program officials, two of the UAV classes are currently unfunded and are currently not being developed. The Army plans to develop, produce and field them if funding becomes available. Within the FCS concept, UAV roles include reconnaissance, target acquisition and designation, mine detection, and wide-band communications relay. The required UAVs will need to be designed, developed, and demonstrated within the 5½-year period prior to the initial FCS production decision. As we recently testified, DOD’s experiences show that it is very difficult to field UAVs. Over the last 5 years, only three systems have matured to the point that they were able to use procurement funding. FCS Increment 1 includes eight manned ground systems, however, one— the maintenance and recovery vehicle—is unfunded. The Army plans to use the Heavy Expanded Mobility Tactical Truck-Wrecker in its place in the Unit of Action. The remaining seven manned ground systems require critical individual and common technologies to meet required capabilities. For example, the Mounted Combat System will require, among other new technologies, a newly developed lightweight weapon for lethality; a hybrid electric drive system and a high-density engine for mobility; advanced armors, an active protection system, and advanced signature management systems for survivability; a Joint Tactical Radio System with the wideband waveform for communications and network connection; a computer-generated force system for training; and a water generation system for sustainability. Under other circumstances, each of the seven manned ground systems would be a major acquisition program on par with the Army’s past major ground systems such as the Abrams tank, the Bradley Fighting Vehicle, and the Crusader Artillery System. As such, each requires a major effort to develop, design, and demonstrate the individual vehicles. Recognizing that a number of subsystems will be common among the vehicles, meeting the Army’s schedule will be a challenge as this effort must take place within the 5½-year period prior to the initial FCS production decision. We have found for a program to deliver a successful product within identified resources, managers should build high levels of demonstrated knowledge before significant commitments are made. Figure 2 depicts the key elements for building knowledge. This knowledge build, which takes place over the course of a program, can be broken down into three knowledge points to be attained at key junctures in the program: At knowledge point 1, the customer’s needs should match the developer’s available resources—mature technologies, time, and funding. This is indicated by the demonstrated maturity of the technologies needed to meet customer needs. At knowledge point 2, the product’s design is stable and has demonstrated that it is capable of meeting performance requirements. This is indicated by the number of engineering drawings that are releasable to manufacturing. At knowledge point 3, the product must be producible within cost, schedule, and quality targets and have demonstrated its reliability. It is also the point at which the design must demonstrate that it performs as needed. Indicators include the number of production processes in statistical control. The three knowledge points are related, in that a delay in attaining one delays those that follow. Thus, if the technologies needed to meet requirements are not mature, design and production maturity will be delayed. For this reason, the first knowledge point is the most important. DOD’s acquisition policy has adopted the knowledge-based approach to acquisitions. Translating this approach to DOD’s acquisition policy, a weapon system following best practices would achieve knowledge point 1 by the start of system development and demonstration, knowledge point 2 at critical design review (about halfway through development), and knowledge point 3 by the start of production. For the most part, all three knowledge points are eventually attained on a completed product. The difference between highly successful product developments—those that deliver superior products within cost and schedule projections—and problematic product developments is how this knowledge is built and how early in the development cycle each knowledge point is attained. If a program is attaining the desired levels of knowledge, it has less risk—but not zero risk—of future problems. Likewise, if a program shows a gap between demonstrated knowledge and best practices, it indicates an increased risk—not a guarantee—of future problems. Typically, these problems cost more money than has been identified and take more time than has been planned. DOD programs that have not attained these levels of knowledge have experienced cost increases and schedule delays. We have recently reported on such experiences with the F/A-22, the Advanced SEAL Delivery System, the Airborne Laser, and the Space Based Infrared System High. For example, the technology and design matured late in the F/A-22 program and have contributed to numerous problems. Avionics have experienced major development problems and have driven large cost increases and caused testing delays. The FCS program started system development and demonstration with significantly less knowledge than called for by best practices. This knowledge deficit is likely to delay the demonstration of subsequent design and production knowledge at later junctures and puts the program at risk of cost growth, schedule delays, and performance shortfalls. Two factors contributed to not having a match between resources and requirements at the start of system development and demonstration: 75 percent of critical technologies were not mature and requirements were not well defined. Later in the program, when the initial production decision is made, a knowledge gap will still exist even if the program proceeds on schedule. For example, prototypes of all 14 funded systems, the network, and the software version needed for initial operational capability will not be brought together and tested for the first time until after the production decision. Further, as production-representative prototypes will not be built, it does not appear that much demonstration of production process maturity can occur before the production decision. Using best practices, at the start of system development and demonstration, a program’s critical technologies should be demonstrated to a technology readiness level of 7. This means the technology should be in the form, fit, and function needed for the intended product and should be demonstrated in a realistic environment, such as on a surrogate platform. While DOD’s policy states a preference for a technology readiness level of 7, it accepts a minimum of a level 6. According to program officials, technologies were accepted for FCS if they were at level 6 or if the Army determined that the technologies would reach a readiness level of 6 before the July 2006 critical design review. To put this discussion of technology maturity in perspective, the difficulties the F/A-22 fighter are currently experiencing with its avionics system are, in essence, the consequence of not demonstrating a technology readiness level of 7 until late in the program. Consequently, the Army started FCS system development and demonstration phase with about 75 percent of its critical technologies below level 7, with many at level 5 and several at levels 3 and 4. Since then, progress has been made, but the Army expects that, by the full program review in November 2004, only 58 percent of the program’s critical technologies would be matured to a technology readiness level of 6 or higher. The Army estimates that 95 percent of the technologies will reach level 6 by the critical design review. The program does not expect all FCS critical technologies to be demonstrated to level 7 until mid-2009, after the initial production decision and about 6 years after the start of system development and demonstration. The second factor keeping the Army from matching resources with customer’s needs before starting the system development and demonstration phase was that it did not have an adequate definition of the FCS requirements. The program continues to work on defining the requirements for the FCS system of systems and the individual systems. System requirements may not be completely defined until at least the preliminary design review in April 2005 and, perhaps, as late as the critical design review in July 2006. The program still has a number of key design decisions to be made that will have major impacts on the FCS requirements and the conceptual design of FCS Increment 1. Currently, the program has 129 trade studies underway including 5 studies that are critical and due to be completed soon. For example, a critical study with great potential impact is determining the upper weight limit of the individual FCS manned platforms. This determination could affect the FCS transportability, lethality, survivability, sustainability, and responsiveness capabilities. These and other open questions on the FCS requirements will need to be answered in order for the detailed design work to proceed and ultimately to be stabilized at the critical design review. To go from system development and demonstration to production in 5 ½ years, the FCS program depends on a highly concurrent approach to developing technology, as well as to designing, building, testing, and producing systems. This level of concurrency resulted from the Army’s establishment of 2010 as its target for initial operating capability for the first FCS Unit of Action. Army officials acknowledge that this is an ambitious date and that the program was not really ready for system development and demonstration when it was approved. However, the officials believe it was necessary to create “irreversible momentum” for the program. Army leaders viewed such momentum as necessary to change Army culture. The result is an accelerated schedule-driven program, as depicted in figure 3, rather than an event-driven program. Even if the program successfully completes this schedule, it will yield lower levels of demonstrated knowledge than suggested by best practices and DOD’s acquisition policy. Significant commitments will thus be made to FCS production before requisite knowledge is available. For example: Technology development is expected to continue through the production decision. At the design readiness review (critical design review) in July 2006, technology development will still be ongoing, putting at risk the stability of ongoing system integration work. In December 2007, while technology development and system integration are continuing and first prototypes are being delivered, the Army plans to begin long lead item procurement and to begin funding for the production facilities. In November 2008, the initial production decision is expected to be made. However, program officials said that some technologies will not have reached level 7 by that time, and the system of systems demonstration will remain to be done. In early 2010, as production deliveries have started, the Army plans to finish Integrated System Development and Demonstration Test Phase 5.1, the first full demonstration of all FCS components as an integrated system. Testing and demonstration will continue until the full rate production decision in mid-2013. The initial operational capability is planned for December 2010. With the FCS concurrent strategy, much demonstration of knowledge will occur late in development and early in production, as technologies mature, prototypes are delivered, and the network and systems are brought together as a system of systems. This makes the program susceptible to “late cycle churn,” a condition that we reported on in 2000. Late cycle churn is a phrase private industry has used to describe the efforts to fix a significant problem that is discovered late in a product’s development. Often, it is a test that reveals the problem. The churn refers to the additional—and unanticipated—time, money, and effort that must be invested to overcome the problem. Problems are most devastating when they delay product delivery, increase product cost, or “escape” to the customer. The discovery of problems in testing conducted late in development is a fairly common occurrence on DOD programs, as is the attendant late cycle churn. Often, tests of a full system, such as launching a missile or flying an aircraft, become the vehicles for discovering problems that could have been found earlier and corrected less expensively. When significant problems are revealed late in a weapon system’s development, the reaction—or churn—can take several forms: extending schedules to increase the investment in more prototypes and testing, terminating the program, or redesigning and modifying weapons that have already made it to the field. Over the years, we have reported numerous instances in which weapon system problems were discovered late in the development cycle. The Army has embarked on an impressive plan to mitigate risk using modeling, simulation, emulation, hardware in the loop, and system integration laboratories throughout FCS development. This is a laudable approach designed to reduce the dependence on late testing to gain valuable information about design progress. However, on a first-of-a-kind system like FCS that represents a radical departure from current systems, actual testing of all the components integrated together is the final proof that the system works both as predicted and as needed. If the FCS strategy does not deliver the system of systems as planned, the Army is still prepared to go forward with production and fielding. The Army’s Acquisition Strategy Report states that at the Initial Production Decision, all elements of the FCS may not be ready for initial production and will require a continuation of system development and demonstration efforts to complete integration and testing in accordance with the program–tailoring plan. For those that need more time, FCS program manager will present to the Milestone Decision Authority a path forward, with supporting analysis. In addition, the Army will accept existing systems in lieu of actual FCS systems to reach initial operational capability. We have reported on options that warrant consideration as alternatives for developing FCS capabilities with less risk. Alternatives are still viable and worth considering, particularly before major funding and programmatic commitments are made. If the FCS program proceeds as planned and does experience problems later in development, it may pose a real dilemma for decision makers. Typically, performance, schedule, and cost problems on weapon system programs are accommodated by lowering requirements and increasing funding. If the FCS program proceeds on its current path until problems occur in demonstration, traditional solutions may not be available because of the significant role it must fulfill and its financial magnitude. While there is a significant amount of potential flexibility among the various FCS systems and technologies, collectively the system of systems has to meet a very high standard. It has to be as lethal and survivable as the current force and its combat vehicles have to be a fraction of the weight of current vehicles to be air transportable on the C-130 aircraft. These “must haves” constrain the flexibility in relaxing requirements for the FCS system of systems. The opportunity for increasing funds to cover cost increases poses a challenge because FCS already dominates the Army’s investment budget. It might be difficult to find enough other programs to cut or defer to offset FCS increases. Assuming the Army’s acquisition cost estimates are accurate and the program will succeed according to plan, the FCS investment for even the first increment is huge—$92 billion (in then-year dollars). These assumptions are optimistic as risks make problems likely, the cost estimate was based on an immature program, and budget forecasts have already forced deferral of four FCS systems. As estimated, FCS will command a significant share of the Army’s acquisition budget, particularly that of ground combat vehicles, for the foreseeable future. In fiscal year 2005, the FCS budget request of $3.2 billion accounts for 52 percent of the Army’s proposed research, development, test and evaluation spending on programs in system development and demonstration and 31 percent of that expected for all Army research, development, test, and evaluation activities. See figure 4 for FCS costs through 2016. The ramp up in FCS research and development funding is very steep, going from $157 million in fiscal 2003 to $1.7 billion in fiscal 2004 to a projected $3.2 billion in fiscal years 2005 and topping out at about $4.3 billion in fiscal 2006. FCS procurement funding is projected to start in fiscal 2007 at $750 million and ramp up to an average of about $3.2 billion in fiscal years 2008 and 2009. In late development (2008-2009) the total FCS costs will run about $5 billion per year. After 2008, FCS will command nearly 100 percent of the funding for procurement of Army ground combat vehicles. After 2011, FCS costs will run nearly $9 billion annually to procure enough FCS equipment for two Units of Action per year. According to Army officials, it is not yet clear that the Army can afford this level of annual procurement funding for FCS. The consequences of even modest cost increases and schedule delays for FCS would be dramatic. For example, we believe that a 1-year delay late in FCS development, not an uncommon occurrence for other DOD programs, could cost $4 billion to $5 billion. A modest 10 percent increase in production cost would amount to over $7 billion. In a broader context, any discussion of DOD’s sizeable investment that remains in the FCS program must also be viewed within the context of the fiscal imbalance facing the nation within the next 10 years. There are important competing priorities, both within and external to DOD’s budget, that require a sound and sustainable business case for DOD’s acquisition programs based on clear priorities, comprehensive needs assessments, and a thorough analysis of available resources. Funding specific program or activities will undoubtedly create shortfalls in others. Alternatives to developing FCS capabilities that do not follow a concurrent strategy are feasible, if acted upon early enough. Alternatives should have the common elements of building more knowledge before making program commitments; preserving the advantages of the FCS concept, such as defining an architecture before individual systems are developed; and spinning off mature technologies to systems already fielded. Alternatives that would allow for building such knowledge include: Adding more time to the FCS program with its scope intact to reduce concurrency would lower risk. However, until technologies are mature and more is known about whether the FCS concept will work, there still would not be a sound basis for estimating how much time will be needed to build the knowledge needed to complete system development and demonstration. Focus on the development and demonstration of its most critical capabilities first, such as the network. This could be done by conducting one or more advanced technology demonstrations to reduce technical and integration risks in critical areas, then proceed with an acquisition program. This would take more time than if the current FCS schedule were successfully carried out. Focus on maturing the most critical technologies first, then bundle them in demonstrations of capabilities, such as Advanced Concept Technology Demonstrations, then proceed with an acquisition program that would attain sufficient knowledge at the right acquisition junctures. This would also take more time than if the current FCS schedule were successfully carried out. To develop the information on whether the FCS program was following a knowledge-based acquisition strategy and the current status of that strategy, we contacted, interviewed, and obtained documents from officials of the Offices of the Under Secretary of Defense (Acquisition, Technology, and Logistics); the Secretary of Defense Cost Analysis Improvement Group; the Assistant Secretary of the Army (Acquisition, Logistics, and Technology); the Program Executive Officer for Ground Combat Systems; the Program Manager for Future Combat Systems; and the Future Combat Systems Lead Systems Integrator. We reviewed, among other documents, the Objective Force Operational and Organizational Plan for Maneuver Unit of Action and the Future Combat Systems’ Operational Requirements Document; the Acquisition Strategy Report, the Baseline Cost Report, the Critical Technology Assessment and Technology Risk Mitigation Plans, and the Integrated Master Schedule. We attended the FCS Business Management Quarterly Meetings, Management Quarterly Review Meetings, and Directors Quarterly Review Meetings. In our assessment of the FCS, we used the knowledge-based acquisition practices drawn from our large body of past work, as well as DOD’s acquisition policy and the experiences of other programs. We discussed the issues presented in this statement with officials from the Army and the Secretary of Defense, and made several changes as a result. We performed our review from July 2003 to March 2004 in accordance with generally accepted auditing standards. Mr. Chairman, this concludes my prepared statement. I would be happy to answer any questions that you or members of the subcommittee may have. For future questions about this statement, please contact me at (202) 512-4841. Individuals making key contributions to this statement include Lily J. Chin, Marcus C. Ferguson, Lawrence Gaston, Jr., William R. Graveline, W. Stan Lipscomb, John P. Swain, and Carrie R. Wilson. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | To become a more responsive and dominant combat force, the U.S. Army is changing its strategy from bigger and stronger weapons to faster and more agile ones. The Future Combat Systems (FCS)--which the Army calls the "greatest technology and integration challenge ever undertaken"--is expected to meet the Army's transformational objectives. Forming FCS' backbone is an information network that links 18 systems. Not only is FCS to play a pivotal role in the Army's military operations, FCS and its future iterations are expected to eventually replace all Army forces. For FCS' first developmental increment, the Army has set aside a 5 1/2-year timetable from program start (May 2003) until the initial production decision (November 2008). GAO was asked to testify about FCS' key features, whether the program carries any risks, and, if so, whether there are alternatives for developing FCS capabilities with fewer risks. The FCS concept is a new generation of manned and unmanned ground vehicles, air vehicles, and munitions, each of which taps into a secure network of superior combat information. These weapon systems are to be a fraction of the weight of current weapons yet as lethal and survivable. FCS' lightweight and small size are critical to meeting the Army's goals of deploying faster and being more transportable for big or small military operations. Rather than rely on heavy armor to withstand an enemy attack, FCS' systems will depend on superior communications to kill the enemy before being detected. One of FCS' key advantages is that it provides an architecture within which individual systems will be designed--an improvement over designing systems independently and making them interoperable after the fact. Another merit is that FCS is being acquired and developed with the full cooperation of the Army's program managers, contractors, and the warfighter community. FCS is at significant risk for not delivering required capability within budgeted resources. Three-fourths of FCS' needed technologies were still immature when the program started. The first prototypes of FCS will not be delivered until just before the production decision. Full demonstration of FCS' ability to work as an overarching system will not occur until after production has begun. This demonstration assumes complete success-- including delivery and integration of numerous complementary systems that are not inherently a part of FCS but are essential for FCS to work as a whole. When taking into account the lessons learned from commercial best practices and the experiences of past programs, the FCS strategy is likely to result in cost and schedule consequences if problems are discovered late in development. Because it is promising to deliver unprecedented performance capabilities to the warfighter community, the Army has little choice but to meet a very high standard and has limited flexibility in cutting FCS requirements. Because the cost already dominates its investment budget, the Army may find it difficult to find other programs to cut in order to further fund FCS. To avoid unanticipated cost and schedule problems late in development, several alternatives can be considered: (1) add time to FCS' acquisition schedule to reduce concurrent development; (2) take the time to develop and demonstrate the most critical capabilities first, such as the FCS network, then proceed with an acquisition program; and (3) focus on maturing the most critical technologies first, then bundle them in demonstrations of capabilities, and ensure that decision makers have attained the knowledge they need at critical junctures before moving forward. |
Generally, DOD provides longevity retirement pay to military service members upon completion of 20 creditable years of active duty service. DOD also provides disability retirement pay to eligible servicemembers who are determined unfit for duty–that is, unable to perform their military duties. To qualify for military disability retirement, the servicemember’s disability must have been determined by DOD medical personnel to be permanent and the servicemember must have (1) at least 20 years of creditable service or (2) an evaluation board determination that the servicemember has a physical disability rating of at least 30 percent, and either at least 8 years of creditable service or a disability resulting from active duty. Nearly 1.5 million retired servicemembers received retirement and disability retirement pay in fiscal year 2002. In fiscal year 2000, the average disability retiree who had been an officer received about $2,022 per month, while the average enlisted disability retiree received about $698 per month. VA provides monthly disability compensation to veterans who have service-connected disabilities to compensate them for the average reduction in earnings capacity that is expected to result from injuries or diseases incurred or aggravated by military service. The payment amount is based on a disability rating scale that begins at 0 for the lowest severity and increases in 10-percent increments to 100 percent for the highest severity. Many veterans claim multiple disabilities, and veterans can reapply for higher ratings and more compensation if their disabilities worsen. For veterans who claim more than one disability, VA rates each claim separately and then combines them into a single rating. About 65 percent of compensated veterans receive payments based on a rating of 30 percent or less and about 8 percent are rated at 100 percent. Average monthly compensation payments in 2002 ranged from about $100 for a 10-percent rating to over $2,100 for a 100-percent rating. Military retirees with disabilities incurred during their military service may receive military retirement pay (based on either longevity or disability, whichever is more financially advantageous to the servicemember) from DOD and disability compensation from VA. For example, a servicemember who incurs a disability may still be fit for duty, depending on the nature and severity of the impairment. If that servicemember completes 20 years of creditable service, he or she may retire based on longevity and also qualify for VA disability compensation for the same impairment or a different impairment that is also service-connected. Similarly, a servicemember who incurs a disability and is found unfit for duty may receive military retirement pay based on disability if he or she meets additional eligibility requirements. This servicemember may also qualify for VA disability compensation for the same impairment or a different impairment that is also service-connected. Current law requires that military retirement pay be reduced (“offset”) by the amount of VA disability benefits received. In 1891, Congress passed legislation to prohibit what it regarded to be dual compensation for either past or current service and a disability pension. Despite the reduction in military retirement pay, it is often to a retiree’s advantage to receive VA disability compensation in lieu of military retirement pay. These VA benefits provide an after-tax advantage because they are not subject to federal income tax, as military retirement pay generally is. In addition, the disability compensation VA pays can be increased if medical reevaluation of the retiree’s condition is found by VA to have worsened. Because VA disability compensation is based on the severity of the disability and not on actual earnings (as is military retirement pay), the VA benefit may, in some instances, be larger than the amount of military retirement pay. For certain retirees with serious disabilities, the National Defense Authorization Act of 2000 provides a cash benefit that is less than what they would have received through concurrent receipt of their military retirement pay and VA disability compensation. The statute states that these special compensation payments are not military retirement pay. As such, they are not subject to the offset provisions, and the legislation did not change the statute that prohibits concurrent receipt. The special compensation payments were reauthorized in 2001 and 2002. In addition, the 2003 National Defense Authorization Act (P.L. 107-314) authorized a new category of “special compensation” for retirees with disabilities, including those who received a Purple Heart or have a disability due to “combat-related” activities. Under the new law, eligible retirees would now be able to receive the financial equivalent of concurrent receipt, although, again, the legislation did not repeal the statute prohibiting concurrent receipt. Military retirees may become eligible for this special compensation if (1) their disability is attributable to an injury for which the member was awarded the Purple Heart, and is not rated less than a 10-percent disability by DOD or VA; or (2) they receive a disability rating of at least 60 percent from either DOD or VA for injuries that were incurred due to involvement in “armed conflict,” “hazardous service,” “duty simulating war” and through an instrumentality of war. Retirees who are eligible under this new special compensation category will no longer be entitled to the special compensation payments first enacted in 2000. The Congressional Budget Office (CBO) estimated that this new special compensation would cost about $6 billion over 10 years. Table 1 shows the 2003 monthly payments amounts of the special compensation enacted in 2000 as well as the monthly payment amounts for the new category of special compensation. Current proposals before Congress pertaining to concurrent receipt would, if enacted, expand the number of those eligible to simultaneously receive the equivalent of their full retirement pay and compensation for a disability beyond the 2003 National Defense Authorization Act. CBO estimated that an earlier version of these proposals would cost about $46 billion over 10 years. Over a longer time horizon, the additional financial liability would be of even greater significance because of mounting concerns about the long-term fiscal consequences of federal entitlements. Among the programs that provide benefits to individuals based on their previous work experience or their inability to continue working because of disability, many use offset provisions when an individual qualifies for benefits under more than one program. The specific rationales for these offset provisions vary, but they generally focus on restoring equity and fairness by treating beneficiaries of more than one program in a similar manner as beneficiaries who qualify for benefits under only one of the programs. Table 2 provides examples of benefit programs that include offset provisions. (See app. I for a description of these programs.) Some programs use offset provisions to ensure that the total benefits received from two programs do not exceed the total income received while working. For example, the Social Security Disability Insurance (DI) program provides benefits to insured persons to replace the income lost when they are unable to work because of physical or mental impairments. In addition to DI benefits, some individuals may also be eligible for workers’ compensation (WC) if the illness or injury is work-related. WC benefits are designed to replace the loss of earnings resulting from work- related illnesses or injuries. Each state and the District of Columbia generally requires employers operating in its jurisdictions to provide WC insurance for their employees. The Social Security Administration (SSA) generally requires that DI benefits be reduced for persons who also receive WC. This offset applies when combined DI and WC benefits exceed 80 percent of the injured worker’s average current earnings. The reduction can apply even if the DI and WC benefits are for unrelated injuries or illnesses. In 1971, the Supreme Court validated the WC offset provision stating that it was intended to provide an incentive for injured employees to return to work because the Congress did not believe it was desirable for injured workers to receive disability benefits that, in combination with their WC benefits, exceeded their preinjury earnings. Some programs use offset provisions to adjust benefit computation formulas that were not originally designed to account for individuals or their dependents working under more than one retirement system. An example is Social Security’s Government Pension Offset (GPO) provision, enacted in 1977 to equalize the treatment of workers covered by Social Security and those with government pensions not covered by Social Security. The Social Security Act requires that most workers be covered by Social Security benefits. In addition to paying retirement and disability benefits to covered workers, Social Security also generally pays benefits to spouses of retired, disabled, or deceased workers. Although state and local government workers were originally excluded from Social Security, today about two-thirds of state and local government workers are covered by Social Security. Prior to 1977, a spouse receiving a pension from a government position not covered by Social Security could receive a full pension benefit and a full Social Security spousal benefit as if he or she were a nonworking spouse. The GPO prevents spouses from receiving a full spousal benefit in addition to a full pension benefit earned from noncovered government employment. Offset provisions are also used by state governments. For example, 29 states and the District of Columbia permit insurers to reduce WC cash payments when the beneficiary also receives other types of benefits, such as those from Social Security retirement, survivor, or disability programs or from government or private pension plans. In addition, as required by federal law, states must deduct from unemployment compensation the value of pensions, retirement pay, or annuities based on previous work in certain situations. The purpose of this offset is to reduce the incentive for retirees who receive pensions to file for unemployment compensation and increase their incentive to seek work. Private sector insurers also use offsets. Our study of three large private disability insurers found that nearly two-thirds of those receiving private long-term disability benefits from the three private insurers also received DI benefits. In such cases, the private disability benefit payments were generally reduced by the amount of the DI benefit payment. In addition to the cost of the benefits, allowing concurrent receipt would have implications for VA program management. Allowing concurrent receipt of military retirement pay and VA disability compensation could provide new incentives for military retirees to file for VA compensation or to seek increases in their disability ratings for VA compensation that they are already receiving. These new claims could further tax VA’s claims processing system. We recently reported that VA faces long-standing challenges to improve the timeliness and quality of disability claims decisions. In addition to creating delays in veterans’ receipt of entitled benefits, untimely, inaccurate, and inconsistent claims decisions can negatively affect veterans’ receipt of other VA benefits and services, including health care, because VA’s assigned disability ratings help determine eligibility and priority for these benefits. While the cost of these new benefits and VA’s administrative challenges in processing the claims may not provide sufficient bases to retain the offset, they warrant consideration in weighing this matter. While VA has had difficulty making decisions in a timely and consistent manner, VA’s disability programs also face more fundamental problems. Our concerns about the long-standing challenges that VA faces in claims processing contributed to our recent decision to place federal disability programs, including VA’s programs, on our high-risk list of programs that need urgent attention and transformation to ensure that they function in the most economical, efficient, and effective manner possible. This designation was based in part on our finding that these programs use outmoded criteria for determining disability. For example, VA’s disability ratings schedule is still primarily based on physicians’ and lawyers’ judgments made in 1945 about the effect service-connected conditions had on the average individual’s ability to perform jobs requiring manual or physical labor. Although VA is revising the medical criteria for its Schedule for Rating Disabilities, the estimates of how impairments affect veterans’ earnings have generally not been reexamined. As a result, changes in the nature of work that have occurred over the last half-century—which potentially affect the extent to which disabilities limit one’s earning capacity—are overlooked by the program’s criteria. For example, in an increasingly knowledge-based economy, one could consider whether physical impairments such as the loss of an extremity still reduce earning capacity by 40 to 70 percent. These outdated concepts persist despite scientific advances and economic and social changes that have redefined the relationship between impairments and the ability to work. Advances in medicine and technology have reduced the severity of some medical conditions and have allowed individuals to live with greater independence and function in work settings. Moreover, the nature of work has changed as the national economy has become increasingly knowledge-based. Without a current understanding of the impact of physical and mental conditions on earnings given labor market changes, VA and other agencies administering federal disability programs may be overcompensating some individuals while undercompensating or denying benefits to other individuals because of outdated information on earning capacity. At the same time, the projected slowdown in growth of the nation’s labor force makes it imperative that those who can work are supported in their efforts to do so. In reexamining the fundamental concepts underlying the design of federal disability programs, approaches used by other disability programs may offer valuable insights. For example, our prior review of three private disability insurers shows that they have fundamentally reoriented their disability systems toward building the productive capacities of people with disabilities, while not jeopardizing the availability of cash benefits for people who are not able to return to the labor force. As we previously reported, to fully incorporate scientific advances and labor market changes into the disability programs would require more fundamental change, such as revisiting the programs’ basic orientation from incapacity to capacity. Reorienting programs in this direction would align them with broader social changes that focus on building and supporting the work capacities of people with disabilities. Such a reorientation would require examining complex program design issues such as beneficiaries’ access to medical care and assistive technologies, the benefits offered and their associated costs, and strategies to return beneficiaries to work. Moreover, reorientation of the federal disability programs would necessitate the integration of the many programs and policies affecting people with disabilities, including those of DOD and VA. Mr. Chairman, this concludes my prepared remarks. I would be happy to answer any questions that you or the other Subcommittee members might have. For further information regarding this testimony, please contact me at (202) 512-7101 or Carol Dawn Petersen at (202) 512-7215. Suit Chan, Beverly Crawford, and Shelia Drake also contributed to this statement. Benefits provided Cash benefits to workers and their dependents who qualify as beneficiaries under the Old-Age Survivors, and Disability Insurance (OASDI) programs of the Social Security Act. OASDI replaces a portion of earnings lost as a result of retirement, disability, or death. Cash benefits to retired or disabled railroad workers, their dependents and survivors. Railroad workers may also receive sickness and unemployment benefits. Cash benefits to coal miners who have become totally disabled due to coal workers’ pneumoconiosis, and to widows and other surviving dependents of miners who have died of this disease Cash benefits to retired or disabled federal employees, and survivors of federal employees and retirees. Eligibility The worker and his/her eligible family members must meet different sets of requirements for each type of benefit. An underlying condition of payment of most benefits is that the worker has contributed to Social Security for the required period of time. Railroad worker must have had at least 120 months of creditable railroad service or 60 months of creditable railroad service if such service was performed after 1995. Coal miner must have worked in the nation’s coal mines or a coal preparation facility and become totally disabled from pneumoconiosis. Federal employees whose initial federal employment began after December 31, 1983, or who voluntarily switched from Civil Service Retirement System (CSRS) to FERS. The worker must have at least 5 years of creditable civilian service. Survivor and disability benefits are available after 18 months of civilian service Specific eligibility requirements and benefit amounts vary from state to state. Various cash and medical benefits to workers injured while working or who have occupational diseases. Temporary financial assistance to eligible workers who are unemployed through no fault of their own and are actively engaged in job search. Short- or long-term disability insurance, or both, to replace income lost by employees because of injuries and illnesses. Worker must meet the state requirements for wages earned or time worked during an established period of time, and be determined unemployed through no fault of his/her own, and meet other eligibility requirements of his/her state law. Specific eligibility requirements vary from plan to plan. | Because pending legislation would modify current law, which requires that military retirement pay be reduced by the amount of VA disability compensation benefit received, the Subcommittee on Personnel, Senate Committee on Armed Services asked GAO to discuss the treatment of concurrent benefit receipt in other programs. GAO was also asked to discuss its broader work on federal disability programs. Three factors are important to weigh in deliberations on the merits of modifying the military offset provision. First, many benefit programs use offset provisions when individuals qualify for benefits from more than one program. Generally, the provisions are designed to treat beneficiaries of multiple programs fairly and equitably in relation to all other program beneficiaries, consistent with the program's purpose. Moreover, eliminating the military retirement offset provision could establish a precedent for other federal benefit programs that could prove costly. Second, the proposed modifications to the concurrent receipt provisions in the military retirement system would have implications not only for the Department of Defense's retirement costs but would also increase the demand placed on the Department of Veterans Affairs' (VA) claim processing system. This would come at a time when the system is still struggling to correct problems with quality assurance and timeliness. Third, such increased demand would come at a time when the VA disability program compensation, along with other federal disability programs, is facing the need for more fundamental reform. Modifying the concurrent receipt provisions adds to the current patchwork of federal disability policies and programs at a time when transformation and modernization are needed. While we are not taking a position on whether military retirement should be modified, as the Congress and other policymakers deliberate this issue, it would be appropriate to consider how modifying the offset would affect the pursuit of more fundamental reforms. |
The safety and quality of the U.S. food supply is governed by a highly complex system stemming from 30 principal laws related to food safety that are administered by 15 agencies. In addition, dozens of interagency agreements are intended to address a wide range of food safety-related activities. The federal system is supplemented by the states, which have their own statutes, regulations, and agencies for regulating and inspecting the safety and quality of food products. USDA and FDA, within the Department of Health and Human Services, have most of the regulatory responsibilities for ensuring the safety of the nation’s food supply and account for most federal food safety spending. Under the Federal Meat Inspection Act, the Poultry Products Inspection Act, and the Egg Products Inspection Act, USDA is responsible for the safety of meat, poultry, and certain egg products. FDA, under the Federal Food, Drug and Cosmetic Act, and the Public Health Service Act, regulates all other foods, including whole (or shell) eggs, seafood, milk, grain products, and fruits and vegetables. Appendix 1 summarizes the agencies’ food safety responsibilities. The existing statutes also give the agencies different regulatory and enforcement authorities. For example, food products under FDA’s jurisdiction may be marketed without the agency’s prior approval. On the other hand, food products under USDA’s jurisdiction must generally be inspected and approved as meeting federal standards before being sold to the public. Under current law, UDSA inspectors maintain continuous inspection at slaughter facilities and examine each slaughtered meat and poultry carcass. They also visit each processing facility at least once during each operating day. For foods under FDA’s jurisdiction, however, federal law does not mandate the frequency of inspections (which FDA typically conducts every 1 to 5 years). Although recent legislative changes have strengthened FDA’s enforcement authorities, the division of inspection authorities and other food safety responsibilities has not changed. As we have reported, USDA traditionally has had more comprehensive enforcement authority than FDA; however, the Public Health Security and Bioterrorism Preparedness and Response Act of 2002 granted FDA additional enforcement authorities that are similar to USDA’s. For example, FDA now requires all food processors to register with the agency so that they can be inspected. FDA also has the authority to temporarily detain food products when it has credible evidence that the products present a threat of serious adverse health consequences. Moreover, FDA requires that entities such as the manufacturers, processors, and receivers of imported foods keep records so that FDA can identify the immediate previous source and the immediate subsequent recipients of food. This record-keeping authority is designed to help FDA track foods in the event of future health emergencies, such as terrorism-related contamination. In addition, FDA now requires advance notice of imported food shipments under its jurisdiction. Despite these additional authorities, important differences remain between the agencies’ inspection and enforcement authorities. For example, the Federal Meat Inspection Act and the Poultry Products Inspection Act require that meat and poultry products be inspected and approved for sale (i.e., stamped by USDA inspectors). The Federal Food, Drug and Cosmetic Act does not require premarket approval, in general, for FDA-regulated food products. Finally, following the events of September 11, 2001, in addition to their established food safety and quality responsibilities, the federal agencies began to address the potential for deliberate contamination of agriculture and food products. In 2001, by executive order, the President added the food industry to the list of critical infrastructure sectors that need protection from possible terrorist attack. As a result of this order, the Homeland Security Act of 2002 establishing the Department of Homeland Security, and subsequent presidential directives, the Department of Homeland Security provides overall coordination on how to protect the U.S. food supply from deliberate contamination. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 also included numerous provisions to strengthen and enhance food safety and security. Many proposals have been made to consolidate the U.S. food safety system. In 2001, parallel Senate and House bills proposed consolidating inspections and other food safety responsibilities in a single independent agency. In 2004 and 2005, legislation was again introduced in the Senate and the House to establish a single food safety agency. This proposed legislation would combine the two food safety regulatory programs of USDA and FDA, along with a voluntary seafood inspection program operated by the National Marines Fisheries Service (NMFS) in the Department of Commerce. In addition, in 1998, the National Academy of Sciences recommended integrating the U.S. food safety system and suggested several options, including a single food safety agency. More recently, the National Commission on the Public Service recommended that government programs designed to achieve similar outcomes be combined into one agency and that agencies with similar or related missions be combined into large departments. The commission chairman testified before the Congress that important health and safety protections fail when responsibility for regulation is dispersed among several departments, as is the case with the U.S. system. The four agencies we examined—USDA, FDA, the Environmental Protection Agency (EPA), and NMFS—are involved in key program functions related to food safety. These functions include inspection and enforcement, research, risk assessment, education and outreach, rulemaking and standard setting, surveillance and monitoring, food security, and administration. These agencies spend resources on similar food safety activities to ensure the safety of different food products. Table 1 illustrates similar activities that these agencies conduct. In fiscal year 2003, the four federal agencies spent nearly $1.7 billion on food safety-related activities. As figure 1 shows, USDA and FDA together are responsible for nearly 90 percent of federal expenditures for food safety. As figure 2 shows, most of the agencies’ expenditures were incurred for inspection/enforcement activities, including inspections of domestic and imported food. However, these expenditures are not based on the volume of foods regulated by the agencies or consumed by the public. USDA’s activities account for almost three-quarters of the agencies’ inspection and enforcement expenditures. That is, the majority of federal expenditures for food safety inspection are directed toward USDA’s programs for ensuring the safety of meat, poultry, and egg products; however, USDA is responsible for regulating about 20 percent of the food supply. In contrast, FDA, which is responsible for regulating about 80 percent of the food supply, accounted for only about 24 percent of these expenditures. As a result of the multiple laws governing food safety, several federal agencies conduct activities—inspections of domestic and imported foods, training, research, risk assessment, education, and rulemaking—that can serve overlapping, if not identical, purposes. USDA and FDA conduct overlapping, and even duplicative, inspections at more than 1,400 domestic facilities that produce foods such as canned goods and frozen entrees. Both agencies inspect these facilities because each has statutory responsibility for the safety of different foods or food ingredients. USDA inspects canning facilities at least daily if the company produces canned beans containing meat and poultry. If the facility produces canned beans without meat or poultry, FDA also inspects it, with a frequency ranging from 1 to 5 years. USDA and FDA inspections have common features—both agencies spend inspection resources to verify that facilities are sanitary and follow good manufacturing practices, such as verifying that facilities do not have rodent or insect infestations. At jointly regulated facilities, both USDA and FDA inspectors verify that HACCP systems are in place. In these instances, each agency verifies that the facility has created and implemented a HACCP plan specific to the products that the agency regulates. Each agency’s regulations require the facility to maintain separate HACCP plans for each product and to develop separate analyses of critical control points and separate strategies to mitigate or eliminate food contaminants. While separate HACCP plans are generally necessary to address the specific hazards associated with specific food products, maintaining these separate plans, and the associated inspections and documentation that each agency requires, can be burdensome. For example, at a facility we visited that produces both crab cakes and breaded chicken, the manager must maintain a seafood HACCP plan and a poultry HACCP plan. He said that although both plans have similar elements, each agency’s inspectors expect different levels of detail for the plans—something the manager finds confusing and difficult to comply with. USDA and FDA inspections of the same food-processing facility represent, in our view, an inefficient use of scarce government resources. For example, at a plant that produces both meat and seafood products, a USDA inspector told us that as part of his daily, routine inspections he walks through the seafood processing and storage section of the plant. (See fig. 3.) However, because FDA regulates seafood, the USDA inspector does not monitor or inspect the seafood storage section. The inspector noted that, with minimum training on seafood temperature controls, he could inspect this section of the plant as well. USDA headquarters officials said the agency’s inspectors are capable of taking on FDA’s inspection responsibilities at jointly regulated facilities, given the proper resources and training. USDA and FDA have new tools that could help reduce overlap in inspections. Under the Bioterrorism Act, FDA could commission USDA inspectors, who are present every day at these jointly regulated facilities, to inspect FDA-regulated food. In doing so, FDA could reduce overlapping inspections and redirect resources to other facilities for which it has sole jurisdiction. While they did not disagree in principle with the benefits of such an arrangement, FDA officials said that the savings would be somewhat offset because FDA would likely have to reimburse USDA for the costs of those inspections. Furthermore, FDA officials said that they do not currently plan to pursue this option and have not conducted any analyses of the costs or savings associated with it. USDA officials commented that their inspectors are fully occupied and that they would need to be trained before conducting joint inspections. Overlaps also occur at seafood processing facilities that both FDA and NMFS inspect. NMFS currently inspects approximately 275 domestic seafood facilities, and FDA inspects some of these plants as part of FDA’s surveillance program. NMFS conducts safety and sanitation inspections, as well as other product quality inspections, on a fee-for-service basis. NMFS inspectors verify sanitation procedures, HACCP compliance, and good manufacturing practices—many of the same components of an FDA inspection. Although the two agencies’ seafood safety inspections are similar, FDA does not take into account whether NMFS has already inspected a particular facility when determining how frequently its inspectors should visit that same facility. FDA officials said they do not rely on NMFS inspections for two reasons. First, FDA officials believe that NMFS has a potential conflict of interest because companies pay NMFS for these inspections; and therefore, as a regulatory agency, FDA should not rely on them. NMFS officials disagreed, stating that their fee-for-service structure does not affect their ability to conduct objective inspections. Furthermore, they noted, when NMFS inspectors find noncompliance with FDA regulations, they refer companies to FDA and/or to state regulatory authorities. NMFS officials stated that companies that contract with NMFS need the agency’s certification in order to satisfy their customers. Second, FDA officials believe, it is difficult for FDA to determine which facilities NMFS inspects at any given time because NMFS’ inspection schedules fluctuate often, according to changes in NMFS’ contracts with individual companies. However, we believe that if FDA were to recognize the results of NMFS’ inspection findings in targeting its resources, it could decrease or eliminate inspections at facilities that NMFS inspectors find are in compliance with sanitation and HACCP regulations. Both USDA and FDA maintain inspectors at 18 U.S. ports of entry to inspect imported food but do not share inspection resources. In fiscal year 2004, USDA spent almost $16 million on imported food inspections, and FDA spent about $121 million. According to USDA inspectors we interviewed, FDA-regulated imported foods are sometimes handled and stored in USDA-approved import inspection facilities. Although USDA inspectors are present at these ports more often than FDA inspectors, USDA inspectors have no jurisdiction over FDA-regulated products and, therefore, the FDA-regulated products may remain at the facilities for some time awaiting FDA inspection. FDA and USDA are also not sharing information they gather during their respective evaluations and/or visits to foreign countries to assess food safety conditions. For example, USDA evaluated 34 countries in 2004 to determine whether these countries’ food safety systems for ensuring the safety of meat and poultry are equivalent to that of the United States. FDA conducted inspections in 6 of these countries, but officials said they do not take USDA’s evaluations of the foreign countries’ food safety systems into account when determining which countries to visit and that USDA’s findings would be of little use to FDA because they relate to products under USDA’s jurisdiction. Both USDA and FDA spend resources to provide similar training to food inspection personnel. USDA spent about $13.4 million and FDA spent about $1.7 million in fiscal year 2004. We found that, to a considerable extent, food inspection training addresses the same subjects—such as plant sanitation, good manufacturing practices, and HACCP principles, albeit for different food products. FDA’s online curriculum includes over 106 courses that address topics common to both USDA and FDA, as well as courses that are specific to FDA’s regulations and enforcement authorities. NMFS currently uses 74 of these courses to train its seafood inspectors. NMFS officials cite benefits to using FDA’s online training, such as accessibility to training materials at times other than when their inspectors are “on duty,” as well as cost savings attributable to reduced expenses for course materials and management. We identified 71 interagency agreements that the principal food safety agencies—USDA, FDA, EPA, and NMFS—have entered into to better protect the public health by addressing jurisdictional boundaries, coordinating activities, reducing overlaps, and leveraging resources. About one-third (24) of the agreements highlight the need to reduce duplication and overlap or make efficient and effective use of resources. However, the agencies cannot take full advantage of these agreements because they do not have adequate mechanisms for tracking them and, in some cases, do not effectively implement them. Agency officials had difficulty identifying the food safety agreements they are party to, and in many instances, the agencies did not agree on the number of agreements they had entered into. In addition, for the two comprehensive inspection-related agreements that we examined in detail, the agencies are not ensuring that their provisions are adhered to or that the overall objectives of the agreements are being achieved. For example: USDA and FDA are not fully implementing an agreement to exchange information about jointly regulated facilities in order to permit more efficient use of both their resources and contribute to improved public health protection. Under this agreement, the agencies are to share inspection information, but FDA does not routinely consider compliance information from USDA when deciding how to target its inspection resources. Also, the agreement calls for the agencies to explore the feasibility of granting each other access to appropriate computer- monitoring systems so that each agency can track inspection findings. However, the agencies maintain separate databases and the inspectors with whom we spoke continue to be largely unaware of a facility’s history of compliance with the other agency’s regulations. Inspectors told us that compliance information might be helpful when inspecting jointly regulated facilities so they could focus on past violations. An agreement between FDA and NMFS recognizes the agencies’ related responsibilities at seafood-processing establishments. The agreement details actions the agencies can take to enable each to discharge its responsibilities as effectively as possible, minimizing FDA inspections at these facilities. However, we found that FDA is not using information from NMFS inspections, which could allow it to reduce the number of inspections at those facilities. Also, FDA rarely notifies NMFS of seizure actions it takes against NMFS-inspected plants, as outlined in the agreement. Although FDA is not implementing the agreement, it has recognized the potential benefits of working with NMFS to leverage resources. In a January 2004 letter to the Under Secretary of Commerce for Oceans and Atmosphere, the then-Commissioner of FDA noted, among other things, that using NMFS inspectors could be cost effective because the NMFS inspectors may already be on-site and the FDA inspector therefore would not have to travel to conduct an inspection. The stakeholders we contacted—selected industry associations, food- processing companies, consumer groups, and academic experts—disagree on the extent to which overlaps exist and on how best to improve the federal structure. Most of these stakeholders agree that the laws and regulations governing the system should be modernized so that scientific and technological advancements can be used to more effectively and efficiently control current and emerging food safety hazards. However, they differed about whether to consolidate food safety inspection and related functions into a single federal agency. Industry Associations: Representatives of industry associations do not see the need to consolidate food safety-related functions, but they see the need for minor changes within the existing regulatory framework to enhance communication and coordination among the existing agencies. Food Processing Companies: Representatives from the individual food companies inspected by USDA and FDA believe that consolidation would improve the effectiveness and efficiency of the system and ensure that food safety resources are distributed based on the best available science. They also said that overlaps can be burdensome or confusing. The representatives did not see the added value of FDA’s once-a-year (or less) inspections because USDA inspectors already visit their plants daily. At one company, USDA and FDA inspectors gave the plant manager contradictory instructions—the USDA inspector did not want the company to paint sterilization equipment because he determined that paint chips could contaminate the food; whereas the FDA inspector told the company to paint the same equipment because he determined that it would be easier to identify sanitation problems on lightly painted surfaces. Academics and Consumer Groups: Academics and consumer groups support consolidating food safety inspection and related functions into a single agency. One group stated that the laws do not build prevention into the farm-to-table continuum and divide responsibility and accountability for food safety among federal agencies. Further, according to this group, the laws prevent risk-based allocation of resources across the federal food safety agencies. The division of responsibility among several government agencies responsible for food safety is not unique to the United States. According to food safety officials in seven countries whose consolidations of food safety systems we examined, they faced similar fragmentation and division of responsibilities in their systems. As reported in February 2005, we examined the efforts of Canada, Denmark, Ireland, Germany, the Netherlands, New Zealand, and the United Kingdom to streamline and consolidate their food safety systems. We found that, in each case, these countries (1) modified existing laws to achieve the necessary consolidation and (2) established a single agency to lead food safety management or enforcement of food safety legislation. We acknowledge that these countries have smaller populations than the United States, but they face several similarities in their efforts to ensure safe food. These countries, like the United States, are high-income countries in which consumers have very high expectations about the safety of their food supplies. In addition, U.S. consumers’ spending on food as a percentage of total spending is somewhat similar to that of these seven countries, ranging from about 10 percent in the United States to over 16 percent in Ireland and the United Kingdom. In general, high- income countries tend to spend a smaller percentage of their income on food than low-income countries. The seven countries’ approaches for modifying their systems, of course, differed. For example, Denmark created a new federal agency in which it consolidated almost all food safety functions and activities, including inspections, which were previously distributed among several government agencies. In contrast, Germany’s new food safety agency functions as a coordinating body to lead food safety management, while the German federal states continue to be responsible for overseeing food inspections performed by local governments. These countries had two primary reasons for consolidating their food safety systems—public concern about the safety of the food supply and the need to improve program effectiveness and efficiency. In addition, an important factor motivating the European Union (EU) countries’ consolidations has been the need to comply with recently adopted EU legislation. These EU changes aim to harmonize and simplify its food safety legislation and to create a single, transparent set of food safety rules that is applicable to all EU-member countries. As we previously reported, Canada reorganized its food safety system in 1997. As part of its consolidation of food safety functions, Canada also assigned responsibilities for animal disease control and feed inspections to the Canadian Food Inspection Agency (CFIA). As a result, CFIA is responsible for detecting animal diseases that may affect human health, such as mad cow disease in cattle as well as for preventing the introduction and spread of the disease through animal feed. Not unexpectedly, the countries faced challenges in implementing their new systems. Many countries had to determine (1) whether to place the new agency within the existing health or agriculture ministry or establish it as a stand-alone agency and (2) what responsibilities the new agency would have. For example, Ireland chose to place its new independent food safety agency under its existing Department of Health and Children, in part, to separate food safety responsibilities from the promotion of the food industry, which is the responsibility of the Department of Agriculture and Food. On the other hand, to separate food safety regulation from political pressures, New Zealand established a semi-autonomous food safety agency attached to the Ministry of Agriculture and Forestry. Officials in several countries also cited challenges in helping employees assimilate into the new agency’s culture and support its priorities. As expected, most countries incurred start-up costs in reorganizing, including the costs associated with acquiring buildings and purchasing new laboratory equipment. Some countries also reported that they experienced a temporary reduction in the quantity of food safety activities performed due to consolidation-related disruptions. None of the countries has conducted an analysis to compare the effectiveness and efficiency of its consolidated food safety system with that of the previous system. However, government officials in these countries as well as other stakeholders consistently stated that consolidation of their systems has led to significant qualitative improvements in operations that enhance effectiveness or efficiency. According to these officials, the benefits included reduced overlaps in inspections, more targeted inspections based on food safety risk, more consistent or timely enforcement of food safety laws and regulations, and greater clarity in responsibilities. Danish officials stated that consolidation and the accompanying reform of food safety laws facilitated risk-based inspections. The frequency of most inspections is now based on an individual food product’s safety risk and on an individual company’s food safety record, not on agencies’ jurisdiction, as was the case before consolidation. As a result, the frequency of inspections at some food processing plants and of lower risk food products has been reduced, making more resources available for inspections of higher risk companies and foods. Government officials in Canada, the Netherlands, and Denmark stated that some cost savings may be achieved as a result of changes that have already taken place or are expected from planned changes needed to complete their consolidation efforts. For example, Dutch officials said that reduced duplication in food safety inspections would likely result in decreased spending. In addition, they anticipate savings from an expected 25-percent reduction in administrative and management personnel and from selling excess property. Figures 4 and 5 illustrate key functions and activities that the governments of Denmark and Canada decided to consolidate in order to achieve more efficient food safety systems. In recent years, many proposals from the Congress and others have been made to reform existing laws and consolidate the governmental structure for ensuring the safety of the food supply. As we have reported in the past, the current system is fragmented and causes inefficient use of resources, inconsistent oversight and enforcement, and ineffective coordination. We have recommended that the Congress consider statutory and organizational reforms, and we continue to believe that the benefits of establishing a single national system for the regulation of our food supply outweigh the costs. In making these recommendations, we fully recognize the time and effort needed to develop a reorganization plan and to transfer authorities, as necessary, under such a reorganization. We also recognize that improvements short of restructuring the current system can be made to help reduce overlaps and duplication, and to leverage existing resources. Therefore, in the report that you are releasing today, we make several recommendations to that end. For example, if cost effective, we recommend that FDA, as authorized under the Bioterrorism Act, commission USDA inspectors to carry out inspections of FDA- regulated foods at food establishments that are under their joint jurisdiction. We also recommend that USDA and FDA examine the feasibility and cost effectiveness of establishing a joint training program for their food inspectors. For further information about this testimony, please contact Robert A. Robinson, Managing Director, Natural Resources and Environment, (202) 512-3841. Maria Cristina Gobin, Terrance N. Horner, Jr., Gary Brown, Katheryn Hubbell, Carol Herrnstadt Shulman, and Katherine Raheb made key contributions to this statement. Oversight of Food Safety Activities: Federal Agencies Should Pursue Opportunities to Reduce Overlap and Better Leverage Resources. GAO-05- 213. Washington, D.C.: March 30, 2005. Homeland Security: Much Is Being Done to Protect Agriculture from a Terrorist Attack, but Important Challenges Remain. GAO-05-214. Washington, D.C.: March 8, 2005. Mad Cow Disease: FDA’s Management of the Feed Ban Has Improved, but Oversight Weaknesses Continue to Limit Program Effectiveness. GAO-05- 101. Washington, D.C.: February 25, 2005. Food Safety: Experiences of Seven Countries in Consolidating Their Food Safety Systems. GAO-05-212. Washington, D.C.: February 22, 2005. Food Safety: USDA and FDA Need to Better Ensure Prompt and Complete Recalls of Potentially Unsafe Food. GAO-05-51. Washington, D.C.: October 7, 2004. Posthearing Questions Related to Fragmentation and Overlap in the Federal Food Safety System. GAO-04-832R. Washington, D.C.: May 26, 2004. Federal Food Safety and Security System: Fundamental Restructuring Is Needed to Address Fragmentation and Overlap. GAO-04-588T. Washington, D.C.: March 30, 2004. Food Safety: FDA’s Imported Seafood Safety Program Shows Some Progress, but Further Improvements Are Needed. GAO-04-246. Washington, D.C.: January 30, 2004. Bioterrorism: A Threat to Agriculture and the Food Supply. GAO-04-259T. Washington, D.C.: November 19, 2003. Combating Bioterrorism: Actions Needed to Improve Security at Plum Island Animal Disease Center. GAO-03-847. Washington, D.C.: September 19, 2003. Results-Oriented Government: Shaping the Government to Meet 21st Century Challenges. GAO-03-1168T. Washington, D.C.: September 17, 2003. School Meal Programs: Few Instances of Foodborne Outbreaks Reported, but Opportunities Exist to Enhance Outbreak Data and Food Safety Practices. GAO-03-530. Washington, D.C.: May 9, 2003. Agricultural Conservation: Survey Results on USDA’s Implementation of Food Security Act Compliance Provisions. GAO-03-492SP. Washington, D.C.: April 21, 2003. Food-Processing Security: Voluntary Efforts Are Under Way, but Federal Agencies Cannot Fully Assess Their Implementation. GAO-03-342. Washington, D.C.: February 14, 2003. Meat and Poultry: Better USDA Oversight and Enforcement of Safety Rules Needed to Reduce Risk of Foodborne Illnesses. GAO-02-902. Washington, D.C.: August 30, 2002. Foot and Mouth Disease: To Protect U.S. Livestock, USDA Must Remain Vigilant and Resolve Outstanding Issues. GAO-02-808. Washington, D.C.: July 26, 2002. Genetically Modified Foods: Experts View Regimen of Safety Tests as Adequate, but FDA’s Evaluation Process Could Be Enhanced. GAO-02-566. Washington, D.C.: May 23, 2002. Food Safety: Continued Vigilance Needed to Ensure Safety of School Meals. GAO-02-669T. Washington, D.C.: April 30, 2002. Mad Cow Disease: Improvements in the Animal Feed Ban and Other Regulatory Areas Would Strengthen U.S. Prevention Efforts. GAO-02-183. Washington, D.C.: January 25, 2002. Food Safety: Weaknesses in Meat and Poultry Inspection Pilot Should Be Addressed Before Implementation. GAO-02-59. Washington, D.C.: December 17, 2001. Food Safety and Security: Fundamental Changes Needed to Ensure Safe Food.GAO-02-47T. Washington, D.C.: October 10, 2001. Food Safety: CDC Is Working to Address Limitations in Several of Its Foodborne Disease Surveillance Systems. GAO-01-973. Washington, D.C.: September 7, 2001. Food Safety: Overview of Federal and State Expenditures. GAO-01-177. Washington, D.C.: February 20, 2001. Food Safety: Federal Oversight of Seafood Does Not Sufficiently Protect Consumers. GAO-01-204. Washington, D.C.: January 31, 2001. Food Safety: Actions Needed by USDA and FDA to Ensure That Companies Promptly Carry Out Recalls. GAO/RCED-00-195. Washington, D.C.: August 17, 2000. Food Safety: Improvements Needed in Overseeing the Safety of Dietary Supplements and “Functional Foods.” GAO/RCED-00-156. Washington, D.C.: July 11, 2000. School Meal Programs: Few Outbreaks of Foodborne Illness Reported. GAO/RCED-00-53. Washington, D.C.: February 22, 2000. Meat and Poultry: Improved Oversight and Training Will Strengthen New Food Safety System. GAO/RCED-00-16. Washington, D.C.: December 8, 1999. Food Safety: Agencies Should Further Test Plans for Responding to Deliberate Contamination. GAO/RCED-00-3. Washington, D.C.: October 27, 1999. Food Safety: U.S. Needs a Single Agency to Administer a Unified, Risk- Based Inspection System. GAO/T-RCED-99-256. Washington, D.C.: August 4, 1999. Food Safety: U.S. Lacks a Consistent Farm-to-Table Approach to Egg Safety. GAO/RCED-99-184. Washington, D.C.: July 1, 1999. Food Safety: Experiences of Four Countries in Consolidating Their Food Safety Systems. GAO/RCED-99-80. Washington, D.C.: April 20, 1999. Food Safety: Opportunities to Redirect Federal Resources and Funds Can Enhance Effectiveness. GAO/RCED-98-224. Washington, D.C.: August 6, 1998. Food Safety: Federal Efforts to Ensure Imported Food Safety Are Inconsistent and Unreliable. GAO/T-RCED-98-191. Washington, D.C.: May 14, 1998. Food Safety: Federal Efforts to Ensure the Safety of Imported Foods Are Inconsistent and Unreliable. GAO/RCED-98-103. Washington, D.C.: April 30, 1998. Food Safety: Agencies’ Handling of a Dioxin Incident Caused Hardships for Some Producers and Processors. GAO/RCED-98-104. Washington, D.C.: April 10, 1998. Food Safety: Fundamental Changes Needed to Improve Food Safety. GAO/RCED-97-249R. Washington, D.C.: September 9, 1997. Food Safety: Information on Foodborne Illnesses. GAO/RCED-96-96. Washington, D.C.: May 8, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | GAO has issued many reports documenting problems resulting from the fragmented nature of the federal food safety system--a system based on 30 primary laws. This testimony summarizes GAO's most recent work on the federal system for ensuring the safety of the U.S. food supply. It provides (1) an overview of food safety functions, (2) examples of overlapping and duplicative inspection and training activities, and (3) observations on efforts to better manage the system through interagency agreements. It also provides information on other countries' experiences with consolidation and the views of key stakeholders on possible consolidation in the United States. USDA and FDA have primary responsibility for overseeing the safety of the U.S. food supply; the Environmental Protection Agency (EPA) and the National Marine Fisheries Service also play key roles. In carrying out their responsibilities, these agencies spend resources on a number of overlapping activities, particularly inspection/enforcement, training, research, and rulemaking, for both domestic and imported food. For example, both USDA and FDA conduct similar inspections at 1,451 dual jurisdiction establishments--facilities that produce foods regulated by both agencies. To better manage the fragmented federal system, these agencies have entered into at least 71 interagency agreements--about a third of them highlight the need to reduce duplication and overlap or make efficient and effective use of resources. The agencies do not take full advantage of these agreements because they do not have adequate mechanisms for tracking them and, in some cases, do not fully implement them. Selected industry associations, food companies, consumer groups, and academic experts disagree on the extent of overlap, on how best to improve the federal system, and on whether to consolidate food safety-related functions into a single agency. However, they agreed that laws and regulations should be modernized to more effectively and efficiently control food safety hazards. As GAO recently reported, Canada, Denmark, Ireland, Germany, the Netherlands, New Zealand, and the United Kingdom also had fragmented systems. These countries took steps to consolidate food safety functions--each country modified its food safety laws and established a single agency to lead food safety management or enforcement of food safety legislation. |
Port security in general has improved as a result of the development of organizations and programs such as Area Maritime Security Committees (area committees), Area Maritime Security Plans (area plans), maritime security exercises, and the International Port Security Program, but challenges to successful implementation of these efforts remain. Additionally, management of these programs will need to address additional requirements directed by the SAFE Port Act. Area committees and interagency operational centers have improved information sharing, but the types and ways information is shared varies. Area plans are limited to security incidents and could benefit from unified planning to include an all-hazards approach. Maritime security exercises would benefit from timely and complete after action reports, increased collaboration across federal agencies, and broader port level coordination. The Coast Guard’s International Port Security Program is currently evaluating the antiterrorism measures maintained at foreign seaports. Two main types of forums have developed as ways for agencies to coordinate and share information about port security—area committees and interagency operational centers. Area committees serve as a forum for port stakeholders, facilitating the dissemination of information through regularly scheduled meetings, issuance of electronic bulletins, and sharing key documents. MTSA provided the Coast Guard with the authority to create area committees—composed of federal, state, local, and industry members—that help to develop the area plan for the port. As of June 2006, the Coast Guard had organized 46 area committees. Each has flexibility to assemble and operate in a way that reflects the needs of its port area, resulting in variations in the number of participants, the types of state and local organizations involved, and the way in which information is shared. Some examples of information shared includes assessments of vulnerabilities at specific port locations, information about potential threats or suspicious activities, and Coast Guard strategies intended for use in protecting key infrastructure. Interagency operational centers are currently located at three ports— Charleston, South Carolina; Norfolk, Virginia; and San Diego, California. These centers are designed to unite maritime intelligence and operational efforts of various federal and nonfederal participants. Unlike area committees, they are operational in nature with a unified or joint command structure designed to receive information from multiple sources and act on it. However, the centers fulfill varying missions and operations, and thus share different types of information. For example, the Charleston center is led by the Department of Justice and focused solely on port security, while the San Diego center is led by the Coast Guard with missions expanding beyond port security to also include search and rescue activities, drug interdiction, and environmental response. In past work, we have reported that these two types of forums have both been helpful in fostering cooperation and information-sharing. We reported that area committees provided a structure to improve the timeliness, completeness, and usefulness of information sharing between federal and nonfederal stakeholders. These committees were an improvement over previous information-sharing efforts because they established a formal structure and new procedures for sharing information. In contrast to area committees, interagency operational centers can provide continuous information about maritime activities and involve various agencies directly in operational decisions using this information. While we have reported that interagency operational centers have improved information sharing, our past work has also shown the types of information and the way information is shared varies at the operational centers depending on their purpose and mission, leadership and organization, membership, technology, and resources. The SAFE Port Act called for an expansion of interagency operational centers, directing the Secretary of DHS to establish such centers at all high-risk priority ports no later than 3 years after the Act’s enactment. In addition to authorizing the appropriation of funds and requiring DHS to report on potential cost-sharing at the centers, it directs the new interagency operational centers to utilize the same compositional and operational characteristics of existing centers, such as the pilot project operational centers for port security. Currently two more centers are expected to be functional within weeks. These will be located in Jacksonville, Florida, and Seattle, Washington. Like the centers in San Diego and Norfolk, they will both be operated jointly by the Coast Guard and the Navy. In addition, the Coast Guard has developed its own operational centers, called sector command centers, as part of an effort to reorganize and improve its awareness of the maritime domain. These are located at 35 ports to monitor information and to support planned future operations, and some of these sector command centers may include other agencies on either a regular or an ad hoc basis. Information sharing efforts, whether through area committees or interagency operational centers, face challenges in several areas. These challenges include: Obtaining security clearances for port security stakeholders. The lack of federal security clearances among port security stakeholders has been routinely cited as a barrier to information sharing, one of the primary goals of both the area committees and interagency operational centers. In previous reviews, we found that the inability to share classified information may limit the ability to deter, prevent, and respond to a potential terrorist attack. The Coast Guard has seen improvements based on its efforts to sponsor security clearances for members of area committees. In addition, the SAFE Port Act includes a specific provision requiring DHS to sponsor and expedite security clearances for participants in interagency operational centers. However, the extent to which these efforts will ultimately improve information sharing remains unclear. Creating effective working relationships. Another challenge associated with establishing interagency operational centers at all high risk ports is the difficulty associated with encouraging various federal, state and local agencies to collaborate and share information effectively under new structures and procedures. While some of the existing operational centers found success with existing interagency relationships, other high-risk ports might face challenges establishing new working relationships among port stakeholders and implementing their own interagency operational centers. Addressing potential overlapping responsibilities. Overlapping leadership roles between the Coast Guard and FBI have been seen during port security exercises. While the SAFE Port Act designates the Coast Guard Captain of the Port as the incident commander in the event of a transportation security incident, the FBI also has leadership responsibilities in terrorist incidents. It is important that actions across the various agencies are clear and coordinated. Determining relationships among various centers. The relationship between the interagency operations centers and the recently developed Coast Guard sector command centers is still to be determined. We have not studied this issue in depth, but it may bear watching. Area plans are another MTSA requirement, and the specific provisions of the plans have been specified by regulation and Coast Guard directive. Implementing regulations for MTSA specified that area plans include, among other things, operational and physical security measures in place at the port under different security levels, details of the security incident command and response structure, procedures for responding to security threats including provisions for maintaining operations in the port, and procedures to facilitate the recovery of the marine transportation system after a security incident. A Coast Guard Navigation and Vessel Inspection Circular (NVIC) provided a common template for area plans and specified the responsibilities of port stakeholders under the plans. Currently, 46 area plans are in place at ports around the country. The Coast Guard approved the plans by June 1, 2004, and MTSA requires that they be updated at least every 5 years. The SAFE Port Act added a requirement to area plans. To ensure that the waterways are cleared and the flow of commerce through United States ports is reestablished as efficiently and quickly as possible after a security incident, the act specified that area plans include a salvage response provision identifying salvage equipment capable of restoring operational trade capacity. None of our past or current work specifically addresses the extent to which area plans now include this provision. We have, however, conducted other work that has a broader bearing on the scope of area plans, and thus potentially on this provision as well. In a recent report examining how ports are dealing with planning for natural disasters such as hurricanes and earthquakes, we noted that area plans cover security issues but do not include other issues that could have a major impact on a port’s ability to support maritime commerce. As currently written, area plans are concerned with deterring and, to a lesser extent, responding to security incidents. We found, however, that unified consideration of all risks faced by a port, both natural and man-made, may be beneficial. Because of the similarities between the consequences of terrorist attacks and natural or accidental disasters, much of the planning for protection, response, and recovery capabilities is similar across all emergency events. Combining terrorism and other threats can enhance the efficiency of port planning efforts because of the similarity in recovery plans for both natural and security-related disasters. This approach also allows port stakeholders to estimate the relative value of different mitigation alternatives. The exclusion of certain risks from consideration, or the separate consideration of a particular type of risk, gives rise to the possibility that risks will not be accurately assessed or compared, and that too many or too few resources will be allocated toward mitigation of a particular risk. As ports continue to revise and improve their planning efforts, available evidence indicates that, if ports take a system-wide approach, thinking strategically about using resources to mitigate and recover from all forms of disaster, they will be able to achieve the most effective results. Area plans provide a useful foundation for establishing an all-hazards approach. While the SAFE Port Act does not call for expanding area plans in this manner, it does contain a requirement that natural disasters and other emergencies be included in the scenarios to be tested in the Port Security Exercise Program. Based on our work, we found there are challenges in using area committees and plans as the basis for broader all-hazards planning. These challenges include: Determining the extent that security plans can serve all-hazards purposes. We recommended that DHS encourage port stakeholders to use area committees and area plans to discuss all-hazards planning. While MTSA and its implementing regulations are focused on transportation security incidents rather than natural disasters and other types of emergencies, we believe that area plans provide a useful foundation for establishing an all-hazards approach. Some federal officials indicated that separate existing plans can handle the range of threats that ports face. However, there would need to be an analysis of gaps between different types of planning. Finally, DHS noted that most emergency planning should properly remain with state and local emergency management planners and were cautious about the federal government taking on a larger role. MTSA regulations require the Coast Guard Captain of the Port and the area committee to conduct or participate in exercises to test the effectiveness of area plans once each calendar year, with no more than 18 months between exercises. These exercises are designed to continuously improve preparedness by validating information and procedures in the area plan, identifying weaknesses and strengths, and practicing command and control within an incident command/unified command framework. Such exercises have been conducted for the past several years. For example, in fiscal year 2004, the Coast Guard conducted 85 port-based terrorism exercises that addressed a variety of possible scenarios. In August 2005, the Coast Guard and the TSA initiated the Port Security Training Exercise Program (PortSTEP)––an exercise program designed to involve the entire port community, including public governmental agencies and private industry, and intended to improve connectivity of various surface transportation modes and enhance area plans. Between August 2005 and October 2007, the Coast Guard expects to conduct PortSTEP exercises for 40 area committees and other port stakeholders. The SAFE Port Act included several new requirements related to security exercises. It required the establishment of a Port Security Exercise Program to test and evaluate the capabilities of governments and port stakeholders to prevent, prepare for, mitigate against, respond to, and recover from acts of terrorism, natural disasters, and other emergencies at facilities regulated by the MTSA. It also required the establishment of a port security exercise improvement plan process that would identify, disseminate, and monitor the implementation of lessons learned and best practices from port security exercises. Finally, it added natural disasters, such as hurricanes or earthquakes, to be included in the list of scenarios to be tested. Our work has not specifically examined compliance with these new requirements, but our review of these requirements and our work in examining past exercises suggests that implementing a successful exercise program faces several challenges. These challenges include: Setting the scope of the program. It will be necessary to determine how exercise requirements in the SAFE Port Act differ from area committee exercises that are currently performed. Exercises currently conducted by area committees already test the ability of a variety of port stakeholders to work together in the event of a port incident. The potential exists for these efforts to be duplicated under the SAFE Port Act exercise requirements. On the other hand, the SAFE Port Act exercise requirements clearly move beyond previous requirements by including natural disasters and other emergencies in the list of scenarios to be exercised. Ensuring that these scenarios are exercised as part of a comprehensive security program may require a wider scope when exercise planning commences. Completing after-action reports in a timely and thorough manner. In past work, we found that after-action reports were generally submitted late and that many failed to assess each objective that was being exercised. Inability to provide timely and complete reports on exercises represents a lost opportunity to share potentially valuable information across the organization as well as plan and prepare for future exercises. Ensuring that all relevant agencies participate. While exercise preparation and participation is time-consuming, joint exercises are necessary to resolve potential role and incident command conflicts as well as determine whether activities would proceed as planned. Our work has shown that past exercises have not necessarily been conducted in this manner. The security of domestic ports is also dependent on security at foreign ports where cargoes bound for the United States originate. To help secure the overseas supply chain, MTSA required the Coast Guard to develop a program to assess security measures in foreign ports and, among other things, recommend steps necessary to improve security measures in their ports. The Coast Guard established this program, called the International Port Security Program, in April 2004. Under this program, the Coast Guard and host nations review the implementation of security measures in the host nations’ ports against established security standards, such as the International Maritime Organization’s International Ship and Port Facility Security (ISPS) Code. Coast Guard teams have been established to conduct country visits, discuss security measures implemented, and collect and share best practices to help ensure a comprehensive and consistent approach to maritime security in ports worldwide. The conditions of these visits, such as timing and locations, are negotiated between the Coast Guard and the host nation. Coast Guard officials also make annual visits to the countries to obtain additional observations on the implementation of security measures and ensure deficiencies found during the country visits are addressed. As of April 2007, the Coast Guard reported that it has visited 86 countries under this program and plans to complete 29 more visits by the end of fiscal year 2007. The SAFE Port Act and other congressional directions have called for the Coast Guard to increase the pace of its visits to foreign countries. Although MTSA did not set a timeframe for completion of these visits, the Coast Guard initially set a goal to visit all countries that conduct maritime trade with the United States by December 2008. In September 2006, the conference report accompanying the fiscal year 2007 DHS Appropriations Act directed the Coast Guard to “double the amount” at which it was conducting its visits. Subsequently, in October 2006, the SAFE Port Act required the Coast Guard to reassess security measures at the foreign ports every 3 years. Coast Guard officials said they will comply with the more stringent requirements and will reassess countries on a 2-year cycle. With the expedited pace, the Coast Guard now expects to assess all countries by March 2008, after which reassessments will begin. We are currently conducting a review of the Coast Guard’s international enforcement programs, such as the International Port Security Program. Although this work is still in process and not yet ready to be included in this testimony, we have completed a more narrowly scoped review required under the SAFE Port Act regarding security at ports in the Caribbean Basin. As part of this work, we looked at the efforts made by the Coast Guard in the region under the program and the Coast Guard’s findings from the country visits it made in the region. For the countries in this region for which the Coast Guard had issued a final report, the Coast Guard reported that most had “substantially implemented the security code,” while one country that was just recently visited was found to have not yet implemented the code and will be subject to a reassessment. At the facility level, the Coast Guard found several facilities needing improvements in areas such as access controls, communication devices, fencing, and lighting. Because our review of the Coast Guard’s International Port Security Program is still ongoing, we have not yet reviewed the results of the Coast Guard’s findings in other regions of the world. While our larger review is still not complete, Coast Guard officials have told us they face challenges in carrying out this program in the Caribbean Basin. These challenges include: Ensuring sufficient numbers of adequately trained personnel. Coast Guard officials said the faster rate at which foreign ports will now be reassessed will require hiring and training new staff—a challenge they expect will be made more difficult because experienced personnel who have been with the program since its inception are being transferred to other positions as part of the Coast Guard’s rotational policy. These officials will need to be replaced with newly assigned personnel. Another related challenge is that the unique nature of the program requires the Coast Guard to provide specialized training to those joining the program, since very few people in the Coast Guard have had international experience or extensive port security experience. Addressing host nation sovereignty issues. In making arrangements to visit the ports of foreign countries, Coast Guard officials stated that they have occasionally encountered initial reluctance by some countries to allow the Coast Guard to visit their ports due to concerns over sovereignty. In addition, the conditions of the visits, such as timing and locations, are negotiated between the Coast Guard and the host nation. Thus the Coast Guard team making the visit could potentially be precluded from seeing locations that were not in compliance. Many long-standing programs to improve facility security at ports are underway, but new challenges to their successful implementation have emerged. The Coast Guard is required to conduct assessments of security plans and facility inspections, but faces challenges to staff and train staff to meet the additional requirements of the SAFE Port Act. TSA’s TWIC program has addressed some of its initial program challenges, but will continue to face additional challenges as the program rollout continues. Many steps have been taken to ensure transportation workers are properly screened, but redundancies in various background checks have decreased efficiency and highlighted the need for increased coordination. MTSA and its implementing regulations requires owners and operators of covered maritime facilities (such as power stations, chemical manufacturing facilities, and refineries that are located on waterways and receive foreign vessels) to conduct assessments of their security vulnerabilities, develop security plans to mitigate these vulnerabilities, and implement measures called for in the security plans. Under the Coast Guard regulations, these plans are to include such items as measures for access control, responses to security threats, and drills and exercises to train staff and test the plan. The plans are “performance-based,” meaning the Coast Guard has specified the outcomes it is seeking to achieve and has given facilities responsibility for identifying and delivering the measures needed to achieve these outcomes. Facility owners were to have their plans in place by July 1, 2004. The Coast Guard performs inspections of facilities to make sure they are in compliance with their security plans. In 2005, we reported that the Coast Guard completed initial compliance inspections at all MTSA regulated facilities by the end of 2004 and found that approximately 97 percent of maritime facility owners or operators were in compliance with MTSA requirements. The most frequently cited deficiencies related to insufficient controls over access, not ensuring the facility was operating in compliance with security requirements, not complying with facility security officer requirements (such as possessing the required security knowledge or carrying out all duties as assigned), and having insufficient security measures for restricted areas. The Coast Guard reported taking enforcement actions and imposing operational controls, such as suspending certain facility operations, for identified deficiencies. Coast Guard guidance calls for the Coast Guard to conduct on-site facility inspections to verify continued compliance with the plan on an annual basis. The SAFE Port Act required the Coast Guard to conduct at least two inspections of each facility annually, and it required that one of these inspections be unannounced. We are currently conducting a review of the Coast Guard’s efforts for ensuring facilities’ compliance with various MTSA requirements and are not yet in a position to report our findings. However, our previous work showed the Coast Guard faces challenges in carrying out its strategy to review and inspect facilities for compliance with their security plans, and these challenges could be amplified with the additional requirements called for by the SAFE Port Act. These challenges include: Ensuring that sufficient trained inspectors are available. Because security measures are performance-based, evaluating them involves a great deal of subjectivity. For example, inspectors do not check for compliance with a specific procedure; instead, they have to make a judgment about whether the steps the owner or operator has taken provide adequate security. Performance-based plans provide flexibility to owners and operators, but they also place a premium on the skills and experience of inspectors to identify deficiencies and recommend corrective action. This complexity makes it a challenge for the Coast Guard to ensure that its inspectors are trained appropriately and have sufficient guidance to make difficult judgments about whether owners and operators have taken adequate steps to address vulnerabilities. Additionally, once proficient at their job, inspectors often face reassignment. Further, the rotation period has been shortened by 1 year—from 4 years to 3. Evaluating compliance activities so they can be improved. In our previous work we also recommended that the Coast Guard evaluate its compliance inspection efforts taken during the initial 6-month period after July 1, 2004, and use the results as a means to strengthen its long- term strategy for ensuring compliance. While the Coast Guard agreed with this recommendation, and has taken some steps to evaluate its compliance efforts, it has not conducted a comprehensive evaluation of these efforts to date. Without knowledge that the current approach to MTSA facility oversight is effective, the Coast Guard will be further challenged in planning future oversight activities. MTSA required the Secretary of DHS to, among other things, issue a transportation worker identification card that uses biometrics, such as fingerprints, to control access to secure areas of seaports and vessels. When MTSA was enacted, TSA had already initiated a program to create an identification credential that could be used by workers in all modes of transportation. This program, called the TWIC program, is designed to collect personal and biometric information to validate workers’ identities, conduct background checks on transportation workers to ensure they do not pose a threat to security, issue tamper-resistant biometric credentials that cannot be counterfeited, verify these credentials using biometric access control systems before a worker is granted unescorted access to a secure area, and revoke credentials if disqualifying information is discovered, or if a card is lost, damaged, or stolen. TSA, in partnership with the Coast Guard, is focusing initial implementation on the maritime sector. We have reported several times on the status of this program and the challenges that it faces. Most recently, we reported that TSA has made progress in implementing the TWIC program and addressing problems we previously identified regarding contract planning and oversight and coordination with stakeholders. For example, TSA reported that it added staff with program and contract management expertise to help oversee the contract and developed plans for conducting public outreach and education efforts. The SAFE Port Act contained a requirement for implementing the first major phase of the TWIC program by mid-2007. More specifically, it required TSA to implement TWIC at the 10 highest risk ports by July 1, 2007, conduct a pilot program to test TWIC access control technologies in the maritime environment, issue regulations requiring TWIC card readers based on the findings of the pilot, and periodically report to Congress on the status of the program. TSA is taking steps to address these requirements, such as establishing a rollout schedule for enrolling workers and issuing TWIC cards at ports and conducting a pilot program to test TWIC access control technologies. As TSA begins enrolling workers and issuing TWIC cards this year, it is important that the agency establish clear and reasonable timeframes for implementing TWIC. Further, TSA could face additional challenges as the TWIC implementation progresses. These challenges include: Monitoring the effectiveness of contract planning and oversight. While the steps that TSA reports taking are designed to address the contract planning and oversight problems that we have previously identified and recommendations we have made, the effectiveness of these steps will not be clear until implementation of the TWIC program begins. Ensuring a successful enrollment process. Significant challenges remain in enrolling about 770,000 persons at about 3,500 facilities in the TWIC program. Sufficient communication and coordination to ensure that all individuals and organizations affected by the TWIC program are aware of their responsibilities will require concerted effort on the part of TSA and the enrollment contractor. Addressing access control technologies. TSA and industry stakeholders need to address challenges regarding TWIC access control technologies to ensure that the program is implemented effectively. Without fully testing all aspects of the technology TSA may not be able ensure that the TWIC access control technology can meet the requirements of the system. Given the differences among the facilities and locations where the technology is to be implemented, it may be difficult to test all scenarios. Since the terrorist attacks on September 11, 2001, the federal government has taken steps to ensure that transportation workers, many of whom transport hazardous materials or have access to secure areas in locations such as ports, are properly screened to ensure they do not pose a security risk. For example, the USA PATRIOT Act in October 2001 prohibited states from issuing hazardous material endorsements for a commercial driver’s license without an applicant background check. Background checks are also part of the TWIC program discussed above. Concerns have been raised, however, that transportation workers may face a variety of background checks, each with different standards. A truck driver, for example, is subject to background checks for all of the following: unescorted access to a secure area at a port, unescorted access to a secure area at an airport, expedited border crossings, hauling hazardous materials, or hauling arms or ammunition for the Department of Defense or cargo for the U.S. Postal Service. In July 2004, the 9/11 Commission reported that having too many different biometric standards, travel facilitation systems, credentialing systems, and screening requirements hampers the development of information crucial for stopping terrorists from entering the country, is expensive, and is inefficient. The Commission recommended that a coordinating body raise standards, facilitate information-sharing, and survey systems for potential problems. In August 2004, Homeland Security Directive 11 announced a new U.S. policy to “implement a coordinated and comprehensive approach to terrorist-related screening—in immigration, law enforcement, intelligence, counterintelligence, and protection of the border, transportation systems, and critical infrastructure—that supports homeland security, at home and abroad.” DHS has taken steps, both at the department level and within its various agencies, to consolidate, coordinate, and harmonize such background check programs. At the department level, DHS created SCO in July 2006 to coordinate DHS background check programs. SCO is in the early stages of developing its plans for this coordination. In December 2006, SCO issued a report identifying common problems, challenges, and needed improvements in the credentialing programs and processes across the department. The office awarded a contract in April 2007 that will provide the methodology and support for developing an implementation plan to include common design and comparability standards and related milestones to coordinate DHS screening and credentialing programs. DHS components are currently in the initial stages of a number of their own initiatives. For example, In January 2007, TSA determined that the background checks required for three other DHS programs satisfied the background check requirement for the TWIC program. An applicant who has already undergone a background check in association with any of these three programs does not have to undergo an additional background check and pays a reduced fee to obtain a TWIC card. Similarly, the Coast Guard plans to consolidate four credentials and require that all pertinent information previously submitted by an applicant at a Coast Guard Regional Examination Center be submitted to TSA through the TWIC enrollment process. The SAFE Port Act required us to conduct a study of DHS background check programs similar to the one required of truck drivers to obtain a hazardous material endorsement. Our work on other projects indicates that DHS is likely to face additional challenges in coordinating its background check programs. These challenges include: Ensuring its plans are sufficiently complete without being overly restrictive. The varied background check programs related to transportation workers may have substantially different standards or requirements. SCO will be challenged to coordinate DHS’s background check programs in such a way that any common set of standards developed to eliminate redundant checks meets the varied needs of all the programs without being so strict that it unduly limits the applicant pool or so intrusive that potential applicants are unwilling to take part. Ensuring that accurate performance information is available. Without knowing the potential costs and benefits associated with the number of redundant background checks that would be eliminated through harmonization, DHS lacks the performance information that would allow its program managers to compare their program results with goals. Thus, DHS faces challenges in determining where to target program resources to improve performance. DHS could benefit from a plan that includes, at a minimum, a discussion of the potential costs and benefits associated with the number of redundant background checks that would be eliminated through harmonization. Coordinating across the broader universe of federal background check programs. Many other federal agencies also have background check programs, making coordination a cross-cutting, government- wide issue. DHS could face challenges harmonizing background check programs within DHS and other federal agencies. Several container security programs have been established and matured through the development of strategic plans, human capital strategies, and performance measures. However, these programs continue to face technical and management challenges in implementation. As part of its layered security strategy, CBP developed the Automated Targeting System (ATS), but this system has faced quality assurance challenges since its inception. In the past, CSI has lacked sufficient staff to meet requirements. C-TPAT has faced challenges with validation quality and management in the past, in part due to its rapid growth. The Department of Energy’s (DOE) Megaports Initiative faces ongoing operational and technical challenges in the installation and maintenance of radiation detection equipment at ports. As part of its responsibility for preventing terrorists and weapons of mass destruction from entering the United States, CBP addresses potential threats posed by the movement of oceangoing containers. CBP inspectors at seaports help determine which containers entering the country will undergo inspections and then perform physical inspections of such containers. To carry out this responsibility, CBP uses a layered security strategy that attempts to focus resources on potentially risky cargo containers while allowing other cargo containers to proceed without disrupting commerce. The ATS is one key element of this strategy. CBP uses ATS to review documentation, including electronic manifest information submitted by the ocean carriers on all arriving shipments, to help identify containers for additional inspection. CBP requires the carriers to submit manifest information 24 hours prior to a United States- bound sea container being loaded onto a vessel in a foreign port. ATS is a complex mathematical model that uses weighted rules that assign a risk score to each arriving shipment based on manifest information. CBP inspectors use these scores to help them make decisions on the extent of documentary review or physical inspection to conduct. In our previous work on ATS we found that CBP lacked important internal controls for the administration and implementation of ATS. Despite ATS’s importance to CBP’s layered security strategy, CBP was still in the process of implementing the following key controls: (1) performance metrics to measure the effectiveness of ATS, (2) a comparison of the results of randomly conducted inspections with the results of its ATS inspections, and (3) a simulation and testing environment. At that time CBP was also in the process of addressing recommendations contained in a 2005 peer review. The SAFE Port Act required that the CBP Commissioner take actions to improve ATS. These requirements included such steps as (1) having an independent panel review the effectiveness and capabilities of ATS; (2) considering future iterations of ATS that would incorporate smart features; (3) ensuring that ATS has the capability to electronically compare manifest and other available data to detect any significant anomalies and facilitate their resolution; (4) ensuring that ATS has the capability to electronically identify, compile, and compare select data elements following a maritime transportation security incident; and (5) developing a schedule to address recommendations made by GAO and the Inspectors General of the Department of the Treasury and DHS. From our findings and the further changes to the program enacted by the SAFE Port Act, we identified the following challenge faced by CBP: Implementing the program while internal controls are being developed. The missing internal controls would provide CBP with critical information on how well it screens containers. CBP’s vital mission does not, however, allow it to halt its screening efforts while it put these controls in place. CBP thus faces the challenge of ensuring that it inspects the highest-risk containers even though it lacks information to optimally allocate inspection resources. In response to the threat that a cargo container could be used to smuggle a weapon of mass destruction (WMD) into the United States, the U.S. Customs Service (now CBP) initiated the CSI in January 2002 to detect and deter terrorists from smuggling WMDs via containers before they reach domestic seaports. Under this initiative, foreign governments allow CBP personnel to be stationed at foreign seaports to identify container shipments at risk of containing WMD. CBP personnel refer high-risk shipments to host government officials, who determine whether to inspect the shipment before it leaves for the United States. Host government officials examine shipments with nonintrusive inspection equipment and, if they deem it necessary, open the cargo containers to physically examine the contents inside. Since our last report on the CSI program, CBP has increased the number of seaports that participate in the program from 34 to 50, with plans to expand to a total of 58 ports by the end of this fiscal year. In our previous work, we identified numerous issues affecting the effectiveness of the CSI program. On the positive side, we praised some of the positive interaction and information sharing we found among CBP officials and host nation officials at CSI ports—something that could lead to better targeting and inspections. In some cases where we found problems, CBP took steps to implement our recommendations, such as developing a strategic plan, a human capital strategy, and performance measures. In other cases, CBP found it more difficult to implement our recommendations. For example, they deferred establishing minimum technical requirements for nonintrusive inspection equipment used by host nations at CSI ports. The SAFE Port Act formalized CSI into law and specified factors to be considered in designating seaports as CSI, including risk level, cargo volume, results of Coast Guard assessments, and the commitment of the host government to sharing critical information with DHS. The act also called for DHS to establish minimum technical criteria for the use of nonintrusive inspection equipment in conjunction with CSI and to require that seaports receiving CSI designation operate such equipment in accordance with these criteria. Another provision related to container cargo requires DHS to ensure that integrated scanning systems, using nonintrusive imaging equipment and radiation detection equipment, are fully deployed to scan all containers before their arrival in the United States as soon as possible, but not before DHS determines that such systems meet a number of criteria. The SAFE Port Act addresses a number of the issues we have previously identified, but our work suggests that CBP may face continued challenges going forward. These challenges include: Ensuring sufficient staff are available for targeting. Although CBP’s goal is to target all U.S. bound containers at CSI seaports before they depart for the United States, we previously reported that it has not been able to place enough staff at some CSI ports to do so. Since then, CBP has provided additional support to deployed CSI staff by using staff in the United States (at the National Targeting Center) to screen containers for various risk factors and potential inspection. Developing an international consensus on technical requirements. There are no internationally recognized minimum technical requirements for the detection capability of nonintrusive inspection equipment used to scan containers. Consequently, host nations at CSI seaports use various types of nonintrusive inspection equipment and the detection capabilities of such equipment can vary. Because the inspection a container receives at a CSI seaport could be its only scan before entering the United States, it is important that the detection equipment used meets minimum technical requirements to provide some level of assurance that the presence of WMDs can be detected. Ensuring that designated high-risk containers are inspected. We also found that some containers designated as high risk did not receive an inspection at the CSI seaport. Containers designated as high risk by CSI teams that are not inspected overseas (for a variety of reasons) are supposed to be referred for inspection upon arrival at the U.S. destination port. However, CBP officials noted that between July and September 2004, only about 93 percent of shipments referred for domestic inspection were inspected at a U.S. seaport. According to CBP, it is working on improvements in its ability to track such containers to assure that they are inspected. Another component in the efforts to prevent terrorists from smuggling weapons of mass destruction in cargo containers from overseas locations is the Megaports Initiative, initiated by the Department of Energy’s (DOE) National Nuclear Security Administration in 2003. The goal of this initiative is to enable foreign government personnel at key seaports to use radiation detection equipment to screen shipping containers entering and leaving these ports, regardless of the containers’ destination, for nuclear and other radioactive material that could be used against the United States or its allies. DOE installs radiation detection equipment, such as radiation portal monitors and handheld radioactive isotope identification devices, at foreign seaports that is then operated by foreign government officials and port personnel working at these ports. Through April 2007, DOE had completed installations of radiation detection equipment at nine ports: Freeport, Bahamas; Piraeus, Greece; Puerto Cortes, Honduras; Rotterdam, the Netherlands; Port Qasim, Pakistan; Manila, the Philippines; Port of Singapore; Algeciras, Spain; and Colombo, Sri Lanka. Additionally, DOE has signed agreements to begin work and is in various stages of implementation at ports in 15 other countries: Belgium, Columbia, China, the Dominican Republic, Egypt, Israel, Jamaica, Mexico, Oman, Panama, South Korea, Taiwan, Thailand, the United Arab Emirates, and the United Kingdom. Further, in an effort to expand cooperation, DOE is engaged in negotiations with approximately 20 additional countries in Europe, Asia, the Middle East, and South America. When we reported on this program in March 2005, DOE had made limited progress in gaining agreements to install radiation detection equipment at the highest priority seaports. At that time, DOE had completed work at only two ports and signed agreements to initiate work at five other ports. We also noted that DOE’s cost projections for the program were uncertain, in part because they were based on DOE’s $15 million estimate for the average cost per port. This per port cost estimate may not be accurate because it was based primarily on DOE’s radiation detection assistance work at Russian land borders, airports, and seaports and did not account for the fact that the costs of installing equipment at individual ports vary and are influenced by factors such as a port’s size, its physical layout, and existing infrastructure. Since our review, DOE has developed a strategic plan for the Megaports Initiative and is in the process of revising its per port cost estimate. As DOE continues to implement its Megaports Initiative, it faces several operational and technical challenges specific to installing and maintaining radiation detection equipment at foreign ports. These challenges include: Ensuring the ability to detect radioactive material. Certain factors can affect the general capability of radiation detection equipment to detect nuclear material. For example, some nuclear materials can be shielded with lead or other dense materials to prevent radiation from being detected. In addition, one of the materials of greatest proliferation concern, highly enriched uranium, is difficult to detect because of its relatively low level of radioactivity. Overcoming the physical layout of ports. In its effort to screen cargo containers at foreign ports for radioactive and nuclear materials, DOE faces technical challenges related to these ports’ physical layouts and cargo stacking configurations. To address a part of these challenges at some ports, DOE is testing at Freeport, Bahamas, a device used to transport cargo containers between port locations— known as a straddle carrier—that is outfitted with radiation detection equipment. Sustaining equipment in port environments. Additionally, environmental conditions specific to ports, such as the existence of high winds and sea spray, can affect the radiation detection equipment’s performance and long-term sustainability. To minimize the effects of these conditions, DOE has used steel plates to stabilize radiation portal monitors placed in areas with high winds, such as in Rotterdam, and is currently evaluating approaches to combat the corrosive effects of sea spray on radiation detection equipment. In another provision related to container security and the work to address WMD and related risks, the SAFE Port Act specified that new integrated scanning systems that couple nonintrusive imaging equipment and radiation detection equipment must be pilot tested at three international seaports. It also required that, once fully implemented, the pilot integrated scanning system scan 100 percent of containers destined for the United States that are loaded at such ports. To fulfill these requirements, DHS and DOE jointly announced the formation of a pilot program called the Secure Freight Initiative (SFI) in December 2006, as an effort to build upon existing port security measures by enhancing the U.S. government’s ability to scan containers for nuclear and radiological materials overseas and better assess the risk of inbound containers. In essence, SFI builds upon the CSI and Megaports programs. According to agency officials, the initial phase of the initiative will involve the deployment of a combination of existing container scanning technology—such as x-ray and gamma ray scanners used by host nations at CSI ports to locate high density objects that could be used to shield nuclear materials, inside containers—and radiation detection equipment. The ports chosen to receive this integrated technology are: Port Qasim in Pakistan; Puerto Cortes in Honduras; and Southampton in the United Kingdom. Three other ports located in Singapore, the Republic of Korea, and Oman will receive more limited deployment of these technologies as part of the pilot program. According to DHS, containers from these ports will be scanned for radiation and other risk factors before they are allowed to depart for the United States. If the scanning systems indicate that there is a concern, both CSI personnel and host country officials will simultaneously receive an alert and the specific container will be inspected before that container continues to the United States. The determination about what containers are inspected will be made by CBP officials, either on the scene locally or at CBP’s National Targeting Center. We have not yet reviewed the efforts made under SFI. However, in carrying it out, the agencies may likely have to deal with the challenges previously identified for the CSI and Megaports programs. Per the SAFE Port Act, DHS is to report by April 2008 on, among other things, the lessons learned from the SFI pilot ports and the need for and the feasibility of expanding the system to other CSI ports, and every 6 months thereafter, DHS is to report on the status of full-scale deployment of the integrated scanning systems to scan all containers bound for the United States before their arrival. C-TPAT, initiated in November 2001, is designed to complement other container security programs as part of a layered security strategy. C-TPAT is a voluntary program that enables CBP officials to work in partnership with private companies to review the security of their international supply chains and improve the security of their shipments to the United States. In return for committing to improving the security of their shipments by joining the program, C-TPAT members receive benefits that result in reduced scrutiny of their shipments, such as a reduced number of inspections or shorter wait times for their shipments. Since C-TPAT’s inception, CBP has certified 6,375 companies, and as of March 2007, it had validated the security of 3,950 of them (61.9 percent). CBP initially set a goal of validating all companies within their first 3 years as C-TPAT members, but the program’s rapid growth in membership made the goal unachievable. CBP then moved to a risk-based approach to selecting members for validation, considering factors such as the company having foreign supply chain operations in a known terrorist area or involving multiple foreign suppliers. CBP further modified its approach to selecting companies for validation to achieve greater efficiency by conducting “blitz” operations to validate foreign elements of multiple members’ supply chains in a single trip. Blitz operations focus on factors such as C-TPAT members within a certain industry, supply chains within a certain geographic area or foreign suppliers to multiple C-TPAT members. Risks remain a consideration, according to CBP, but the blitz strategy drives the decision of when a member company will be validated. In our previous work, we raised a number of concerns about the overall management of the program and the effectiveness of the validation process. We found that CBP had not established key internal controls necessary to manage the programs. Since that time, CBP has worked to develop a strategic plan, a human capital strategy, and performance measures. We also found that validations lacked sufficient rigor to meet C-TPAT stated purpose of the validations—to ensure that members’ security measures are reliable, accurate and effective. Since that time, CBP has developed new validation tools, and we have ongoing work to assess what progress is being made. The SAFE Port Act formalized C-TPAT into law. In addition, it included a new goal that CBP validate C-TPAT members’ security measures and supply chain security practices within 1 year of their certification and revalidate those members no less than once in every 4 years. CBP faces several challenges in addressing this requirement and dealing with the concerns we previously identified. These challenges include: Conducting validations within 1 year. The goal of completing validations within a year of members’ certification is a challenge. While CBP has belatedly reached some of its earlier staffing goals, consistent membership growth has led to a steady backlog of validation requirements. Ensuring sound validations. CBP’s standard for validations—to ensure that members’ security measures are reliable, accurate and effective—is hard to achieve. Since C-TPAT is a voluntary rather than a mandatory program, there are limits on how intrusive CBP can be in its validations. Further, CBP lacks jurisdiction over foreign companies operating outside the United States in a member’s foreign supply chain; therefore its ability to review the complete supply chain of a member is questionable. Measuring outcomes and results. Challenges developing C-TPAT outcome-based performance measures persist because of difficulty measuring deterrent effect. CBP has contracted with the University of Virginia for help in developing useful measures. While DHS’s priority mission since its inception has been homeland security, various DHS components have other nonsecurity functions. CBP, which is responsible for border security, also collects customs duties and other revenues. In forming DHS, there was concern that moving the customs revenue functions from Treasury into the new CBP would diminish attention given to these functions. In recognition of that concern, Congress required the newly created DHS not reduce the number of staff in key positions related to customs revenue functions. CBP is the second largest revenue generator for the U.S. government, collecting nearly $30 billion in customs revenue in fiscal year 2006. The SAFE Port Act required us to study the extent to which CBP had been able to carry out its customs revenue functions. We recently completed this study, in which we found three key weaknesses related to CBP’s performance of customs revenue functions (1) CBP failed to maintain the legislatively mandated staffing levels for performing customs revenue functions, (2) CBP lacks a strategic workforce plan to help ensure it has a sufficient number of staff with the necessary skills and competencies to effectively perform customs revenue functions, and (3) CBP does not publicly report on its performance of customs revenue functions, which would help ensure accountability. Staff resources contributing to customs revenue functions generally declined since the formation of DHS in March 2003, in part due to department priorities focused on homeland security and recruiting and retention problems for some positions. As shown in figure 1, since September 2003, CBP has not maintained the mandated number of staff in each of the nine designated customs revenue positions, although recent efforts by CBP increased the number of staff to the mandated levels in most of these positions as of December 2006. For example, the number of Import Specialists on board dropped from 984 in March 2003 to a low of 892 in March 2006, and grew to 1,000 in December 2006. CBP was below the mandated staff levels for three customs revenue positions as of December 2006, ranging from 2 to 34 positions below the baseline. Recently, CBP took several steps such as opening job announcements and closely monitoring its customs revenue staffing levels to increase the number of customs revenue staff by more than 130 to 2,273. The number of support staff—which includes a variety of management, technical, and administrative support positions—associated with the customs revenue positions has also declined overall, and the declines for some positions have been substantial. For example, the Import Specialist position lost 94 of its 407 mandated level for support staff. As shown in figure 2, CBP has maintained the mandated support staff levels for few of the customs revenue positions, with six of eight positions being below the mandated level in September 2006. Lastly, other positions within DHS such as CBP Officers, Immigration and Customs Enforcement (ICE) Investigators, and Office of Inspector General (OIG) Auditors contribute to performing or improving customs revenue functions, but their contributions have declined over time. For example, before the formation of DHS, there were about 65 Treasury OIG Auditors focused on customs issues. Since the formation of DHS, the DHS OIG has prioritized audits in other areas such as homeland security and, more recently, disaster assistance, and the number of Auditors focusing on customs issues declined to 15 as of February 2007. Because of other priorities, DHS OIG Auditors have not conducted any assessments of high- risk areas within customs revenue functions and have not done any performance audits focused on improving these functions. CBP lacks a strategic workforce plan to guide its efforts to perform customs revenue functions but has taken some recent steps to improve its human capital management amid external and internal challenges. CBP has not performed an assessment to determine the critical workforce skills and competencies needed to perform customs revenue functions. In addition, CBP has not yet determined how many staff it needs in customs revenue positions, their associated support positions, and other positions that contribute to the protection of customs revenue. Further, CBP has not developed a strategic workforce plan to inform and guide its human capital efforts to perform its current and emerging customs revenue functions. CBP has recently taken some steps to improve staffing for customs revenue functions, but gaps exist in these efforts. CBP has proposed revising the roles and responsibilities for Import Specialists and is working to develop legislatively mandated resource allocation models to determine ideal staffing levels for performing various agency functions. For example, the SAFE Port Act requires CBP to determine optimal staffing levels required to carry out CBP’s commercial operations. According to CBP, this model, which is due in June 2007, will suggest the ideal staffing level for the customs revenue positions as well as some other trade-related positions. However, the resource allocation models being developed will not assess the deployment of customs revenue staff across the more than 300 individual ports—an important consideration since about 75 percent of customs revenue staff work at ports of entry. Additionally, external and internal challenges heighten the importance of such strategic workforce planning. First, the workload for some customs revenue positions has increased. For example, the growing number of free trade agreements has had a pronounced effect on some customs revenue positions, including attorneys in CBP’s Office of Regulations and Rulings who participate in every phase of the negotiation and implementation of the free trade agreements—from participating in negotiating sessions through issuing binding rulings regarding the proper interpretation of the CBP regulations implementing the agreement. In addition, some customs revenue positions have seen an expansion of revenue-related as well as nonrevenue-related responsibilities. For instance, with the formation of DHS, the Fines, Penalties, and Forfeitures Specialists from the former Customs Service became responsible for administering fines and penalties for violations of immigration and agriculture laws in addition to their existing responsibilities related to customs law. Also, staff in some customs revenue positions told us they have been assigned work that is unrelated to customs revenue functions. For example, one port has not had a Secretary/Receptionist position for 5 years. As a result, that function was given to Import Specialists on a rotational basis. Despite being the second largest revenue generator for the U.S. government, CBP does not publicly report on its performance of customs revenue functions in its annual plans and performance reports, thus failing to help ensure accountability. We have previously found that good management practices dictate linking performance measures to strategic goals and objectives in an effort to improve performance and accountability. Good management practices also suggest publicly reporting this information so that Congress can make informed decisions and so that taxpayers have a better understanding of what the government is providing in return for their tax dollars, or in this case, how well it is collecting customs revenue. CBP’s strategic planning documents recognize the importance of customs revenue protection by establishing it as a strategic objective and identifying a revenue-related performance measure. However, we found that CBP does not use this measure or publicly report on results related to its customs revenue functions in its annual plans and Performance and Accountability Reports, the official documents agencies issue to Congress and the public to report program performance. According to a CBP official, CBP does not report on customs revenue functions in its Performance and Accountability Reports because these functions do not directly address its long-term goal of facilitating trade. In our recent report, we made three recommendations. We recommended that the CBP Commissioner develop a strategic workforce plan and work with the Office of Management and Budget to establish and report on performance measures related to customs revenue functions in its Performance and Accountability Reports. We also recommended that the DHS Inspector General should identify areas of high risk related to customs revenue functions. The department concurred with our recommendation to develop a strategic workforce plan and partially concurred with our recommendation to establish and report on specific customs revenue performance measures and agreed to take action to implement these recommendations by March 31, 2008. The DHS Inspector General also concurred with our recommendation and agreed to take action to implement it by September 30, 2007. MTSA established a maritime security framework that the Coast Guard implemented with area maritime security committees, area maritime security plans, and exercises to test the plans. In addition, various agencies showed initiative in establishing other programs related to maritime security—such as the Coast Guard, DOD and DOJ establishing interagency operations centers; CBP implementing CSI and C-TPAT; and DOE establishing the Megaports Inititive. In some cases, agencies have struggled to implement programs required by MTSA or other legislation— such as TSA delays with the TWIC program and CBP not meeting required staffing levels for customs revenue functions. The SAFE Port Act further defined and strengthened this maritime security framework—and created additional requirements for agencies at a time when their programs are still maturing. We have reviewed many of the MTSA and SAFE Port Act related programs and made recommendations to develop strategic plans, better plan their use of human capital, establish performance measures, and otherwise improve the operations of these programs. In general, these agencies have concurred with our recommendations and are making progress implementing them. We will continue to monitor these programs and provide Congress with oversight and insight into maritime security. Madam Chairwoman and Members of the Subcommittee, this completes my prepared statement. I will be happy to respond to any questions that you or other Members of the Subcommittee have at this time. For information about this testimony, please contact Stephen L. Caldwell, Director, Homeland Security and Justice Issues, at (202) 512-9610, or caldwells@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Jonathan Bachman, Jason Bair, Fredrick Berry, Christine Broderick, Stockton Butler, Steven Calvo, Christopher Currie, Wayne Ekblad, Maria Gomez, Christopher Hatscher, Monica Kelly, Tracey King, Daniel Klabunde, Gary Malavenda, Robert Rivas, and Stan Stenersen. This appendix provides information on the number of staff in specific customs revenue functions positions from the creation of the Department of Homeland Security (DHS) until late in 2006. The change in the number of staff in customs revenue positions and their associated support staff varies by position. Figure 3 shows the change in the number of staff in customs revenue positions; figure 4 shows the change in the number of associated support staff. Transportation Security: TSA Has Made Progress in Implementing the Transportation Worker Identification Credential Program, but Challenges Remain. GAO-07-681T. Washington, D.C.: April 12, 2007. Customs Revenue: Customs and Border Protection Needs to Improve Workforce Planning and Accountability. GAO-07-529. Washington, D.C.: April 12, 2007. Port Risk Management: Additional Federal Guidance Would Aid Ports in Disaster Planning and Recovery. GAO-07-412. Washington, D.C.: March 28, 2007. Transportation Security: DHS Should Address Key Challenges before Implementing the Transportation Worker Identification Credential Program. GAO-06-982. Washington, D.C.: September 29, 2006. Maritime Security: Information-Sharing Efforts Are Improving. GAO-06-933T. Washington, D.C.: July 10, 2006. Cargo Container Inspections: Preliminary Observations on the Status of Efforts to Improve the Automated Targeting System. GAO-06-591T. Washington, D.C.: March 30, 2006. Combating Nuclear Smuggling: Efforts to Deploy Radiation Detection Equipment in the United States and in Other Countries. GAO-05-840T. Washington, D.C.: June 21, 2005. Container Security: A Flexible Staffing Model and Minimum Equipment Requirements Would Improve Overseas Targeting and Inspection Efforts. GAO-05-557. Washington, D.C.: April 26, 2005. Homeland Security: Key Cargo Security Programs Can Be Improved. GAO-05-466T. Washington, D.C.: May 26, 2005. Maritime Security: Enhancements Made, But Implementation and Sustainability Remain Key Challenges. GAO-05-448T. Washington, D.C.: May 17, 2005. Cargo Security: Partnership Program Grants Importers Reduced Scrutiny with Limited Assurance of Improved Security. GAO-05-404. Washington, D.C.: March 11, 2005. Maritime Security: New Structures Have Improved Information Sharing, but Security Clearance Processing Requires Further Attention. GAO-05-394. Washington, D.C.: April 15, 2005. Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375. Washington, D.C.: March 30, 2005. Protection of Chemical and Water Infrastructure: Federal Requirements, Actions of Selected Facilities, and Remaining Challenges. GAO-05-327. Washington, D.C.: March 2005. Homeland Security: Process for Reporting Lessons Learned from Seaport Exercises Needs Further Attention. GAO-05-170. Washington, D.C.: January 14, 2005. Port Security: Better Planning Needed to Develop and Operate Maritime Worker Identification Card Program. GAO-05-106. Washington, D.C.: December 2004. Maritime Security: Substantial Work Remains to Translate New Planning Requirements into Effective Port Security. GAO-04-838. Washington, D.C.: June 2004. Container Security: Expansion of Key Customs Programs Will Require Greater Attention to Critical Success Factors. GAO-03-770. Washington, D.C.: July 25, 2003. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The United States has a vital national interest in maritime security. The safety and economic security of the United States depend in substantial part upon the secure use of the world's waterways and ports. In an effort to further the progress made through the Maritime Transportation Security Act of 2002, the Security and Accountability for Every Port Act (SAFE Port Act) was passed and became effective in October 2006. This testimony, which is based on past GAO work, synthesizes the results of this work as it pertains to the following: (1) overall port security, (2) facility security at U.S. ports, (3) the international supply chain and cargo container security, and (4) customs revenue collection efforts. With the Coast Guard generally implementing earlier port security requirements, the SAFE Port Act called for changes to several ongoing programs. For example, it called for interagency operational centers at high-risk ports within 3 years. Three centers currently operate, but agency coordination will pose a challenge. Also, the act established a port security exercise program, but more exercises could challenge stakeholders' ability to maintain coordination and quickly report results. Additionally, an expansion of foreign port security assessments may be challenged by greater workloads and the need for additional staff. Many port facility security requirements are being implemented, but not always on schedule. While the Coast Guard has approved, and verified through inspection, facility security plans, the SAFE Port Act requires inspections more often and some without notice. The Coast Guard will be challenged by the number of trained inspectors it needs. Worker credentialing programs were also modified by the act. One such program has seen substantial delays in the past, but is receiving more support. Efforts to avoid duplication in these programs will be challenged by the need for extensive coordination within and among federal departments. The SAFE Port Act codified existing major container security programs and also added guidance for these programs. It also required programs to test new technologies or combine existing technologies for scanning containers. While more container security activity is occurring overseas, challenges remain in the continued implementation of these efforts. These challenges include the inability to directly test the security measures used by different companies in their supply chains, particularly overseas. Since its formation, the Department of Homeland Security has faced challenges in maintaining its customs revenue functions. For example, the Department failed to maintain the legislatively mandated staffing levels, lacks a strategic workforce plan to help ensure it has a sufficient number of skilled staff to effectively perform customs revenue functions, and does not publicly report on its performance of customs revenue functions, which would help ensure accountability. |
The Internet is a vast network of interconnected networks that is used by governments, businesses, research institutions, and individuals around the world to communicate, engage in commerce, perform research, educate, and entertain. From its origins in the 1960s as a research project sponsored by the U.S. government, the Internet has grown increasingly important to both American and foreign businesses and consumers, serving as the medium for hundreds of billions of dollars of commerce each year. The Internet has also become an extended information and communications infrastructure, supporting vital services such as power distribution, health care, law enforcement, and national defense. Today, private industry—including telecommunications companies, cable companies, and Internet service providers—owns and operates the vast majority of the Internet’s infrastructure. In recent years, cyber attacks involving malicious software or hacking have been increasing in frequency and complexity. Attacks against the Internet can come from a variety of sources, including criminal groups, hackers, and terrorists. Federal regulation recognizes the need to protect critical infrastructures such as the Internet. It directs federal departments and agencies to identify and prioritize critical infrastructure sectors and key resources and to protect them from terrorist attack. Furthermore, it recognizes that since a large portion of these critical infrastructures is owned and operated by the private sector, a public/private partnership is crucial for the successful protection of these critical infrastructures. Federal policy also recognizes the need to be prepared for the possibility of debilitating disruptions in cyberspace and, because the vast majority of the Internet infrastructure is owned and operated by the private sector, tasks DHS with developing an integrated public/private plan for Internet recovery. In its plan for protecting critical infrastructures, DHS recognizes that the Internet is a key resource composed of assets within both the information technology and the telecommunications sectors. It notes that the Internet is used by all critical infrastructure sectors to varying degrees and provides information and communications to meet the needs of businesses and government. In the event of a major Internet disruption, multiple organizations could help recover Internet service. These organizations include private industry, collaborative groups, and government organizations. Private industry is central to Internet recovery because private companies own most of the Internet’s infrastructure and often have response plans. Collaborative groups—including working groups and industry councils— provide information-sharing mechanisms to allow private organizations to restore services. In addition, government initiatives could facilitate a response to major Internet disruptions. Federal policies and plans assign DHS with the lead responsibility for facilitating a public/private response to and recovery from major Internet disruptions. Within DHS, responsibilities reside in two divisions within the Office of the Under Secretary for National Protection and Program, Office of Cybersecurity and Communications: the National Cyber Security Division (NCSD) and the National Communications System (NCS). NCSD operates the U.S. Computer Emergency Readiness Team (US-CERT), which coordinates defense against and response to cyber attacks. The other division, NCS, provides programs and services that assure the resilience of the telecommunications infrastructure in times of crisis. Additionally, the Federal Communications Commission can support Internet recovery by coordinating resources for restoring the basic communications infrastructures over which Internet services run. For example, after Hurricane Katrina, the commission granted temporary authority for private companies to set up wireless Internet communications supporting various relief groups; federal, state, and local government agencies; businesses; and victims in the disaster areas. Prior evaluations of DHS’s cyber security responsibilities have highlighted issues and challenges facing the department. In May 2005, we issued a report on DHS’s efforts to fulfill its cyber security responsibilities. We noted that while DHS had initiated multiple efforts to fulfill its responsibilities, it had not fully addressed any of the 13 key cyber security responsibilities noted in federal law and policy. We also reported that DHS faced a number of challenges that have impeded its ability to fulfill its cyber responsibilities. These challenges included achieving organizational stability, gaining organizational authority, overcoming hiring and contracting issues, increasing awareness of cyber security roles and capabilities, establishing effective partnerships with stakeholders, achieving two-way information sharing with stakeholders, and demonstrating the value that DHS can provide. In that report, we also made recommendations to improve DHS’s ability to fulfill its mission as an effective focal point for cyber security, including recovery plans for key Internet functions. DHS agreed that strengthening cyber security is central to protecting the nation’s critical infrastructures and that much remained to be done. The Internet’s infrastructure is vulnerable to disruptions in service due to terrorist and other malicious attacks, natural disasters, accidents, technological problems, or a combination of these things. Disruptions to Internet service can be caused by cyber and physical incidents—both intentional and unintentional. Over the last few years, physical and cyber incidents have caused localized or regional disruptions, highlighting the importance of recovery planning. However, these incidents have also shown the Internet as a whole to be flexible and resilient. Even in severe circumstances, the Internet has not yet suffered a catastrophic failure. To date, cyber attacks have caused various degrees of damage. For example, in 2001, the Code Red worm used a denial-of-service attack to affect millions of computer users by shutting down Web sites, slowing Internet service, and disrupting business and government operations. In 2003, the Slammer worm caused network outages, canceled airline flights, and automated teller machine failures. Slammer resulted in temporary loss of Internet access to some users, and cost estimates on the impact of the worm range from $1.05 billion to $1.25 billion. The federal government coordinated with security companies and Internet service providers and released an advisory recommending that federal departments and agencies patch and block access to the affected channel. However, because the worm had propagated so quickly, most of these activities occurred after it had stopped spreading. In 2002 and again in 2007, coordinated denial-of-service attacks were launched against all of the root servers in the Domain Name System. In the 2002 attack, at least nine of the thirteen root servers experienced degradation of service, while in the 2007 attack, six of the thirteen root servers experienced degradation of service. However, average end users hardly noticed the attacks. The attacks were efficiently handled by the server operators and their service providers. The 2002 attack pointed to a need for increased capacity for servers at Internet exchange points to enable them to manage the high volumes of data traffic during an attack. The 2007 attack demonstrated that some of the improvements made since 2002 to improve the resilience of the Internet had worked. Like cyber incidents, physical incidents could affect various aspects of the Internet infrastructure, including underground or undersea cables and facilities that house telecommunications equipment, Internet exchange points, or Internet service providers. For example, on July 18, 2001, a 60- car freight train derailed in a Baltimore tunnel, causing a fire that interrupted Internet and data services between Washington and New York. The tunnel housed fiber-optic cables serving seven of the biggest U.S. Internet service providers. The fire burned and severed fiber optic cables, causing backbone slowdowns for at least three major Internet service providers. Efforts to recover Internet service were handled by the affected Internet service providers; however, local and federal officials responded to the immediate physical issues of extinguishing the fire and maintaining safety in the surrounding area, and they worked with telecommunications companies to reroute affected cables. In another physical incident, Hurricane Katrina caused substantial destruction of the communications infrastructures in Louisiana, Mississippi, and Alabama, but it had minimal affect on the overall functioning of the Internet outside of the immediate area. According to an Internet monitoring service provider, while there was a loss of routing around the affected area, there was no significant impact on global Internet routing. According to the Federal Communications Commission, the storm caused outages for more than 3 million telephone customers, 38 emergency 9-1-1 call centers, hundreds of thousands of cable customers, and more than 1,000 cellular sites. However, a substantial number of the networks that experienced service disruptions recovered relatively quickly. Federal officials stated that the government took steps to respond to the hurricane, such as increasing analysis and watch services in the affected area, coordinating with communications companies to move personnel to safety, working with fuel and equipment providers, and rerouting communications traffic away from affected areas. However, private sector representatives stated that requests for assistance, such as food, water, fuel, and secure access to facilities were denied for legal reasons; the government made time-consuming and duplicative requests for information; and certain government actions impeded recovery efforts. Since its inception, the Internet has experienced disruptions of varying scale—including fast-spreading worms, denial-of-service attacks, and physical destruction of key infrastructure components—but the Internet has yet to experience a catastrophic failure. However, it is possible that a complex attack or set of attacks could cause the Internet to fail. It is also possible that a series of attacks against the Internet could undermine users’ trust and thereby reduce the Internet’s utility. Several federal laws and regulations provide broad guidance that applies to the Internet infrastructure, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption because some do not specifically address Internet recovery and others have seldom been used. Pertinent laws and regulations address critical infrastructure protection, federal disaster response, and the telecommunications infrastructure. Specifically, the Homeland Security Act of 2002 and Homeland Security Presidential Directive 7establish critical infrastructure protection as a national goal and describe a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems that are essential to the operations of the economy and the government. These authorities apply to the Internet because it is a core communications infrastructure supporting the information technology and telecommunications sectors; however, they do not specifically address roles and responsibilities in the event of an Internet disruption. Regarding federal disaster response, the Defense Production Actand the Stafford Act provide authority to federal agencies to plan for and respond to incidents of national significance like disasters and terrorist attacks. Specifically, the Defense Production Act authorizes the President to ensure the timely availability of products, materials, and services needed to meet the requirements of a national emergency. It is applicable to critical infrastructure protection and restoration but has never been used for Internet recovery. The Stafford Act authorizes federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency. However, the act does not authorize assistance to for-profit companies—such as those that own and operate core Internet components. Other legislation and regulations, including the Communications Act of 1934and the NCS authorities,govern the telecommunications infrastructure and help to ensure communications during national emergencies. For example, the NCS authorities establish guidance for operationally coordinating with industry to protect and restore key national security and emergency preparedness communications services. These authorities grant the President certain emergency powers regarding telecommunications, including the authority to require any carrier subject to the Communications Act of 1934 to grant preference or priority to essential communications.The President may also, in the event of war or national emergency, suspend regulations governing wire and radio transmissions and authorize the use or control of any such facility or station and its apparatus and equipment by any department of the government. Although these authorities remain in force in the Code of Federal Regulations, they have seldom been used—and never for Internet recovery. Thus it is not clear how effective they would be if used for this purpose. In commenting on the statutory authority for Internet reconstitution following a disruption, DHS agreed that this authority is lacking and noted that the government’s roles and authorities related to assisting in Internet reconstitution following a disruption are not fully defined. As of our June 2006 report, DHS had begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but these efforts were not complete or comprehensive. Specifically, DHS had developed high-level plans, including the National Response Plan and the National Infrastructure Protection Plan, for infrastructure protection and national disaster response, but the components of these plans that address the Internet infrastructure were not complete. In addition, DHS had started a variety of initiatives to improve the nation’s ability to recover from Internet disruptions, including establishing working groups to facilitate coordination, such as the National Cyber Response Coordination Group and Internet Disruption Working Group, and exercises in which government and private industry practice responding to cyber events. While these activities were promising, the responsibilities and plans for selected working groups had not yet been defined, and key exercises lacked effective mechanisms for incorporating lessons learned. In addition, the relationships among the initiatives were not evident. For example, the National Cyber Response Coordination Group, the Internet Disruption Working Group, and the North American Incident Response Group were all meeting to discuss ways to address Internet recovery, but the interdependencies among the groups had not been clearly established. As a result, the nation was not prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. Although DHS has various initiatives to improve Internet recovery planning, there are key challenges in developing a public/private plan for Internet recovery, including (1) innate characteristics of the Internet that make planning for and responding to a disruption difficult, (2) lack of consensus on DHS’s role and on when the department should get involved in responding to a disruption, (3) legal issues affecting DHS’s ability to provide assistance to restore Internet service, (4) reluctance of the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until these challenges are addressed, DHS will have difficulty achieving results in its role as a focal point for recovering the Internet from a major disruption. First, the Internet’s diffuse structure, vulnerabilities in its basic protocols, and the lack of agreed-upon performance measures make planning for and responding to a disruption more difficult. The components of the Internet are not all governed by the same organization. In addition, the Internet is international. According to private-sector estimates, only about 20 percent of Internet users are in the United States. Also, there are no well-accepted standards for measuring and monitoring the Internet infrastructure’s availability and performance. Instead, individuals and organizations rate the Internet’s performance according to their own priorities. Second, there is no consensus about the role DHS should play in responding to a major Internet disruption or about the appropriate trigger for its involvement. The lack of clear legislative authority for Internet recovery efforts complicates the definition of this role. DHS officials acknowledged that their role in recovering from an Internet disruption needs further clarification because private industry owns and operates the vast majority of the Internet. Private sector officials representing telecommunication backbone providers and Internet service providers were also unclear about the types of assistance DHS could provide in responding to an incident and about the value of such assistance. There was no consensus on this issue. Many private-sector officials stated that the government does not have a direct recovery role, while others identified a variety of potential roles, including providing information on specific threats; providing security and disaster relief support during a crisis; funding backup communication infrastructures; driving improved Internet security through requirements for the government’s own procurement; serving as a focal point with state and local governments to establish standard credentials to allow Internet and telecommunications companies access to areas that have been restricted or closed in a crisis; providing logistical assistance, such as fuel, power, and security, to focusing on smaller-scale exercises targeted at specific Internet disruption issues; limiting the initial focus for Internet recovery planning to key national security and emergency preparedness functions, such as public health and safety; and establishing a system for prioritizing the recovery of Internet service, similar to the existing Telecommunications Service Priority Program. A third challenge to planning for recovery is that there are key legal issues affecting DHS’s ability to provide assistance to help restore Internet service. As noted earlier, key legislation and regulations guiding critical infrastructure protection, disaster recovery, and the telecommunications infrastructure do not provide specific authorities for Internet recovery. As a result, there is no clear legislative guidance on which organization would be responsible in the case of a major Internet disruption. In addition, the Stafford Act, which authorizes the government to provide federal assistance to states, local governments, nonprofit entities, and individuals in the event of a major disaster or emergency, does not authorize assistance to for-profit corporations. Several representatives of telecommunications companies reported that they had requested federal assistance from DHS during Hurricane Katrina. Specifically, they requested food, water, and security for the teams they were sending in to restore the communications infrastructure and fuel to power their generators. DHS responded that it could not fulfill these requests, noting that the Stafford Act did not extend to for-profit companies. A fourth challenge is that a large percentage of the nation’s critical infrastructure—including the Internet—is owned and operated by the private sector, meaning that public/private partnerships are crucial for successful critical infrastructure protection. Although certain policies direct DHS to work with the private sector to ensure infrastructure protection, DHS does not have the authority to direct Internet owners and operators in their recovery efforts. Instead, it must rely on the private sector to share information on incidents, disruptions, and recovery efforts. Many private sector representatives questioned the value of providing information to DHS regarding planning for and recovery from Internet disruption. In addition, DHS has identified provisions of the Federal Advisory Committee Actas having a “chilling effect” on cooperation with the private sector. The uncertainties regarding the value and risks of cooperation with the government limit incentives for the private sector to cooperate in Internet recovery-planning efforts. Finally, DHS has lacked permanent leadership while developing its preliminary plans for Internet recovery and reconstitution. In May 2005, we reported that multiple senior DHS cyber security officials had recently left the department.These officials included the NCSD Director, the Deputy Director responsible for Outreach and Awareness, the Director of the US-CERT Control Systems Security Center, the Under Secretary for the Information Analysis and Infrastructure Protection Directorate and the Assistant Secretary responsible for the Information Protection Office. DHS officials acknowledge that the current organizational structure has overlapping responsibilities for planning for and recovering from a major Internet disruption. Given the importance of the Internet infrastructure to our nation’s communication and commerce, our June 2006 report suggested a matter for congressional consideration and made recommendations to DHS regarding improving efforts in planning for Internet recovery.17 Specifically, we suggested that Congress consider clarifying the legal framework that guides roles and responsibilities for Internet recovery in the event of a major disruption. This effort could include providing specific authorities for Internet recovery as well as examining potential roles for the federal government, such as providing access to disaster areas, prioritizing selected entities for service recovery, and using federal contracting mechanisms to encourage more secure technologies. This effort also could include examining the Stafford Act to determine whether there would be benefits in establishing specific authority for the government to provide for-profit companies—such as those that own or operate critical communications infrastructures—with limited assistance during a crisis. Additionally, to improve DHS’s ability to facilitate public/private efforts to recover the Internet in case of a major disruption, we recommended that the Secretary of the Department of Homeland Security implement nine actions (see table 1). The department agreed with our recommendations and has made progress in addressing many of them. Still, work remains to be done to ensure that our nation is prepared to effectively respond to a disruption of the Internet infrastructure. GAO-06-672. Establish dates for revising the National Response Plan—including efforts to update key components that are relevant to the Internet. In process DHS revised its National Response Plan (the revised version is called the National Response Framework) and released it for public comment in September 2007. As part of this effort, the agency revised segments that are relevant to the Internet, including the Cyber Incident Annex. However, DHS did not provide a date for when it expects to complete the Framework. Use the planned revisions to the National Response Plan and the National Infrastructure Protection Plan as a basis to draft public/private plans for Internet recovery and obtain input from key Internet infrastructure companies. In process As noted above, DHS’s National Response Framework has been updated and released for public comment, but has not yet been completed. In addition, DHS released the National Infrastructure Protection Plan’s base plan in June 2006 and the sector specific plans in May 2007. Because both documents have been made available for input from key infrastructure companies, DHS expects that they should serve as the basis for public/private plans for Internet recovery. In process DHS officials stated that the creation of the Office of Cybersecurity and Communications acknowledges the increasing convergence of the IT and Communications Sectors. Further, DHS officials stated that NCS and NCSD are working closely together to ensure that activities are coordinated, issues are jointly addressed, and the resources and expertise of each organization are utilized. Moreover, the officials stated that the Office of Cybersecurity and Communications is working to co-locate the US-CERT and the NCC watch operations centers to ensure that IT and communications experts are working side-by-side to share situational awareness information and foster the early identification of attack trends, as well as the implications of these attacks, across all infrastructure sectors. We are currently evaluating DHS’s efforts to restructure its organization in light of the convergence of voice and data communications. DHS has reported the roles and responsibilities of its multiple working groups and initiatives, but has not fully described the relationships and interdependencies among the various Internet recovery-related activities currently under way. DHS disbanded the IDWG because its functions are to be addressed by the IT and Communications Sector Specific Plans and the Cross-Sector Cyber Security Working Group. DHS officials reported that they may reconstitute the IDWG in the future if needed to address Internet resilience objectives that are not covered by other existing organizations. Identify ways to incorporate lessons learned from actual incidents and during cyber exercises into recovery plans and procedures. In process DHS officials stated that they developed a Cyber Storm After Action Report, which was used to revise the NCRCG’s operating documents, and the lessons learned were taken into account in the development of Cyber Storm II. DHS officials stated that exercises such as Cyber Storm and Cyber Tempest, as well as data from the Katrina After Action Report have been used in updating the National Response Framework. However, DHS has not yet developed a formal process for incorporating the lessons learned. In process DHS officials stated that there are a number of ongoing initiatives within the department that seek to address the challenges to effective Internet recovery. DHS reported that the strategic partnerships formed through the IDWG, the framework of the NIPP, implementation of the sector specific plans, the National Cyber Response Coordination Group, and operational activities conducted by US-CERT are helping to define the appropriate government functions in responding to a major Internet disruption. An IDWG study examined the existence of incident triggers for responding to Internet disruptions and concluded that triggers or response thresholds vary from one private sector organization to another and that overall, the establishment of triggers would hold little value for infrastructure owners and operators. The study revealed that the development of triggers for the federal government could be useful if used across departments and agencies. Currently, US-CERT’s incident levels provide the response categories that should guide department and agency involvement in responding to incidents. Moreover, the study demonstrated the need for greater understanding as to what the federal response would be in the event of an Internet disruption. Agency officials stated that DHS is collaborating with the private sector to better understand existing operational and corporate governance policies. DHS acknowledges that more needs to be done to fully address these challenges. In summary, as a critical information infrastructure supporting our nation’s commerce and communications, the Internet is subject to disruption—from both intentional and unintentional incidents. While major incidents to date have had regional or local impacts, the Internet has not yet suffered a catastrophic failure. Should such a failure occur, however, existing legislation and regulations do not specifically address roles and responsibilities for Internet recovery. As the focal point for ensuring the security of cyberspace, DHS has initiated efforts to refine high-level disaster recovery plans; however, much remains to be done. DHS faces numerous challenges in developing integrated public/private recovery plans—not the least of which is that the government does not own or operate much of the Internet. In addition, there is no consensus among public and private stakeholders about the appropriate role of DHS and when it should get involved; legal issues limit the actions the government can take; the private sector is reluctant to share information on Internet performance with the government; and DHS is undergoing important organizational and leadership changes. As a result, the exact role of the government in helping to recover the Internet infrastructure following a major disruption remains unclear. To improve DHS’s ability to facilitate public/private efforts to recover the Internet in case of a major disruption, we suggested that Congress consider clarifying the legal framework guiding Internet recovery. We also made recommendations to DHS to establish clear milestones for completing key plans, coordinate various Internet recovery-related activities, and address key challenges to Internet recovery planning. While DHS has made progress in implementing these recommendations, full implementation could greatly enhance our nation’s ability to recover from a major Internet disruption. Mr. Chairman, this concludes my statement. I would be happy to answer any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact me at (202) 512-6244, or by e-mail at wilshuseng@gao.gov. Other key contributors to this testimony include Scott Borre, Vijay D’Souza, Nancy Glover, Colleen Phillips, and Jeffrey Woodward. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Since the early 1990s, growth in the use of the Internet has revolutionized the way that our nation communicates and conducts business. While the Internet originated as a U.S. government-sponsored research project, the vast majority of its infrastructure is currently owned and operated by the private sector. Federal policy recognizes the need to prepare for debilitating Internet disruptions and tasks the Department of Homeland Security (DHS) with developing an integrated public/private plan for Internet recovery. GAO was asked to summarize its report on plans for recovering the Internet in case of a major disruption (GAO-06-672) and to provide an update on DHS's efforts to implement that report's recommendations. The report (1) identifies examples of major disruptions to the Internet, (2) identifies the primary laws and regulations governing recovery of the Internet in the event of a major disruption, (3) evaluates DHS plans for facilitating recovery from Internet disruptions, and (4) assesses challenges to such efforts. A major disruption to the Internet could be caused by a physical incident (such as a natural disaster or an attack that affects key facilities), a cyber incident (such as a software malfunction or a malicious virus), or a combination of both physical and cyber incidents. Recent physical and cyber incidents, such as Hurricane Katrina, have caused localized or regional disruptions but have not caused a catastrophic Internet failure. Federal laws and regulations that address critical infrastructure protection, disaster recovery, and the telecommunications infrastructure provide broad guidance that applies to the Internet, but it is not clear how useful these authorities would be in helping to recover from a major Internet disruption. Specifically, key legislation on critical infrastructure protection does not address roles and responsibilities in the event of an Internet disruption. Other laws and regulations governing disaster response and emergency communications have never been used for Internet recovery. As of 2006, DHS had begun a variety of initiatives to fulfill its responsibility to develop an integrated public/private plan for Internet recovery, but these efforts were not yet comprehensive or complete. For example, the department had developed high-level plans for infrastructure protection and incident response, but the components of these plans that address the Internet infrastructure were not complete. As a result, the risk remained that the government was not adequately prepared to effectively coordinate public/private plans for recovering from a major Internet disruption. Key challenges to establishing a plan for recovering from Internet disruptions include (1) innate characteristics of the Internet that make planning for and responding to disruptions difficult, (2) lack of consensus on DHS's role and when the department should get involved in responding to a disruption, (3) legal issues affecting DHS's ability to provide assistance to restore Internet service, (4) reluctance of many in the private sector to share information on Internet disruptions with DHS, and (5) leadership and organizational uncertainties within DHS. Until these challenges are addressed, DHS will have difficulty achieving results in its role as a focal point for helping the Internet to recover from a major disruption. DHS has made progress in implementing GAO's recommendations by revising key plans in coordination with private industry infrastructure stakeholders, coordinating various Internet recovery-related activities, and addressing key challenges to Internet recovery planning. However, further work remains to complete these activities, including finalizing recovery plans and defining the interdependencies among DHS's various working groups and initiatives. Full implementation of these recommendations should enhance the nation's ability to recover from a major Internet disruption. |
Experts see ECCE as a loosely connected system of programs that crisscross private and public sectors and serve the dual goals of providing child care for working families and promoting children’s readiness for school.education takes many forms, from individuals caring for children in the child’s home to centers and preschools offering full-time care and education (see table 1). Multiple programs and settings exist because early care and recommends that at least 75 percent of an ECCE program’s teachers have a bachelor’s degree or equivalent and all teachers have a minimum of an associate degree or equivalent. NIEER recommends that ECCE teachers have a bachelor’s degree. The American Academy of Pediatrics, the American Public Health Association, and the National Resource Center for Health and Safety in Child Care recommend that ECCE teachers or caregivers have a state or national child care certificate. Both federal and state governments collect data on some, but not all, ECCE workers. The following lists a few federal data efforts: Annual data collection on Head Start and Individuals with Disabilities Education Act (IDEA) teachers: Head Start data are provided in Program Information Reports (PIR) which contain information on the education level and salaries of all Head Start directors, teachers, teaching assistants and, with the exception of salary information, family-based child care providers and are submitted to HHS by local Head Start grantees. Data on IDEA workforce—teachers who work with children and youth with disabilities—are submitted by states to Education and include information on the number of teachers and teaching assistants, their education levels, and whether they meet IDEA teacher qualifications. Annual surveys by Census and the Department of Labor: The Census Bureau and the Department of Labor’s Bureau of Labor Statistics (BLS) include data on ECCE workers in three annual surveys of U.S. households and businesses. Census conducts two of these surveys— the ACS and the Current Population Survey. Both gather information on the demographics, occupations, and income of households using standardized industry and occupation codes to classify workers. BLS conducts the third survey—the Occupational Employment Survey—which is an annual survey of business establishments that uses the same occupational and industry codes. Although ACS has the most detailed information on ECCE workers, none of these surveys capture all ECCE worker types or workplace settings. The following lists a few state data efforts: Establishing state registries: Many states have computerized registries, which track education, training, and employment histories of individual ECCE workers. Registries are housed in state educational agencies or other organizations, such as universities or child care resource and referral agencies. According to the National Registry Alliance, in most states, registry participation is voluntary, so not all ECCE teachers and caregivers are included. Developing longitudinal data systems on preschool teachers: State educational agencies are increasingly using longitudinal data systems to obtain information on teachers and students, and some include data on the ECCE workforce. Longitudinal data link student performance to teachers and also indicate the education and training that teachers have received. If federal Education funding is used to help pay for the system, Education has guidance on system requirements to afford comparisons across states. The Census Bureau’s ACS provides important insight into the composition, education level, and income of the ECCE workforce. According to these data, there were nearly 1.8 million ECCE workers nationwide in 2009 in a range of ECCE positions. About 72 percent of these workers lacked an associate degree or higher. However education level varied by type of worker, with program directors, preschool teachers, and teaching assistants being the most educated (see fig. 3). Among the 333,000 ECCE workers and directors with a bachelor’s degree included in ACS, approximately 93 percent, or nearly 300,000, did not have degrees specifically in early childhood education. For example, 29 percent had a degree in other education, 7 percent in psychology, and 3 percent in sociology. ECCE workers with some of the highest education levels are in Head Start programs, and such workers are not separately identified in ACS data (see table 3). In terms of income, ECCE occupations are often low-paying, according to research and government data sources. Our analysis of ACS data found that, in 2009, 77 percent of full- and part-time ECCE workers—and 61 percent of full-time workers—earned less than $22,000 per year, approximately the federal poverty level for a family of four. Average income ranged from $11,500 to $18,000 per year for the various ECCE worker positions and was around $33,000 per year for program directors. Moreover, with the exception of program directors, the difference in average annual incomes between the highest and lowest paid full-time ECCE position was small, ranging from $20,000 to $22,500. Our analysis of Head Start PIR data submitted by grantees to HHS found that, although Head Start program teachers and teaching assistants were paid more than other ECCE teachers, their average annual income lagged behind average income earned by workers in general with similar levels of education. PIR data for the 2008-2009 program year showed that, on average, Head Start teachers earned about $28,000 per year, and teaching assistants earned about $18,000 per year. However, when PIR data for Head Start teachers is compared to ACS data on the average annual income of workers in general with similar levels of education (i.e., those with associate degrees), general workers earned $41,500 per year, or $13,500 more than Head Start teachers. Although ACS contains important nationwide data on ECCE workers, its exclusion of some types of workers and consolidation of others into single categories creates an incomplete picture of this workforce’s numbers, components, education and income. These limitations include the following: Family, friends, and neighbors who regularly care for other people’s children for a fee, but do not identify ECCE as their primary occupation: Obtaining data on these workers is important because they are a primary source of child care for many families, especially those who are low-income. One study estimated that as much as 38 percent of all care is provided through this type of care. Preschool teachers working in elementary schools: ACS data do not distinguish preschool teachers in elementary schools from kindergarten teachers. Obtaining discreet data on preschool teachers in elementary schools is important because they are a key component of the ECCE workforce, often teaching children in state-funded prekindergarten programs in elementary schools. In the past decade (academic year 2001-2002 through academic year 2009-2010), children served in state-funded preschool programs have increased by almost 600,000 to approximately 1.3 million children, according to NIEER data. Staff in before- and after-school programs: ACS classifies these ECCE workers as child care workers and combines them with those who care for much younger children. Combining these two groups is a concern, according to ECCE experts and researchers, because the needed skills are different. For example, one expert told us that after-school workers need training in how to manage the behavior of older children and in strategies that help connect after-school activities to school-day curricula. ECCE workers who work with young children, in contrast, may benefit more from training in how to stimulate early language and math skills. Classification of workers as preschool teachers or child care providers: ECCE experts frequently express concern that the distinction ACS and other federal statistical surveys make between child care workers and preschool teachers is not necessarily meaningful because both of these occupations include tasks related to educating children. ACS data on workers’ education levels are also limited. ACS captures high school diplomas, General Educational Development (GED) credentials, and degree or course credit earned through colleges and universities, but not other credentials or training. For example, the Child Development Associate (CDA) credential is one of the most recognized ECCE credentials across the country. It requires120 hours of training in early childhood education and passing an assessment by the Council for Professional Recognition. Yet in ACS data, an ECCE worker who has a CDA would be listed as having only a high school degree/GED (because such a degree is required before getting these credentials) or some college, but no degree (if the credential’s training options included college-level courses, this was the option that an individual chose, and such an individual had no other college degree). ACS also has only limited data on fields in which degrees are earned. ACS began collecting this information for workers in its 2009 survey, but only for bachelor’s degrees. ACS does not indicate those who have studied early childhood education but not yet earned a degree, or those with an associate, master’s, or doctorate degree in the ECCE field. As a result, education levels and training may be underreported for large numbers of the workforce. Workforce data on workers in a particular occupation, like ECCE workers, can be used to assess the overall quality of a workforce and to develop strategies to improve its quality.researchers, a lack of statewide and national ECCE workforce data disadvantages policymakers when assessing ECCE needs and planning improvements and allocating limited funds. For example, a lack of workforce data can make it difficult for policymakers to assess demand and supply trends for ECCE workers or the extent to which ECCE workers have specialized education or training in early child development. They also told us that, without knowing the extent to which ECCE workers care for and educate children of varying ages or other traits, such as children with disabilities or English language learners, it is difficult for policymakers to know how to best target limited quality improvement training funds among worker types. Both federal and state officials reported that HHS and Education are trying to improve the comprehensiveness of data collected on ECCE workers, as follows: HHS sponsored a National Academy of Sciences workshop in 2011 for ECCE government officials, researchers, and experts, which included a BLS presentation on ECCE worker data in federal statistical surveys. HHS’s Office of Planning, Research and Evaluation is sponsoring a nationwide child care survey that will include data on the education, training, and income of ECCE workers across different types of child care settings, such as center-based and home-based settings. The last time a similar survey was conducted was more than 20 years ago. At the time of this report, HHS had not made any decision regarding whether this survey will be a one-time or on-going survey. HHS officials said that the contract for this study will run through September 29, 2014. HHS has provided guidance and funding for state registry systems. Thirty-two states use these systems to gather data on the demographics, completed and ongoing education and training, and employment status of ECCE workers, according to a 2011 policy brief issued by the Center for the Study of Child Care Employment. However, according to the National Registry Alliance, in most states, participation in these registries is voluntary or, if required, applicable to only some ECCE workers, hindering development of a complete picture of all ECCE workers in a state. Education has provided grants for statewide longitudinal data systems that contain data linking children and teachers, including ECCE teachers in some states. Teacher data may include information on training, education, and compensation. Officials from both BLS and Census told us that additional avenues exist for improving ECCE workforce data collected in federal statistical surveys and that these improvements are often contingent upon federal agencies proactively pursuing them. For example, BLS officials described standardized 5-year revision cycles, which the Office of Management and Budget oversees, to improve the occupation and industry codes used in ACS and other federal statistical surveys. These cycles consist of federal interagency committees investigating if and how such codes should be revised, with the public and government agencies not part of these committees providing input through the public comment process published in the Federal Register. BLS chairs the interagency committee to revise the occupational codes, and this committee completed its most recent revision cycle in March 2009. According to BLS officials, Education actively participated in this revision cycle, successfully showing that the tasks special education preschool teachers perform are sufficiently different from the tasks general preschool teachers perform; and this in turn justified creating a new occupational code specific to special education preschool teachers. The next revision cycle is expected to start in 2013, with revisions issued by 2018. Census chairs the interagency committee to revise industry codes; the results from the 2012 revision cycle are expected to be published soon, and none of the revisions affected ECCE industries. A second possible avenue to improve ECCE data, according to BLS and Census officials, is for HHS, Education, or both to request that periodic supplemental survey questions be added to one of the federal statistical surveys. BLS and Census use such supplemental surveys to gather additional information on specific subpopulations on an ongoing basis. For example, officials from both agencies told us that a supplement might be one way to gather data on before- and after-school workers distinct from ECCE workers of very young children; however, this option is not without its challenges in terms of timing and sample size. BLS and Census officials also told us that improving ECCE workforce data (or other data collected in federal statistical surveys) is often contingent upon federal agency subject-matter experts actively requesting and discussing such improvements. For example, Census officials are investigating changing how they present data on ECCE workers in their publicly available ACS files in response to questions we raised with them related to this study. Specifically, we asked about the practice of combining the separate occupation codes for preschool teachers and kindergarten teachers into a single code when they work in elementary schools. In response to our questions about this practice, Census investigated and determined that it is feasible to report ACS data separately for these two types of teachers and is considering changing this. HHS and Education told us they have taken steps to proactively influence the revision of occupational and industry codes in the next revision cycles. HHS told us, for example, that they are consulting with research experts regarding proposed revisions to occupational codes for ECCE workers and that they have developed a workplan and timeline to ensure that they fully participate in the five-year revision cycle of these codes scheduled to start in 2013 (see appendix IV). Education also told us that they are working with or planning to work with BLS and Census to improve ECCE data. For example, they mentioned that they are working with Census on ways to expand upon and improve data gathered through household surveys in general on educational certificates and other credentials and that any enhancements resulting from this work may extend to ECCE workforce data (see appendix V). Experts and government officials that we spoke with said that in general, better educated and trained ECCE workers are more effective than those with less education and training because they are able to acquire the skills and knowledge necessary to more effectively work with children. Some research has concluded that teachers and caregivers with higher degrees, especially those with a concentration in early childhood education or development, were more effective than those with less education or no degree. Other research did not find as clear a link. Some of the discrepancies in these findings are attributed to the wide variability of study designs and not taking the environment in which teachers work into account (e.g., staff-to-child ratios and adequate materials and physical settings). In terms of income, research has found that better educated ECCE workers can command higher salaries, but that salaries do not necessarily increase worker quality in and of themselves. It appears that better educated teachers and caregivers are more competitive in the marketplace, and thus are better able to select jobs that pay more, and these jobs tend to be associated with higher quality ECCE programs. HHS and Education administer six key ECCE programs that provide states and other grantees the flexibility to spend federal dollars for ECCE purposes—sometimes from program funds set aside to improve general program quality—on a variety of workforce quality improvement activities. HHS and Education do not have complete information on all program workforce quality improvement activities, including the amount of funds spent, at least in part because states have discretion over how they use program funds. However, such activities can include professional development, wage supplementation, and scholarships (see fig. 4). For example, HHS’s Head Start program has funded online professional development for staff in rural and other areas where staff find it difficult to meet credentialing requirements. Because of this targeted professional development intervention and other efforts, more staff have been able to get the training needed to satisfy those requirements, according to HHS officials. HHS and Education officials said states and other grantees are not required to report expenditures on activities to improve the quality of ECCE workers. For example, Head Start officials noted that about half of the fiscal year 2010 $176 million allocated for training and technical assistance was provided to local grantees. Those officials also noted that there is no readily available way to disaggregate the money used for workforce quality improvement training and technical assistance from money spent on other items in a grantee’s budget. Likewise, Education officials explained that, although their programs maintain data on the amount awarded to state or other grantees, it would be difficult to determine how much was used on activities to improve the quality of ECCE workers. However, one program—CCDF—has begun collecting more data from the states on the use of CCDF to improve worker quality through the biannual CCDF state plan process beginning in fiscal year 2012-2013. HHS’s Office of Child Care will require states to assess their efforts to create an effective and well-supported child care workforce, including availability of ECCE degree programs offered in a state, quality assurance mechanisms for training programs and technical assistance, and descriptions of workforce data available to them. An HHS official told us that such information should help policymakers determine how to best use CCDF program quality funds to improve worker quality. Both HHS and Education have appointed a senior-level staff member as a “point person” to coordinate with other federal agencies and raise awareness of the importance of early care and education. In HHS, this position is Deputy Assistant Secretary and Inter- Department Liaison for Early Childhood Development; in Education it is Senior Advisor to the Secretary on Early Learning. support of the development of integrated state early learning and development systems. Jointly administering the Race to the Top-Early Learning Challenge grant, which is intended to improve the quality of ECCE for children. In May 2011, HHS and Education announced $500 million in funding for the Race to the Top-Early Learning Challenge competitive grants awarded in December 2011. These competitive grants to states support ECCE infrastructure, such as more coherent early childhood systems and developing data on ECCE workers. The grants also encourage states to increase retention and educator quality by supporting their ECCE workers with professional development, career advancement opportunities, and incentives to improve their skills. Administration, monitoring, and oversight of these grantees by the two agencies are ongoing, according to Education officials. Convening interagency study groups in September 2009 to increase coordination and collaboration on early learning issues. The agencies tasked the groups with identifying and helping articulate key components of a high-quality, coordinated state system of early learning and development. The groups identified seven such systems, including workforce and professional development systems, program standards, and data systems, and the groups informed the development of criteria for the Race to the Top-Early Learning Challenge grants. These groups met for about a year, and as of September 2011, there were no plans to resume them. Conducting several “listening tours” to obtain input on workforce issues at meetings across the country. One of these tours focused exclusively on ECCE workers and professional development. In addition to their recent collaborative work, HHS and Education have each worked to improve ECCE worker quality with their own initiatives. For instance, HHSofficials noted two new national centers to provide child care technical assistance to states, territories, and tribes on improving the quality of care for preschool and school-age children, including improving ECCE worker quality. In addition to the Early Learning Challenge grants, Education also included an ECCE focus as a priority in prior Race to the Top grants and Investing in Innovation grants, whereby a few applications targeted ECCE workers. Education officials said they hoped to reach those in informal home-based settings as well. At the time of our review, it was too soon to assess the impact of these initiatives on the quality of ECCE workers. In our survey of state child care directors, the 37 states that responded reported spending at least $1.4 billion on activities to improve ECCE worker quality over fiscal years 2007 through 2010. The two most heavily funded activities were worker in-service training and scholarships. All 37 states reported pursuing in-service training, coaching, and mentoring, and 34 states said they offered scholarships or other financial aid to students in postsecondary education. States responding reported spending more on training than scholarships: nearly 60 percent, or about $848 million, of all funds dedicated to ECCE worker quality went to training while less than 20 percent, or about $259 million, went to scholarships (see fig. 5). Neither the overall level of funding nor the number of states pursuing specific activities changed substantially from 2007 to 2010. Wage supplementation was the activity with the third-highest funding total reported by our survey respondents, who said they spent about 12 percent of total funds for ECCE worker quality on wages, or about $172 million from fiscal years 2007 through 2010. Nineteen of 37 states reported supplementing wages and 3 of those accounted for almost all— 81 percent—of these expenditures. Wage supplementation can encourage increased professional development and worker retention by paying workers who obtain additional formal education or in-service training a higher amount, according to several state officials. While the supplemental wages may require workers to stay in their current program for a specified amount of time, the increases provide a greater incentive for workers receiving them to remain in these occupations, according to several state officials. For example, officials from two states we surveyed said they believe wage supplementation has increased professional development and retention of ECCE workers in their states. These officials noted state research that suggested the wage supplementation increased worker retention and an interest in pursuing further education. The types of ECCE workers targeted by states’ quality improvement activities varied among our survey respondents, but across all activities, center-based child care workers were targeted most and private home- based child care workers the least. For example, 34 states reported targeting training activities to center-based workers to a great or very great extent in fiscal year 2010, while only 2 states said they targeted training to private home-based workers to a great or very great extent. Several state officials we spoke to said they most frequently target center-based child care workers because those centers care for far more children than private in-home workers. Moreover, research has suggested that private in-home workers may be less interested in formal training workshops and instead prefer less formal learning approaches, such as home visits. Research has also suggested that on-site training and visits to family-based child care providers can be effective for workers in that setting. Overall, responding states that could identify the funding streams used reported relying primarily on CCDF and state funds for worker quality and improvement activities. Specifically, CCDF and state funding streams each accounted for more than 40 percent of the total funding and together close to 90 percent (about $1.3 billion) of all funding identified by the state respondents from fiscal years 2007 through 2010. Other sources of funding included IDEA and Improving the Academic Achievement of the Disadvantaged (Title I), as well as Head Start and other federal funding and private funds (see fig. 6). The existing gaps in national data on the ECCE workforce make it difficult to describe these workers and whether they have the necessary education, training, and skills to help children reach positive outcomes. Not knowing the true size of this workforce and its education and training levels inhibits research needed to link worker characteristics to worker quality, and to positive outcomes, including academic achievement of children, particularly those from low income families. Lack of data also hinders development of targeted support for these workers. However, data collection can be expensive and burdensome to both the agency conducting the collection effort as well as the public responding to these efforts. Hence careful consideration is needed when thinking through options, costs, and the resultant value of the data to be collected. The federal government is uniquely positioned to improve national data collection, while balancing these considerations, because of its experience in conducting nationwide household and business surveys and its administration of programs and grants and accompanying reporting requirements. HHS and Education have taken a number of steps to improve data collection, such as funding a survey of caregivers and teachers, and beginning to work with BLS and Census to determine how best to improve federal statistical surveys, which include data on ECCE workers across program settings; however, it is too early in the process to assess the impact of these changes on federal data collection efforts in general, let alone their ultimate success in improving federal data on the ECCE workforce iin particular. We provided a draft of this report to the Departments of Health and Human Services and Education for review and comment. HHS’s written comments are reproduced in appendix IV, and Education’s comments are reproduced in appendix V. Technical comments from both agencies were incorporated in the report as appropriate. In their written comments, both Education and HHS generally agreed with the report’s conclusions, namely that data on the ECCE workforce need to be improved. Both agencies also provided additional information in their comments that gave us cause to reconsider a recommendation put forth in the draft report that they reviewed. This additional information was not provided to us at the time of our study or at exit meetings held with the agencies when we discussed the findings to be included in our draft report. It outlined how HHS and Education are working with or plan to work with OMB, BLS and Census to improve national data on the ECCE workforce currently available through the American Community Survey and other federal statistical surveys. Our draft report contained a recommendation to this effect, but in light of the new information, we have deleted it. The additional information is contained in HHS and Education’s written comments and has been incorporated into the report as appropriate. HHS’s comments suggested that GAO develop a recommendation related to the capacity of the higher education system to provide adequate professional development opportunities for all ECCE workers who may want them, noting the information we present in the report about the percentage of ECCE teachers without college degrees. While we acknowledge that this is an important concern for HHS, our study’s objective was to describe what we knew about the characteristics of this workforce, which in turn led to a discussion about the data limitations and problems. To develop a recommendation such as the one suggested by HHS would require us to delve into more depth about the characteristics of the ECCE workforce, such as why education levels are low, which was outside the scope of our study. HHS objected to our statement used in the Highlights page that said, “some research indicated that ECCE workers who are better educated and trained are more effective teachers, but other research did not find as clear a link.” Due to space considerations on the Highlights page, this sentence truncated the details laid out in the report, and as such, we have revised it to more closely reflect the report text. That said, we stand by our conclusions about the research as presented in the report, which is based on interviews with experts—including HHS officials—as well as our own review of the literature. HHS also objected to the statement in our report that HHS and Education do not have complete information on all program workforce improvement activities, including how they are funded. In its comments, HHS noted that it was developing such information and provided the example of the CCDF. For example, HHS stated that the Office of Child Care has asked states about their professional development activities using CCDF, including new information to be submitted beginning in December 2012. The statement in our report, however, reflects the workforce improvement activities across six ECCE programs pursued at both HHS and Education, not just CCDF and we have clarified this in the report. Moreover, we mention the new CCDF reporting requirements in the report as an example of how some information is being gathered on workforce quality improvement activities. Lastly, HHS outlined other efforts that they have undertaken over the past 2 years to improve ECCE workforce data. Many of these examples were already in the report, although we did incorporate some additional details on them from HHS’s comments where appropriate. In its comments, Education cited concerns that not all data limitations raised in the report could be solved through improving ACS or other federal statistical data. We agree with this perspective and do not believe that we suggest this in the report. We highlight the ACS and the other federal surveys because they are the current vehicles by which the federal government is collecting ECCE data through agencies such as BLS and Census. We assume that any effort among the various federal agencies about how to improve the data would delve more explicitly into what data were needed by the agencies and which changes, if any, made sense for any particular database. Education also cited the balance that Census in particular has struck between the need for more data and the public burden of responding to such data collection efforts. Again, we fully agree with the need to balance data collection and public burden and have cited the need for this balance in our concluding observations. We are sending copies of this report to the Secretary of Health and Human Services, the Secretary of Education, the appropriate congressional committees, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions regarding this report, please contact me at (202) 512-7215 or brownke@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. The objectives of our report on the quality of Early Child Care and Education (ECCE) workers were to determine (1) What is known about the composition, education, and income of ECCE workers and how these characteristics relate to quality? and (2) What activities are the Department of Health and Human Services (HHS), the Department of Education (Education), and the states financing to improve worker quality? For this review, we focused on paid ECCE workers who care for and educate infants to prekindergarten and school-age children in before- and after-school programs. To address the first objective, we analyzed data on the composition, education level, and income of the ECCE workforce from the U.S. Census Bureau’s (Census) American Community Survey (ACS) and HHS’s Head Start Program Information Report (PIR); interviewed ECCE experts, researchers and government officials; reviewed relevant federal laws and regulations; and identified and reviewed studies on the characteristics and quality of the ECCE workforce. ACS is an ongoing national survey of 3 million households, which replaced the decennial census long form questionnaire as a source for social, economic, demographic, and housing information in 2000. We chose this source because of its large sample size and detailed information on the education levels of its respondents. Using ACS 2009 data, we identified ECCE workers based on the following criteria: The individual was an employed civilian. If not self-employed, the individual had positive wage or salary income. The individual fell into one of the following categories (with ACS industry or occupation number in parentheses): Family-based child care worker: Individual was self-employed, worked in the child day care services industry (8470) under the child care worker occupation (4600) or under the education administrator occupation (0230). Center-based child care worker: Individual was not self employed and worked in either the child day care services industry (8470) or in the elementary or secondary school industry (7860) under the child care worker occupation (4600). Teaching Assistant: Individual worked in the child day care services industry (8470) under the assistant teacher occupation (2540). Preschool teacher: Individual worked in the child day care services industry (8470)kindergarten teacher occupation (2300) or under the special education teacher occupation (2330). under either the preschool or Private home-based child care worker: Individual worked in the private household industry (9290) under the child care worker occupation (4600). Director of programs: Individual was not self-employed and worked in the child day care services industry (8470) under the education administrator occupation (0230) or under the director of religious activities and education occupation (2050). Unless otherwise noted, all ACS estimates had a 95 percent confidence interval within plus or minus 10 percent of the estimate. We assessed the reliability of these data by reviewing available documentation, discussing the strengths and limitations of the data with Census officials, and conducting reliability tests on the data that we used. We determined that the data were sufficiently reliable for the purposes of describing the composition, education level, and income of the ECCE workforce. We also examined Head Start and Early Head Start PIR data. Head Start grantees report on the Head Start and Early Head Start programs they administer annually to HHS using HHS’s PIR reporting system; we used data from the 2008-2009 program year. We assessed the reliability of these data by reviewing available documentation, discussing the strengths and limitations of the data with HHS Head Start officials, and conducting computerized reliability tests on the data that we used. We determined that the fields relating to education and salary of Head Start and Early Head Start teachers, as well as teaching assistants, were sufficiently reliable to include in this report. Because salary data for teachers and teaching assistants were reported as an average by position for each Head Start or Early Head Start program, we averaged these data across all programs and weighted them by program size and numbers of teachers and teaching assistants in order to report them as an average for all programs by Head Start position. Although PIR data contain education and salary information on Head Start program directors, we did not report these data for two reasons. First, PIR data do not uniquely identify program directors and this can result in double counting because one director can oversee multiple programs, according to HHS Head Start officials. Second, HHS officials also told us that Head Start program directors often oversee programs that are much larger and more varied than a typical child care or preschool program, thus they are not necessarily comparable to directors of these other program types. We also interviewed ECCE experts and federal officials to obtain their perspectives on ECCE worker quality and on the availability and limitations of ECCE workforce data. We identified experts and government officials by reviewing studies and policy papers, attending two conferences, and reviewing applicable websites. Experts and government officials we interviewed included those from the National Association for the Education of Young Children; the National Institute for Early Education Research; the Center for the Study of Child Care Employment; HHS’s Office of Planning, Research, and Evaluation; HHS’s Administration for Children and Families; Education’s Office of Special Education and Rehabilitative Services; Education’s Office of Elementary and Secondary Education; the Human Services Policy Center, Evans School of Public Policy, University of Washington; the National Association of State Child Care Administrators; the Charles Stewart Mott Foundation; and the National Association for Family Child Care. Our discussions on ECCE worker quality covered such topics as perspectives on quality of the ECCE workforce as a whole, as well as for workers in particular ECCE workplace settings (e.g., child care, preschools, or Head Start programs) and if and how education and income levels relate to worker quality. Our discussions on the availability of ECCE workforce data sought to identify data collection efforts that organizations were currently undertaking—for example, state efforts to collect workforce data through registries. We also identified relevant studies on the characteristics and quality of the ECCE workforce while conducting the above interviews and by searching the literature. Our search emphasized studies conducted from 2006 through 2011, although we also included several older relevant studies. Likewise, although our search emphasized studies that were national in scope, we also included key studies that pertained to only a portion of the country or the workforce. We searched a number of bibliographic databases, including ERIC, ProQuest, PsycINFO, Social SciSearch, and PolicyFile. Our search used such search terms as child care workers, preschool teachers, and early childhood care providers. Two analysts, at least one of whom was a social scientist with expertise in research methodology, reviewed all studies cited in this report to ensure their reliability and to ensure that we presented their findings accurately. Appendix III lists the key studies we cited in this report. To address the second objective and obtain background information, we surveyed the 50 states and the District of Columbia; interviewed officials from HHS and Education, contacted several states for follow-up information; and reviewed relevant federal laws and regulations. We surveyed the 50 states and the District of Columbia about the types of activities states pursued to improve ECCE worker quality from fiscal years 2007 through 2010 and the amount of federal, state, and private funds used to finance these activities. The survey further categorized federal funds as follows: Child Care and Development Fund (CCDF) not funded by the American Recovery and Reinvestment Act of 2009; CCDF/American Recovery and Reinvestment Act of 2009; Improving Academic Achievement of the Disadvantaged (Title I); Individuals with Disabilities Education Act (IDEA); and other federal funds (such as Head Start and 21st Century Community Learning Centers). We sent the survey to state lead agency child care administrators because they are responsible for managing government child care programs and subsidies in their states, including the administration of CCDF. To get as complete information as possible, these child care administrators were requested to contact the state educational agencies in their states and other relevant departments about funding for activities in their states. We developed protocols that facilitated coordination between the state lead agency child care administrators and state departments of education to encourage full participation in the survey. We pretested the survey in five states and made appropriate revisions to the survey in response to these pretests. The survey also contained questions about the reliability of the state data systems that housed the funding data reported in the survey. All states responding to our survey indicated that these systems were sufficiently reliable for the purposes of reporting funding figures requested in the survey. Thirty-seven states responded to our survey (a 73 percent response rate) and these responses are not generalizable nationwide. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors. For example, difficulties in how a particular question is interpreted, in the sources of information that are available to respondents, or how data are analyzed can introduce unwanted variability into survey results. We took steps in the development of the questionnaire, the data collection, and the data analysis to minimize such errors. For example, a GAO social science survey specialist designed the questionnaire, in collaboration with GAO staff with subject-matter expertise. As we mentioned earlier, the draft survey was pretested and was reviewed by a second GAO social science analyst. When data were analyzed, an independent GAO analyst verified the statistical program used for the analysis. Since this was a web-based survey, respondents entered their answers directly into the electronic questionnaire, thereby eliminating the need to have the data keyed into a database and avoiding data entry errors. We conducted this survey between April 20 and July 1, 2011. We also interviewed HHS, Education, and several state officials to determine the types of activities and strategies agencies pursued to improve workforce quality; the federal and state funding sources most commonly used to finance these activities and strategies; perspectives regarding if and how worker quality was improved as a result; and how the agencies track the relevant spending and results. We also reviewed relevant federal laws and regulations. Finally, we reviewed other documentation pertaining to the HHS and Education ECCE funding efforts to determine if and how these funds could be used to improve worker quality. The GAO workforce quality improvement activity survey of the 50 states and the District of Columbia included the following activities and descriptions. Activity description Initiatives that provide or give ECCE workers opportunities to obtain relevant and ongoing training. These opportunities focus, at least in part, on how to become a more effective early-learning teacher. Examples of in-service training include workshops, classes, and conferences. Coaching and mentoring include ongoing one-on-one support from more experienced child care professionals. Scholarships or other forms of financial aid available to students attending institutions of higher education. For example, scholarships through the Teacher Education Assistance for College and Higher Education program that subsidize a student obtaining a degree or other financial aid programs which subsidize higher education coursework, but not necessarily a degree. Develop, redesign, or improve state registry systems (i.e., an automated data system that tracks the workforce) State registry systems or other automated data systems that collect data on the ECE workforce and/or track and approve ECE trainers and classes. Train the trainer programs that are focused, at least in part, on how to improve the quality of the ECCE workforce. One example is train the trainer programs, which have a sole or partial focus on effective mentoring or coaching strategies for improving the interactions between ECCE workers and the children in their care. Another example is train the trainer programs, which have a sole or partial focus on effective strategies for developing early-learning teaching skills in language, literacy, pre-reading and early math. Initiatives that provide the ECCE workforce with educational and/or experiential opportunities to upgrade their job skills and which result in state certificates or credentials. Examples are early childhood certificates or credentials, associate certificates or credentials, administrator certificates or credentials, and after-school education credentials. Initiatives which initiate or increase agreements between two or more colleges, universities, or state-credentialed or certification programs, whereby course credits that students earned from one educational institution can apply toward a higher degree at another institution. Wage supplemental programs, regardless of whether the program ties such supplementation to an ECCE worker obtaining progressively higher levels of education or training. Initiatives that are designed to help prospective and existing ECCE workers get information and advice on a variety of career planning topics such as skills assessments, career advancement in general or according to a state’s specified career path, and employment opportunities. Apprenticeship programs are usually in partnership with the U.S. Department of Labor and/or state departments of labor and provide both instruction on early childhood learning and on-the-job training under the supervision of an ECCE professional. The GAO survey contained questions about three other activities that were not included in the final results. Two activities’ survey questions allowed space for respondents to record other workforce improvement activities that they did not believe fit into the specified worker improvement activities noted in the table above. GAO did not include the results of these two “other” categories because, upon review, some responses did not seem to be appropriate for inclusion in these other categories. For example, it seemed that a number of the activities listed by some states did not seem to be activities primarily designed to improve the quality of ECCE workers. The total amount of funds states attributed to these two other categories was approximately $204 million. The third activity not included in the final results was monetary or other incentives given to child care or prekindergarten programs for workforce quality improvement activities. We did not include this in our results because the majority of the funding information on this activity was for payments to child care providers for child care, rather than activities to improve ECCE worker quality. States that had reported most of the funding for this activity noted that there was no way to separate the funds given to providers for earning higher education—the ECCE worker quality improvement activity—from funds given to those same providers for the underlying provision of child care. Since we could not identify the funds spent on ECCE worker quality activities for vast majority of the funds reported, we did not report on the funding for the category as a whole. Early Education and Care: Overlap Indicates Need to Assess Crosscutting Programs. GAO/HEHS-00-78. Washington, D.C.: April 28, 2000. GAO Update on the Number of Prekindergarten Care and Education Programs, GAO-05-678R. Washington, D.C.: June 2, 2005. HHS, Office of Inspector General. Most Early Head Start Teachers Have The Required Credentials, But Challenges Exist. OEI-05-10-00240. August 2011. Weiss, Elaine and Brandon, Richard. The Economic Value of the U.S. Early Childhood Sector. The PEW Center on the States. July 2010. Brandon, Richard with Scarpa, Juliet. Supply, Demand and Accountability: Effective Strategies to Enhance the Quality of Early Learning Experiences Through Workforce Improvement. Human Services Policy Center Whitepaper, Evans School of Public Affairs, University of Washington. May 2006. Saracho, Olivia N., Spodek, Bernard. “Early Childhood Teachers’ Preparation and the Quality of Program Outcomes.” Early Child Development and Care, vol. 177, no. 1 (January 2007): 71-91. Torquati, Julia; Raikes, Helen; Huddleston-Casas, Catherine. “Teacher Education, Motivation, Compensation, Workplace Support, and Links to Quality of Center-Based Child Care and Teachers’ Intention to Stay in the Early Childhood Profession.” Early Childhood Research Quarterly, vol. 22, no. 2 (2007): 261-275. Early, Diane, Maxwell, Kelly, Burchinal, Margaret, et al. “Teachers’ Education, Classroom Quality, and Young Children’s Academic Skills: Results from Seven Studies of Preschool Programs.” Child Development, vol. 78, no. 2 (March/April 2007): 558-580. Bromer, Juliet. The Family Child Care Network Impact Study: Promising Strategies for Improving Family Child Care Quality. Herr Research Center for Children and Social Policy at Erikson Institute, Policy Brief 2009, No.1. Paulsell, Dianne; Porter, Toni; Kirby, Gretchen. Supporting Quality In Home-Based Child Care: Final Brief. Mathematica Policy Research Inc. March 31, 2010. Kipnis, Fran and Whitebook, Marcy. Workforce Information: A Critical Component of Coordinated State Early Care and Education Data Systems, Policy Brief 2011. Center for the Study of Child Care Employment. In addition to the individual named above, others making key contributions to this report include Janet Mascia (Assistant Director), Nancy Cosentino, Shelby Kain, Carla Rojas, Andrew Nelson, Susan Aschoff, Alex Galuten, Shana Wallace, Ben Bolitzer, Stewart Kaufman, Cathy Hurley, Christine San, and Ashley McCall. | Research shows that well trained and educated ECCE workers are key to helping children in care reach their full developmental potential. Federal and state governments spend billions of dollars each year to improve ECCE programs, including the quality of its caregivers and teachers. Because of the importance of this workforce and the federal investment in it, GAO examined (1) what is known about the composition, education, and income of the ECCE workforce and how these characteristics relate to quality, and (2) what activities are the Departments of Health and Human Services (HHS) and Education, and the states financing to improve worker quality? GAO surveyed state child care administrators, interviewed HHS, Department of Education (Education), and other federal and state officials; interviewed ECCE experts and researchers; analyzed Census Bureau and Head Start data; conducted a literature search; and reviewed relevant federal laws and regulations. The paid early child care and education (ECCE) workforce was made up of approximately 1.8 million workers in a range of positions, most of whom had relatively low levels of education and income, according to Censuss 2009 American Community Survey (ACS) data. For example, nearly half of all child care workers had a high school degree or less as did 20 percent of preschool teachers. Average yearly income ranged from $11,500 for a child care worker working in a childs home to $18,000 for a preschool teacher. Experts and government officials that we spoke with said, in general, better educated and trained ECCE workers are more effective than those with less education and training. They also noted the need for more comprehensive workforce datasuch as on workers with specialized ECCE training. While existing ECCE workforce data provide valuable insight into worker characteristics, critical data gaps exist. For example, these data omit key segments of ECCE workers, such as some caregivers who provide child care in their own homes, and also do not separately identify preschool teachers working in elementary schools. HHS and Education have taken steps to improve ECCE workforce data, such as providing guidance and funding to states to encourage the collection of state-level data and working with federal agencies to improve workforce data collected nationally. HHS, Education, and the states use training, scholarships, and other activities to improve ECCE worker quality, but program and funding data are scarce. For example, HHS funded online training to help Head Start teachers meet new teacher credentialing requirements. Both HHS and Education have collaborated on initiatives to improve ECCE worker quality, such as the Race to the Top-Early Learning Challenge Grants. For the most part, however, neither HHS nor Education track expenditures on worker quality improvement. In our survey, states reported that the most common workforce improvement activities were in-service training, coaching, and mentoring for current workers (all 37 state survey respondents) and scholarships to workers enrolled in higher education programs (34 states). Of those who knew funding sources for these activities, states reported relying primarily on state and federal child care funds. GAO is not making recommendations in this report. HHS and Education generally agreed with the reports findings and conclusions and also provided additional information on several specific points in the report. |
Since 1991, DynCorp Aerospace Technology has provided support services for State’s counternarcotics program in the Andean region and, occasionally, in Central America. In 1998, State awarded a 5-year, cost plus award fee contract to DynCorp for approximately $170 million to continue this support. The Bureau’s Office of Aviation manages the overall aviation program from its main operating base at Patrick Air Force Base, Florida. As the aviation program’s contractor, DynCorp performs major maintenance and initial pilot training at Patrick Air Force Base and flies and maintains U.S. aircraft and trains foreign personnel at various locations in Bolivia, Colombia, and Peru. The total budget for the aviation program is about $50 million annually. See appendix I for a summary of the aviation program’s staffing and assets by country. In Colombia, the Office of Aviation and DynCorp maintain a headquarters office and hangar at the El Dorado International Airport in Bogota. They also operate forward operating locations at airfields on several Colombian military and police bases. The Office of Aviation and DynCorp fly aerial eradication missions from several locations in Colombia. In recent months, they have used a Colombian Army base at Larandia and a Colombian National Police base in San Jose—usually one or the other but currently both. The Office of Aviation and DynCorp are collocated with the Colombian Army Aviation Brigade in Tolemaida. They use this base primarily for training, maintenance, and repair. As we reported in June 1999 and October 2000, U.S. estimates indicate that the illicit drug threat from Colombia has both expanded and become more complex over the past several years. Insurgent and paramilitary groups have increased their drug-trafficking activities, severely complicating U.S. and Colombian efforts to reduce illicit drug cultivation and production. For example, the insurgents exercise some degree of control over 40 percent of Colombia’s territory east and south of the Andes where, according to the Drug Enforcement Administration, most of the new coca cultivation sites and most of the major drug production facilities are located. As a result, the aerial eradication missions are dangerous; and as a normal course, helicopter gunships and search and rescue aircraft accompany the eradication aircraft. Eradication planes and the supporting helicopters are often shot at. Aerial eradication missions have been cancelled or redirected because Office of Aviation or government of Colombia officials considered the targeted locations too dangerous. The Office of Aviation’s oversight of DynCorp met both State’s overall contracting requirements and requirements specified in the contract with DynCorp. State requires the Office of Aviation to examine contractor performance to ensure compliance with the contract and coordinate with the contractor on all matters that may arise in the administration of the contract. The contract includes State’s oversight requirements and also establishes DynCorp’s performance-based award fee plan, which requires the Office of Aviation to evaluate contractor performance every 4 months to determine DynCorp’s monetary award. Under the terms of the contract, DynCorp is entitled to reimbursement of reasonable and allowable costs incurred and an award fee—which averaged about $410,000 each trimester between June 1999 and January 2001—based on the Office of Aviation’s evaluation of DynCorp’s performance. The contract establishes four evaluation categories— management, technical proficiency, safety, and cost—and four performance assessment levels—outstanding, excellent, satisfactory, and unsatisfactory. Each assessment level corresponds to a range of percentages of the additional compensation that could be granted to DynCorp. For example, if the Office of Aviation rates DynCorp’s overall performance in the evaluation categories as outstanding, the Office would award a minimum of 95 percent of the award fee. An excellent rating would be 75 to 94 percent of the award fee. A key distinguishing factor between each assessment level is the Office’s evaluation of DynCorp’s ability to identify and correct deficiencies in the program or preclude deficiencies from occurring by proactive management. The Office of Aviation’s oversight measures consisted of regular interaction with DynCorp officials and frequent visits to operating sites. In addition, Office of Aviation officials regularly reviewed reports submitted by DynCorp’s senior in-country managers outlining DynCorp’s performance on a daily, weekly, and monthly basis. The Office of Aviation is collocated with DynCorp at the main operating base and in each country, thus allowing Office of Aviation officials to monitor DynCorp’s operations on a daily basis. At the headquarters office in Bogota, Colombia, for example, we observed a senior Office of Aviation official conferring with DynCorp’s operations manager about the flight schedule of the C-27 cargo plane; frequent telephone communication among Office of Aviation and DynCorp officials about operational matters, such as the delivery of needed supplies or the availability of pilots and mechanics at specific locations; and discussions about a program to verify the amount of coca eradicated. Further, during our visits to Larandia and Tolemaida, DynCorp managers made frequent contacts with their Office of Aviation counterparts concerning the status of planned security upgrades and training for the Colombian Army Aviation Brigade, respectively. Senior Office of Aviation officials told us that they held regular meetings at the main operating base with DynCorp managers to discuss program objectives and provide guidance on operational plans and procedures. Several DynCorp employees stated that the regular meetings have improved the program’s operations. The DynCorp maintenance manager in Colombia told us that Office of Aviation officials have incorporated his expertise when drafting or revising standard operating procedures on issues relevant to his duties. Furthermore, a manager’s meeting in April 2001 addressed the delay in shipping special tools to the DynCorp maintenance manager in Tolemaida. To solve the problem, DynCorp is now assessing the status of requests and reviewing the procedures for ordering tools. Senior Office of Aviation officials also made frequent visits to Colombia to oversee DynCorp operations. The operations officer made seven visits from June 1999 to March 2001. On several of his visits in 2000, he provided guidance to help establish the aviation support for the Colombian Army’s Aviation Brigade. He stated that he regularly accompanies the contractors on eradication missions to provide guidance. The Office of Aviation Director and other senior officials told us they made numerous trips to overseas locations, primarily Colombia, during the same period to confer with DynCorp managers and other Office of Aviation officials and provide technical assistance. Office of Aviation officials regularly reviewed DynCorp’s reports, including monthly reports from DynCorp’s in-country managers summarizing the contractor’s performance. These reports are based on daily and weekly reports submitted by managers from each forward operating location. The Office of Aviation also regularly received daily and weekly reports on the flight status of all aircraft and copies of all contractor memorandums dealing with safety. The senior Office of Aviation official in Colombia told us he viewed the contractor’s input as critical for his monthly evaluation of contractor performance. Although the Office of Aviation and DynCorp interacted regularly, several Office of Aviation and DynCorp officials told us that a high turnover of DynCorp managers in Colombia over the past 2 years had led to frequent misunderstandings between the main operating base in Florida and operational sites in Colombia. We were told about several instances when managers in Colombia communicated directly with the main operating base, bypassing DynCorp managers in Bogota. In late 2000, the Office of Aviation encouraged DynCorp to promote a pilot to operations manager in Bogota and, after a new country manager was hired, provided oral and written guidance clarifying the chain of command. A number of Office of Aviation and DynCorp officials told us that these changes had alleviated tension that had been building between the Office of Aviation and DynCorp and greatly improved the overall morale of personnel in the program. Every month, senior Office of Aviation officials in Bolivia, Colombia, and Peru submit a report to the main operating base in Florida evaluating DynCorp’s performance using the evaluation categories—management, technical proficiency, safety, and cost. The Office of Aviation Deputy Director consolidates the country reports and an evaluation of contractor performance at the main operating base into an overall monthly evaluation. The consolidated report is used to evaluate DynCorp’s performance and help make the trimester award fee determination. We reviewed the monthly and consolidated reports prepared from June 1999 through January 2001. We noted that the trimester performance evaluations encouraged DynCorp to correct deficiencies. For example: In August and September 1999, the senior Office of Aviation official in Peru rated DynCorp’s performance in quality control (a measure within the technical proficiency category) as unsatisfactory—the lowest of four ratings. He determined that poor quality control resulted in unnecessary downtime for one of the aviation program’s cargo planes and that the downtime affected daily operations. These evaluations were incorporated into the September 1999 trimester evaluation, lowering Peru’s technical proficiency and overall ratings from the previous trimester evaluation. In October and November 1999, Peru’s quality control ratings improved, and in January 2000 a joint review by Office of Aviation and DynCorp officials also noted improvements in Peru’s quality control program. The January 2000 trimester evaluation showed Peru’s quality control as excellent—the second highest of the four ratings. In the May 2000 trimester performance evaluation, the Office of Aviation lowered DynCorp’s safety rating to satisfactory following a March 2000 internal safety survey that was highly critical of the Colombian program. Office of Aviation officials noted that most deficiencies resulted from an unqualified safety manager at one operating location. In response, DynCorp hired a new safety manager, who began conducting regular audits and inspections of each operating location in Colombia. The September 2000 trimester evaluation showed that DynCorp had addressed the shortcomings identified in the internal safety survey. In the January 2000 trimester performance evaluation, the Office of Aviation rated Bolivia’s material support as unsatisfactory. The monthly reports leading to the evaluation cited lengthy delays in receiving spare parts and chemicals for a corrosion control program. Following the poor trimester rating, DynCorp improved the timeliness of its shipments and received an excellent rating in the April 2000 monthly report and the subsequent trimester evaluation in May 2000. In our review of the monthly and consolidated reports, we noted that DynCorp did not meet aspects of an evaluation category but received a high evaluation overall. Office of Aviation officials told us that in assessing DynCorp’s overall performance, the evaluation system permits them to consider mitigating circumstances and other information not specifically in the formal assessment. We found this to be the case with the contract’s technical proficiency category, which is based, in part, on the time aircraft cannot fly due to (1) maintenance deficiencies or (2) needed supplies were not available. During the majority of the period we examined (June 1999 through January 2001), DynCorp met the maintenance and supply rates. However, during two periods when DynCorp did not meet the contract’s rates, it was rated satisfactory or better for these two subcategories. During July through September 1999, more aircraft flying hours were lost due to maintenance problems than the contract allowed. Office of Aviation officials determined that this loss was beyond DynCorp’s control because an unusually high number of aircraft engine changes were needed. During August through December 2000, more aircraft flying hours were lost than allowed by the contract because DynCorp did not have needed supplies. Office of Aviation officials considered the situation beyond DynCorp’s control because it was the Office’s responsibility to provide the needed helicopter mast assemblies. Further, Office officials said that DynCorp did well to come as close as it did to this measure given the lack of mast assemblies. Although we are satisfied that the Office of Aviation considered each country’s reports in preparing the consolidated reports, during July 1999 to May 2000, portions of the Bolivian Office of Aviation senior official’s reports were not included. The current Office of Aviation officials in Bolivia and at the main operating base in Florida told us that the Office of Aviation official in Bolivia at the time sometimes provided information that was irrelevant to contractor performance. As a result, senior Office of Aviation officials at the main operating base often revised or excluded parts of the reports. For example, the official in Bolivia repeatedly reported that several training documents needed to be translated into Spanish, although translation was not part of the contract with DynCorp. In other instances, the official in Bolivia evaluated Office of Aviation performance rather than contractor performance—in more than half the affected reports, the official reported that the Office of Aviation did not provide needed supplies or guidance on the Bolivian nationalization program. To oversee and evaluate the safety of contractor operations and physical security of the aviation program’s facilities, Office of Aviation officials relied on daily interaction with DynCorp’s country managers and forward operating location managers, frequent site visits, periodic reports as part of the trimester performance evaluation, and internal and external reviews. Overall, these assessments judged aviation program operations to be safe and physically secure; however, some concerns have not been resolved. According to Office of Aviation and DynCorp senior officials, enhancing safety is an ongoing process, and their employees should always strive to identify and implement ways to enhance safety. To ensure that aircraft were maintained and operated safely, the Office of Aviation safety manager monitored and evaluated the safety of contractor operations at the main operating base and at overseas locations. The manager said he used a safety checklist based on U.S. government and aircraft manufacturers’ requirements when inspecting contractor operations and maintenance. He said that he monitored the main operating base on a daily basis and made periodic trips to overseas locations to monitor the safety of operations and maintenance. His trip reports identified safety issues that needed to be resolved and progress made in implementing previously identified safety concerns. The safety manager also coordinated with the DynCorp staff responsible for maintaining safe aircraft operations. For example, they worked together to update the aviation program’s accident response plan, modeling it after a plan the DynCorp safety manager used while serving in the U.S. Air Force. In addition, Office of Aviation officials conducted internal Aviation Resources Management Surveys of DynCorp operations at the main operating base and overseas locations. According to Office of Aviation officials, these surveys are intended to provide a stringent on-site safety assessment. The most recent survey for Colombia, completed in March 2000, concluded that DynCorp needed to devote more attention to safety. As previously noted, DynCorp hired a new safety manager who began conducting regular audits and inspections of each operating location in Colombia. In addition, DynCorp made other safety improvements, including establishing safety classes for pilots and instituting an airfield cleanup campaign. In August 2000, the Office of Aviation requested an independent evaluation of aviation operations and safety by the Inter-Agency Committee for Aviation Policy (ICAP). In November 2000, ICAP conducted a review of the Office of Aviation’s operations at two forward operating locations and the headquarters office in Colombia and at the main operating base in Florida. In February 2001, ICAP issued its report. ICAP concluded that the aviation program in Colombia and at Patrick Air Force Base was safe but made approximately 80 suggestions and recommendations to enhance safety and security. Office of Aviation and DynCorp officials have taken action on or implemented most of ICAP’s suggestions and recommendations. For instance: To improve their document control process, Office of Aviation and DynCorp officials told us they clarified the procedures for seeking comments on and approving changes to operating procedures and other directives. To improve maintenance oversight, DynCorp hired additional quality control staff to fill this role. To correct deficiencies identified at fuel stations at forward operating locations, DynCorp hired a fuel management specialist who has ensured that the deficiencies were corrected. In some instances, Office of Aviation officials disagreed with ICAP’s suggestions and recommendations. Among others, we noted the following: ICAP recommended that search and rescue helicopters accompany eradication aircraft on night operations. The Office of Aviation Director and Deputy Director said that eradication planes are much less likely to be shot down during night operations than in the daylight because the planes cannot be easily seen. Deploying helicopters nearby would serve to alert drug traffickers to the impending arrival of eradication aircraft and increase the likelihood that the traffickers could shoot them down. Further, deploying many aircraft during night operations increases the likelihood of aircraft accidents. ICAP recommended that the Office of Aviation update manuals to reflect modifications that were made to certain eradication aircraft. Office of Aviation officials noted that the aircraft in question were originally used 40 years ago as unarmed observation planes by the U.S. military. Later, the U.S. military added armaments and tested and documented their effect on the airplane’s performance. According to the Office of Aviation Director, the aviation program’s modifications have less effect on the aircraft’s performance than the U.S. military’s modifications. He said that as a result the manuals reflect a worse case than necessary and the aircraft does not need additional testing. In addition, such testing would be very expensive. In other instances, Office of Aviation and DynCorp officials agreed with ICAP’s suggestions or recommendations but have not yet corrected the problem. ICAP recommended that the aviation program provide emergency vehicles at its forward operating locations to assist in the event its aircraft have an accident during takeoff or landing. Office of Aviation officials said that they have asked the Department of Defense to identify any excess emergency vehicles in its inventory. The Office of Aviation was also searching for used emergency vehicles because new emergency vehicles are very expensive. ICAP pointed out that the aviation program needed to improve its management information system. Office of Aviation officials said they are implementing a new, integrated management information system and obtaining a satellite communications system to improve communication between remote locations. They said they expect to have both systems in place by November 2001. ICAP found that certification and training records for maintenance personnel were often not readily available or were dated. Office of Aviation and DynCorp officials agreed, and the DynCorp Program Manager said he would either hire a training coordinator or assign existing staff to fulfill those responsibilities. Although Office of Aviation and DynCorp officials assess physical security through regular site visits and inspections, State’s Bureau of Diplomatic Security has overall responsibility for ensuring a secure as possible workplace for U.S. government employees at overseas locations. Its Regional Security Office (RSO) in Bogota has assessed the aviation program’s security needs through site visits and inspection reports. RSO and Office of Aviation and other Bureau officials have reviewed Office of Aviation sites in Colombia to determine what action had been taken on previously identified weaknesses and to determine the adequacy of physical security. In May 2001, the forward operating location in use at Larandia still needed security improvements and, according to RSO officials, was especially vulnerable to sabotage. Specifically, a public road runs within a few feet of and parallel to a runway used for aerial eradication missions. On weekends the road carries considerable civilian traffic. The only physical security is a chain-link fence and a partially completed barrier. We observed that the public road had only minimal security with a checkpoint at the base entrance and an unmanned bunker near the airfield. RSO and other security reports have recommended additional security measures, such as adding a second checkpoint and erecting a solid barrier between the road and the airfield. Further, both RSO and ICAP have concluded that the headquarters office and hangar at the Bogota airport are not secure. The ICAP report identified this location as being especially vulnerable. During several weeks in April and May 2001, we observed that only one guard was at the entrance at any given time, and the office had no x-ray or bomb-detection equipment to inspect packages. Further, the office and hangar are on a public road adjacent to a commercial shipping business. Each day, we observed a large volume of vehicles entering the area and parking near the aviation program’s office. Both RSO and ICAP recommended that State find a more secure facility. Office of Aviation and Bureau officials agreed with the physical security assessments and recommendations and said upgrades in security should be completed in the next few months. However, they noted that they must rely on government of Colombia and U.S. Embassy support to make the improvements because aviation program facilities are not located on U.S. government property. Office of Aviation officials told us that the U.S. Embassy is negotiating with the Colombian Army base commander at Larandia to increase security checkpoints on the public road. In addition, the Colombia National Police have increased the number of staff assigned to the airfield. The U.S. Embassy had found a more secure location for the aviation program’s headquarters office and hangar at the Bogota airport and had been negotiating a lease. However, according to Office of Aviation officials, that location is no longer suitable and U.S. Embassy and Bureau officials have begun a search for another location. The Office of Aviation complied with the requirements of the State Department and the DynCorp contract through an integrated oversight and performance evaluation process. The Office’s oversight measures, which include reviews of DynCorp reports and frequent communication, are a fundamental part of the process. These measures provide the Office with sufficient information to evaluate the effectiveness of DynCorp’s performance. Based on this information, each month the Office of Aviation formally notifies the contractor of how well it is doing and actions that it needs to take to improve performance. These steps culminate in a trimester evaluation leading to a performance-based, monetary award. This monetary award serves as an incentive for the contractor to cooperate with the Office of Aviation throughout the evaluation process. Because Office of Aviation and contractor staff in Colombia must perform their mission in a hostile environment, maintaining the safety and security of these personnel, the physical structures, and aircraft is crucial. Although the Office of Aviation has taken steps to improve safety and security in Colombia, it has not completed all actions that ICAP and RSO identified as necessary. We recognize that guaranteeing the safety and security of Office of Aviation and contractor employees and assets is very difficult. Nevertheless, the Office of Aviation has not yet fully implemented all suggestions and recommendations to ensure that its employees and contractors work in locations that are as safe and secure as possible. To improve the safety and security of the Office of Aviation’s forward operating locations and headquarters office in Colombia, we recommend that the Secretary of State direct the Assistant Secretary of State for the Bureau for International Narcotics and Law Enforcement Affairs to document what remains to be done to address the suggestions and recommendations made by ICAP and RSO and when action is expected to be completed. In those instances where the Bureau disagrees that corrective action is necessary, we recommend that it document the reasons why it disagrees. The Department of State provided written comments on a draft of this report (see app. II). It stated that the report findings are essentially factual and correct and that it will continue to pursue improvements where needed. State also noted, as we did, that many of the concerns presented in the report are outside the control or influence of the Office of Aviation. Therefore, we urge the Assistant Secretary of State for the Bureau for International Narcotics and Law Enforcement Affairs to work with the Bureau of Diplomatic Security and the U.S. Embassy in Bogota, in particular, to complete required action in these areas. In addition, in oral comments, Office of Aviation officials provided technical comments that we have incorporated into this report, as appropriate. To determine what oversight and evaluation requirements were applicable for the DynCorp contract, we reviewed State’s regulations for contract oversight and the relevant contract provisions. We also discussed the contract oversight and evaluation requirements with State’s contract officer. To determine whether the Office of Aviation was adhering to the applicable oversight and evaluation requirements, we examined the trimester performance evaluation documentation for the period June 1999 through January 2001 in detail. Specifically, we examined each of the monthly reports from Bolivia, Colombia, and Peru and the consolidated reports and related documents prepared by Office of Aviation and DynCorp officials for the period and discussed the specific reports and issues raised in them with Office of Aviation’s senior officials, including the Director, the Deputy Director, and the Contract Technical Officer, at Patrick Air Force Base, Florida, and other Office of Aviation officials in Washington, D.C. In Colombia, we also discussed specific reports with Office of Aviation officials and DynCorp managers who had first-hand knowledge of the evaluations and the status of DynCorp’s efforts in the country at the time the reports were prepared. To determine whether the Office of Aviation ensured the safe operations of its aircraft and physical security of its facilities, we examined the safety issues raised in the monthly reports prepared for the trimester performance evaluations and the findings of the recent ICAP and RSO reports and Aviation Resources Management Surveys. We met with the team that conducted the ICAP review and discussed their methodology and criteria and the support for many of their findings in more detail than is presented in ICAP’s report. We followed up with Office of Aviation officials in Washington, D.C.; Patrick Air Force Base, Florida; and in Colombia to determine the status of their efforts to address the shortcomings raised in the reports. In Colombia, we discussed safety and physical security issues with cognizant Office of Aviation officials and DynCorp managers at the headquarters office at the El Dorado International Airport in Bogota, the forward operating location at Larandia, and the maintenance and training facility at Tolemaida. At each site, we also toured the facilities to make our own observations and met with fixed-wing aircraft and helicopter pilots and mechanics to obtain their views on flight operations, safety, and physical security. In addition, at the main operating base in Florida, we flew on an eradication training mission. Finally, we discussed the Office of Aviation’s implementation of its contract oversight and evaluation requirements and germane safety and security issues and concerns with the U.S. Ambassador and Deputy Chief of Mission at the U.S. Embassy in Bogota, Colombia; senior Bureau officials in Washington, D.C.; and the Director and Deputy Director at the main operating base in Florida. Our review was conducted from November 2000 through August 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman, Senate Caucus on International Narcotics Control; interested congressional committees; and the Secretary of State. Copies will also be made available to other interested parties upon request. If you or your staff have any questions concerning this report, please call me at (202) 512-4268. An additional GAO contact and staff acknowledgments are listed in appendix III. The State Department’s Office of Aviation manages a major counternarcotics aviation program with a highly mobile workforce that includes State employees and staff on loan from other U.S. agencies. As of July 31, 2001, the Office of Aviation had 24 staff to oversee the contractor- operated aviation program in Bolivia, Colombia, and Peru. Table 1 lists the number of Office of Aviation staff, where they are located, and their major job responsibilities. As of July 31, 2001, DynCorp, the contractor that implements the aviation program, employed about 545 staff—including 25 fixed-wing aircraft pilots hired under a subcontract with Eagle Aviation Services Technology, Inc. Of the 545 employees, 344 are assigned to Colombia—about 90 are U.S. citizens and count against the congressionally-mandated ceiling limiting U.S. civilian contractors in Colombia at any time to 300. About 88 DynCorp employees are stationed in Colombia permanently; the rest— mainly pilots and mechanics—rotate in and out of Colombia about every 2 weeks. Table 2 shows the number of DynCorp employees supporting State’s aviation program, where they are located, and their major job responsibilities. Table 3 lists the number and type of aircraft the Office of Aviation has assigned to Patrick Air Force Base and each of the three countries involved in the aviation program. In addition to the contact named above, Jim Strus and Chris Hall made key contributions to this report. | The Andean region continues to cultivate, produce, and export almost all of the world's cocaine as well as an increasing amount of heroin, according to the State Department. Colombia is the source of 90 percent of the cocaine entering the United States and about two-thirds of the heroin found on the East Coast. Although coca cultivation estimates have fallen by about two-thirds in Bolivia and Peru since 1996, increases in coca cultivation in Colombia have offset much of these successes. Under State's Bureau for International Narcotics and Law Enforcement Affairs, the Office of Aviation, through a contract with DynCorp Aerospace Technology, supports foreign governments' efforts to locate and eradicate illicit drug crops in the Andean region. In recent years, DynCorp has maintained and operated aircraft to locate and eradicate drug crops in Colombia, trained pilots and mechanics for the Colombian Army Aviation Brigade, and provided logistical and training support for the aerial eradication programs of the Colombian National Police and manual eradication programs in Bolivia and Peru. The Office of Aviation met both State's overall contracting oversight requirements and more specific oversight and evaluation requirements in the DynCorp contract. Office of Aviation officials interacted daily with DynCorp managers at the main operating base and in each country, made regular site visits to each country, and reviewed DynCorp's internal reports. The Office of Aviation ensured that its aviation program operated safely and was physically secure, but it can do more. The Office relied on monthly reports and the trimester performance evaluations, as well as periodic surveys and independent assessments of DynCorp's operations and facilities. Overall, these reports have concluded that the aviation program was safe and that physical security was adequate. However, several matters of concern have not been resolved. |
The Stryker family of vehicles consists of 10 eight-wheeled armored vehicles mounted on a common chassis that provide transport for troops, weapons, and command and control. Stryker vehicles weigh on average about 19 tons—or 38,000 pounds, substantially less than the M1A1 Abrams tanks (68 tons) and the Bradley Fighting vehicle (33 tons), the primary combat platforms of the Army’s heavier armored units. The C-130 cargo aircraft is capable of tactical, or in-theater, transport of one Stryker vehicle; the Army’s Abrams tank and Bradley Fighting vehicle exceed the C-130 aircraft’s size and weight limits. The Army’s original operational requirements for Stryker vehicles included (1) the capability of entering, being transportable in, and exiting a C-130 aircraft; (2) the vehicle’s combat capable deployment weight must not exceed 38,000 pounds to allow C-130 transport of 1,000 miles; and (3) the Stryker vehicles must be capable of immediate combat operations after unloading. The Army’s most current operational requirements for Stryker vehicles required the same vehicle weight and C-130 transport capabilities without reference to C-130 transport of 1,000 miles. The Army has similar operational requirements for its Future Combat Systems’ vehicles. The Army’s April 2003 Operational Requirements document for the Future Combat Systems requires the vehicles’ essential combat configuration to be no greater than 38,000 pounds and have a size suitable for C-130 aircraft transport. A memorandum of agreement between the Air Force and the Army issued in 2003, set procedures allowing C-130 transport of 38,000-pound Stryker vehicles aboard Air Force aircraft, but required that the combined weight of the vehicles, other cargo, and passengers shall not exceed C-130 operational capabilities, which vary based on mission requirements, weather, airfield conditions, among other factors. Eight of the 10 vehicle configurations are being acquired production ready—meaning they require little engineering design and development work prior to production. Two of the 10 vehicle configurations, the Mobile Gun System and the NBC Reconnaissance vehicle, are developmental vehicle variants—meaning that a substantial amount of design, development, and testing is needed before they can go into production. Table 1 provides descriptions of the ten Stryker vehicles. Three of the vehicles are shown in figures 1 to 3. The Army selected one light infantry brigade and one mechanized infantry brigade at Fort Lewis, Washington, to become the first two of six planned Stryker brigades. The first of these brigades, the 3rd Brigade, Second Infantry Division, became operational in October 2003, at which time the Brigade was deployed to Iraq. The second of the two Fort Lewis brigades became operational in May 2004, and plans are for it to deploy to Iraq in late 2004. The Army plans to form four more Stryker brigades from 2005 through 2008. The planned locations of the next four brigades are Fort Wainwright/Fort Richardson, Alaska; Fort Polk, Louisiana; Schofield Barracks, Hawaii; and a brigade of the Pennsylvania Army National Guard. Acquisition of the eight Stryker production vehicle configurations is about two-thirds complete with about 68 percent of the over 1,800-planned production vehicles ordered, and a low rate of production for the two developmental Strykers is scheduled for September 2004. Estimated program costs have increased because of, among other reasons, increases in the Army’s estimate for related military construction, such as for the cost of building new Stryker vehicle maintenance facilities. However, the Army does not yet have reliable estimates for the Stryker’s operating costs, such as for vehicle maintenance, because of limited peacetime operational experience with the vehicles. The Army is pursuing three acquisition schedules for the Stryker production and developmental vehicles. Since the November 2000 Stryker vehicle contract award, the Army has ordered 1,231 production vehicles—about 68 percent—of the 1,814 production vehicles the Army plans to buy for the six Stryker brigades. Of the 1,231 vehicles ordered, 800 have been delivered to the brigades, including all of the production vehicles for the first two Stryker brigades. The Army is currently fielding Stryker production vehicles for the third of the six planned brigades. The third brigade is to be fielded in Alaska. Thus far, the Army has bought limited quantities of the developmental vehicle variants—8 Mobile Gun System and 4 NBC Reconnaissance vehicles—as prototypes and for use in testing at various test sites around the country. Of 238 Mobile Gun Systems the Army plans to buy overall, current plans are to buy 72 initially upon approval for low-rate initial production scheduled for September 2004. The Army plans low-rate initial production of 17 NBC Reconnaissance vehicles also in September 2004. The Mobile Gun System is not scheduled to reach a full production decision until September 2006 at the earliest, while the NBC Reconnaissance vehicle is not scheduled to reach its full production decision until 2007. Table 2 below shows the status of Stryker vehicle acquisition as of April 2004. The Stryker vehicle program’s total costs increased, in then-year dollars, from the original November 2000 estimate of $7.1 billion to the December 2003 estimate of $8.7 billion—or about 22 percent. The increases occurred primarily due to revised estimates for the associated cost of military construction, such as that needed to upgrade maintenance and training facilities for a Stryker brigade, but were also due to lesser increases in procurement and research, development, test, and evaluation (RDT&E) costs for the vehicles—which together grew by about 8 percent from the original November 2000 estimate. In then-year dollars, the estimated cost of military construction accounted for the largest increase in the Stryker program’s cost estimate. In December 2003, the Army increased its estimate for military construction by about $1.01 billion over the original November 2000 estimate, from $322 million to $1.3 billion. (See table 3.) As in all major Department of Defense acquisition programs, military construction costs are included in the program’s total costs. According to the Army, the military construction cost estimate increased because the December 2003 estimate reflects (1) the identification of all five sites scheduled to receive Stryker brigades and (2) the total cost of upgrading or building maintenance and training facilities at these installations to accommodate a Stryker brigade. When the original estimate was made, only one site had been identified to receive a Stryker brigade and that estimate identified just the cost of maintenance facility upgrades. The Stryker vehicle’s procurement costs increased by about $390 million. The largest factor in the increase of procurement costs was the higher than originally estimated costs of procuring add-on reactive armor, including the additional costs to equip six Stryker brigades with add-on armor, instead of four brigades as originally planned. Also, the cost of RDT&E increased about $138 million, from $508 million to $645.6 million. Most of the RDT&E cost increase is attributable to revised estimates for the cost of test and evaluation, development, and system engineering for the developmental vehicles. The average acquisition cost per vehicle increased by about $0.79 million, from $3.34 million to $4.13 million. The program costs and average acquisition cost per vehicle estimates reflect a reduction in the number of Strykers planned from 2,131 to 2,096. (See table 3 above.) The Army does not have reliable estimates of Stryker vehicle operating costs because, with the first Stryker brigade’s deployment to Iraq, it lacks sufficient peacetime operational experience with the vehicles. The Army considers 3 years of actual peacetime operational cost data to be sufficient for reliable estimates. Since none of the production vehicles have 3 years of peacetime operating experience, reliable operating cost estimates will not be available until 2005 at the earliest. With the Mobile Gun System and NBC Reconnaissance vehicles still in development, it will be several years before these vehicles are fully fielded and sufficient data are available for reliable estimates of their operating costs. According to the Army, current Stryker vehicle operating cost estimates, shown in table 4 below, are engineering estimates based in part on operating costs for another vehicle in the Army’s inventory—the M-113 armored personnel carrier. The estimates assume peacetime operations. Vehicle operating costs include the cost for maintenance, repair, and the cost of consumable and repairable parts. The Army calculates vehicle cost per mile by tracking vehicle mileage and the actual costs of consumable or replaceable parts used. However, the short time frame from fielding the first Stryker brigade’s production vehicles—May 2002 through January 2003—and the brigades’ deployment to Iraq in October 2003, limited the amount of time and miles the vehicles were in peacetime service. Similarly, fielding of Stryker vehicles for the second brigade was completed in January 2004. While the Army collected operational cost and mileage data for both brigades, there were insufficient actual operating costs and miles on the vehicles to make reliable estimates. Consequently, until the Army can collect more actual peacetime operating cost data for the production vehicles, it will not be able to determine actual vehicle operating costs and make reliable operating cost estimates for these vehicles. Similarly, reliable operating cost estimates for the Mobile Gun System and NBC Reconnaissance vehicle will not be available until after 2006 when they are scheduled to begin full production and fielding. According to Army and OSD test reports, the tested Stryker production vehicles met operational requirements with certain limitations and, overall, support the key operational capabilities and force effectiveness of the Stryker Brigade Combat Team. The separate developmental testing schedules of the Mobile Gun System and NBC Reconnaissance vehicles have been delayed, resulting in delays in meeting planned production milestone dates. Delay in the Mobile Gun System’s development was due in part to shortfalls in meeting performance requirements of the vehicle’s ammunition autoloader system. The NBC Reconnaissance vehicle’s development schedule was delayed pending OSD approval of an updated technology readiness assessment for the vehicle and its nuclear, biological, and chemical sensor systems. Following the Army’s completion of live-fire tests and evaluation for seven production vehicles in February 2004 and its ongoing test evaluation of the eighth, the Army stated that the Stryker production vehicles met operational requirements, with limitations; and OSD approved full production. The Army’s System Evaluation Report for the Stryker production decision concluded that overall, the Stryker family of vehicles is effective, suitable, and survivable, and supports the key operational capabilities and force effectiveness of the Stryker Brigade Combat Team. The report concluded that the Stryker production vehicle configurations met operational requirements with limitations. For example, in the area of lethality, the report noted that four Stryker vehicle configurations have a remote weapons station that provides effective protective and supporting fires for dismounted maneuver. However, limitations of the remote weapons station’s capability to provide accurate and continuous fires at night and while moving reduce its effectiveness and lethality. Similarly, while the Stryker vehicles contribute to force protection and meet survivability requirements, there are inherent and expected survivability limitations as in any armored vehicle system. Table 5 lists some of the operational requirements of the vehicles and excerpts of selected performance capabilities and limitations from the Army’s Stryker system evaluation report. The OSD Director, Operational Test and Evaluation, found that six Stryker production vehicles are operationally effective for employment in small- scale contingency operations and operationally suitable with certain limitations. OSD found that the Engineer Squad vehicle is not operationally suitable because of poor reliability. However, in its March 2004 Stryker acquisition decision, OSD determined that the operational capabilities provided by the Engineer Squad vehicle supported its continued production in light of planned fixes, operational work-arounds, and planned follow-on testing. It also determined that corrective actions are needed to address survivability and ballistic vulnerability limitations of the vehicles, such as ensuring basic armor performance and reducing exposure of Stryker personnel. Although developmental testing is ongoing, the development and testing schedule of the Mobile Gun System has been delayed, resulting in more than a 1-year delay in meeting planned production decision milestone dates, with initial limited production to start in September 2004. The delay in the Mobile Gun System’s development was due in part to shortfalls in meeting performance requirements of the vehicle’s ammunition autoloader system. At the time of our review, the Mobile Gun System was undergoing additional testing to find a fix for the autoloader, in preparation for a low- rate production decision. The Mobile Gun System is scheduled for production qualification testing through July 2004, production verification testing starting in October 2005, and live-fire test and evaluation starting in November 2005 through September 2006. The Army’s earlier Mobile Gun System acquisition schedule was to complete developmental testing and have a low-rate initial production decision in 2003 and begin full production in 2005. Current Army plans are to buy limited quantities of Mobile Gun System vehicles upon OSD approval of low-rate initial production planned for September 2004. A full-rate production decision for the Mobile Gun System is currently scheduled for late in 2006. The Mobile Gun System has a 105mm cannon with an autoloader for rapidly loading cannon rounds without outside exposure of its three- person crew. The principal function of the Mobile Gun System is to provide rapid and lethal direct fires to protect assaulting infantry. The Mobile Gun System cannon is designed to defeat bunkers and create openings in reinforced concrete walls through which infantry can pass to accomplish their missions. According to the Army’s Stryker Program Management Office, the autoloader system was responsible for 80 percent of the system aborts during initial Mobile Gun System reliability testing because of cannon rounds jamming in the system. As of February 2004, the Army was planning additional testing and working with the autoloader’s manufacturer to determine a solution. A functioning autoloader is needed if the Mobile Gun System is to meet its operational requirements because manual loading of cannon rounds both reduces the desired rate of fire and requires brief outside exposure of crew. In its March 2004 Stryker acquisition decision, OSD required the Army to provide changes to the Mobile Gun System developmental exit criteria within 90 days, including the ability to meet cost and system reliability criteria. Although its developmental testing is also ongoing, the development schedule of the NBC Reconnaissance vehicle has also been delayed, and its production is now scheduled to occur about two years later than planned. The delay was primarily due to additional time needed to develop and test the vehicle’s nuclear, biological, and chemical sensor systems. As a result, low-rate initial production, previously scheduled for December 2003, will not occur until September 2004. A full-rate production decision, which had previously been scheduled for June 2005, will not occur until July 2007. In its March 2004 Stryker acquisition decision, OSD required the Army to provide within 90 days an updated technology readiness assessment for the NBC Reconnaissance vehicle and its nuclear, biological, and chemical sensor systems. At that time, OSD will make a determination as to whether the vehicle is ready for production. Although the Army demonstrated during training events that Stryker vehicles can be transported short distances on C-130 aircraft and unloaded for immediate combat, the average 38,000 pound weight of Stryker vehicles, other cargo weight concerns, and less than ideal environmental conditions present significant challenges in using C-130s for routine Stryker transport. Similar operational limits would exist for C-130 transport of the Army’s Future Combat Systems because they are also being designed to weigh about 38,000 pounds. In addition, much of the mission equipment, ammunition, fuel, personnel, and armor a Stryker brigade would need to conduct a combat operation might need to be moved on separate aircraft, increasing the numbers of aircraft or sorties needed to deploy a Stryker force, adding to deployment time and the time it would take after arrival to begin operations. Yet, the Army’s weight requirement and C-130 transport requirements for the vehicles, and information the Army provided to Congress in budget documents and testimony, created expectations that Stryker vehicles could be routinely transported by C-130 aircraft within an operational theater. In a December 2003 report on the first Stryker Brigade’s design evaluation, we reported that the Stryker Brigade demonstrated the ability to conduct tactical deployments by C-130 aircraft. At the National Training Center in April 2003, we observed the brigade conduct a tactical movement by moving a Stryker infantry company with its personnel, supplies, and 21 Stryker vehicles via seven C-130 aircraft flying 35 sorties from Southern California Logistics Airfield to a desert airfield on Fort Irwin about 70 miles away. Figure 4 shows a Stryker vehicle being offloaded from a C-130 at the National Training Center. A team from the Department of Defense’s (DOD) Office of the Director for Operational Test and Evaluation and the Army’s Test and Evaluation Command also observed the Stryker vehicle’s deployment and recorded the weight of the vehicles and the total load weight onboard the aircraft. The average weight for the eight production vehicle configurations was just less than 38,000 pounds, while the total load weight—including a 3- days’ supply of fuel, food, water, and ammunition—averaged more than 39,100 pounds. Table 6 shows the weight of eight-production vehicles and their total load weight recorded at the time of the April 2003 National Training Center deployment. We noted in our December 2003 report, however, that while the tactical deployment of Stryker vehicles by C-130 aircraft was demonstrated, the Army had yet to demonstrate under various environmental conditions, such as high temperature and airfield altitude, just how far Stryker vehicles can be tactically deployed by C-130 aircraft. The weight of Stryker vehicles presents significant challenges for C-130 aircraft transport because, as a general rule U.S. Air Force air mobility planning factors specify an allowable C-130 cargo weight of about 34,000 pounds for routine flight. With most Stryker vehicles weighing close to 38,000 pounds on board, the distance—or range—that a C-130 aircraft could fly is significantly reduced when taking-off in high air temperatures or from airfields located in higher elevations. In standard, or nearly ideal, flight conditions—such as day-time, low head-wind, moderate air temperature, and low elevation—an armored C-130H with a cargo payload of 38,000 pounds can generally expect to fly 860 miles from takeoff to landing. Furthermore, according to a Military Traffic Management Command’s Transportation Engineering Agency study of C-130 aircraft transportability of Army vehicles, a C-130’s range is significantly reduced with only minimal additional weight, and ideal conditions rarely exist in combat scenarios. The C-130 aircraft’s range may be further reduced if operational conditions such as high-speed takeoffs and threat-based route deviations exist because more fuel would be consumed under these conditions. Even in ideal flight conditions, adding just 2,000 pounds onboard the aircraft for associated cargo such as mission equipment, personnel, or ammunition reduces the C-130 aircraft’s takeoff-to-landing range to 500 miles. In addition, the more than 41,000-pound weight of the Mobile Gun System would limit the C-130 aircraft’s range to a maximum distance of less than 500 miles. Figure 5 shows the affects of cargo weight on an armored C-130H aircraft’s flight range in nearly ideal flight conditions. The addition of armor to the Strykers would pose additional challenges. With removable armor added to Strykers, the vehicles will not fit inside a C-130. To provide interim protection against rocket-propelled grenades, the Stryker vehicles of the brigade that deployed to Iraq in October 2003, were fitted with Slat armor weighing about 5,000 pounds for each vehicle (see fig. 6). By 2005, the Army expects to complete the development of add-on reactive armor—weighing about 9,000 pounds per vehicle—for protection against rocket-propelled grenades. With either type of armor installed, a Stryker vehicle will not fit inside a C-130 aircraft cargo bay. Regardless, with the added weight of the armor even in ideal flight conditions, the aircraft would be too heavy to take off. Furthermore, according to the Army Test and Evaluation Command’s Stryker System Evaluation, in less than favorable flight conditions, the Air Force considers routine transport of the 38,000-pound cargo weight of a Stryker vehicle on C-130 aircraft risky, and such flight may not be permitted under the Air Force’s flight operations risk management requirements if other transport means are available. In two theaters where U.S. forces are currently operating—the Middle East and Afghanistan, high temperatures and elevation can reduce C-130 aircraft range if carrying a 38,000-pound Stryker vehicle. Table 7 shows the reduced C-130 aircraft transport range due to daytime average summer temperatures of more than 100 degrees Fahrenheit in Iraq and high temperatures and elevations in Afghanistan. From two locations in Afghanistan (Bagram at 4,895 feet elevation and Kabul at 5,871 feet elevation) during daytime in the summer, a C-130 with a Stryker vehicle on board would not be able to take off at all. In winter from these same locations, its flight range would be reduced to 610 miles departing from Bagram and to 310 miles departing from Kabul. These same weight concerns would also apply to the Army’s Future Combat Systems vehicles, which according to the Army’s operational requirements should be no larger than 38,000 pounds and be transportable by a C-130. Additionally, the Mobile Gun System, expected to weigh over 41,000 pounds, is probably too heavy to transport a significant distance via C-130 aircraft. Furthermore, the C-130 aircraft cannot transport many of a Stryker brigade’s vehicles at all. Stryker vehicles make up a little more than 300 of the over 1,000 vehicles of a Stryker brigade, and many of the brigade’s support vehicles, such as fuel trucks, are too large or heavy for C-130 transport. Because a C-130’s range is limited by weight and a Stryker’s weight exceeds limits for routine C-130 loading, a tactical movement of significant distance of a Stryker brigade via C-130 aircraft in less than ideal conditions could necessitate moving much of the mission equipment, ammunition, fuel, personnel, and armor on separate aircraft. Such use of separate aircraft for moving Stryker vehicles and associated equipment, personnel, and supplies increases the force closure, or deployment, time and might limit the deployed forces’ ability to be capable of immediate combat operations upon arrival—one of the Army’s key operational requirements for the Stryker vehicles—because aircraft would arrive at different times and potentially different locations. In combination, a 38,000-pound Stryker vehicle, and the associated equipment, personnel, or armor that would have to be transported on separate aircraft are likely to increase the number of aircraft or sorties that would be needed to deploy a Stryker force. For example, if a decision were made to use a Stryker’s add-on armor for a tactical mission, at about 9,000 pounds for each vehicle’s armor, it would take at least one additional C-130 aircraft sortie to transport the armor for about four vehicles. Or, because of potential limits of the availability of C-130 lift assets, the size of a Stryker force and number of Stryker vehicles that could be tactically deployed would have to be reduced. At the National Training Center in April 2003, we observed, upon landing, an infantry company unload the vehicles from the C-130 aircraft, reconfigure them for combat missions, and move onward to a staging area. All Stryker variants except one reconfigured into combat capable modes within their designated time standard. Once reconfigured, units of the Stryker brigade also demonstrated the ability to conduct immediate combat operations. However, this was a short-range movement with only seven aircraft and did not require fitting armor on the vehicles. In an operational mission, depending on the size of the Stryker force deployed, using separate C-130 aircraft for transporting vehicles and associated people and equipment could significantly increase force deployment time because of the increased numbers of aircraft sorties needed. Upon arrival, it would also increase the time needed to reconfigure and begin operations because the vehicles, equipment, and personnel on different aircraft might arrive at different times or at different airfield locations. In addition, if a decision were made to use add-on armor for a mission, the armor would need to be installed after arrival, adding an average of about 10 hours per vehicle in reconfiguration time to install the armor. The capability of transporting Stryker vehicles on C-130 aircraft, despite its challenges and limitations, is a major objective of the Army’s transformation to a lighter more responsive force. As such, the Army’s weight and C-130 transport requirements for the vehicles, as well as information the Army provided to Congress, created expectations that Stryker vehicles could be routinely transported within an operational theater by C-130 aircraft. For example, in several congressional hearings since 2001, senior Army leadership testified that Stryker vehicles would be capable of transport by C-130 aircraft. In addition, annual budget justifications, which the Army submits to Congress for Stryker vehicle acquisition, highlight the C-130 transport capability of Stryker-vehicle- equipped Brigade Combat Teams. During our review, Army officials acknowledged the significant challenges and limitations of meeting expectations for transporting Stryker vehicles— and beyond 2010, the Future Combat Systems—on C-130 aircraft in terms of limited flight range, the size force that could be deployed, and the challenges of arriving ready for combat. The officials, however, believe that the capability to transport Stryker vehicles or the Future Combat Systems’ vehicles on C-130 aircraft, even over short distances, offers the theater combatant commanders an additional option among other modes of intratheater transportation—such as C-17 aircraft, sealift, or driving over land—for transporting Stryker brigades and vehicles in tactical missions. In addition, the officials believe that the ability to transport elements of a Stryker brigade as small as a platoon with four Stryker vehicles— as a part of an operational mission of forces moving by other means, greatly enhances the combatant commander’s war-fighting capabilities. In less than 4 years from the November 2000 Stryker vehicle contract award, the Army is well under way in fielding the eight production vehicle configurations, and Stryker vehicles are already in use in military operations in Iraq. However, program costs have increased, largely because of the cost of military construction related to Stryker vehicle needs, and delays in developing and testing the two remaining variants will delay their fielding and use. Furthermore, although the Army has successfully demonstrated that Stryker vehicles can be transported on C-130 aircraft during training events, routine use of the C-130 for airlifting Stryker vehicles, for other than short-range missions with limited numbers of vehicles, would be difficult in theaters where U.S. forces are currently operating. Therefore, the intended capability of Stryker brigades to be transportable by C-130 aircraft would be markedly reduced. The Army’s operational requirements and information the Army provided to Congress created expectations that a Stryker vehicle weight of 38,000 pounds—and a similar weight for Future Combat System vehicles—would allow routine C-130 transport in tactical operations. Consequently, congressional decision makers do not have an accurate sense or realistic expectations of the operational capabilities of Stryker vehicles and Future Combat Systems. We recommend that the Secretary of Defense, in consultation with the Secretary of the Army and the Secretary of the Air Force, take the following two actions: 1. Provide to Congress information that clarifies the expected C-130 tactical intratheater deployment capabilities of Stryker brigades and Stryker vehicles and describes probable operational missions and scenarios using C-130 transport of Stryker vehicles that are achievable, including the size of a combat capable C-130 deployable Stryker force; describes operational capability limitations of Stryker brigades given the limits of C-130 transport; and identifies options for, and the feasibility of, alternative modes of transportation—such as C-17 aircraft— for transporting Stryker brigades within an operational theater. 2. Provide the Congress similar clarification concerning the operational requirements and expected C-130 tactical airlift capabilities of Future Combat System vehicles, considering the limits of C-130 aircraft transportability. In commenting on a draft of this report, the Department of Defense partially concurred with our recommendations. The department also provided technical comments, which we incorporated in the report where appropriate. DOD concurred that operational requirements for airlift capability for brigade transport need clarification and stated that the ongoing Mobility Capabilities Study, scheduled for completion in the spring of 2005, will include an assessment of the intratheater transport of Army Stryker Brigade Combat Teams and address the recommendations of this report. In responding to our recommendation to provide information to Congress concerning C-130 transport of Stryker-equipped brigades, the department partially concurred and stated that the Army has studied C-130 transportability in depth. While we agree that the Army has studied C-130 transportability of Stryker vehicles—including the limitations that we point out in this report—their comments provide no assurance that this information will be provided to Congress, and we believe Congress needs this type of information to have an accurate sense of the operational capabilities of Stryker brigades. The department also partially concurred with our recommendation to provide to Congress similar clarification concerning the operational requirements and expected C-130 tactical airlift capabilities of Future Combat System vehicles, considering the limits of C-130 aircraft transportability. The department noted in its response that the Army is currently considering many factors, including C- 130 tactical airlift capability limits, as it reviews Future Combat Systems Unit of Action capability requirements. The department also stated that the Mobility Capabilities Study would include intratheater transport of Army units of action—the Army’s Future Combat Systems-equipped future force. Given the ongoing congressional interest in the implications of the Army’s requirements for C-130 transport of Stryker vehicles and Future Combat System ground vehicles, we agree that the information the Congress would need, if addressed in the Mobility Capabilities Study and provided to Congress, would meet the intent of our recommendations. With the Mobility Capabilities Study not scheduled for completion until the spring of 2005, we will assess at that time the adequacy of the study’s assessment of intratheater transport of Army Stryker- and Future Combat System- equipped units. The Senate Armed Services Committee has directed GAO to monitor DOD’s processes used to conduct the Mobility Capabilities Study, and to report on the adequacy and completeness of the study to the congressional defense committees no later than 30 days after the completion of the study. The appendix contains the full text of the department’s comments. To determine the current status of Stryker vehicle acquisition and the latest Stryker vehicle program and operating cost estimates, we analyzed documents on Stryker vehicle acquisition plans, contract performance requirements, and costs and interviewed officials from the Army Program Executive Office/Stryker Program Management Office, Warren, Michigan. To determine Stryker program costs, we reviewed the DOD approved December 2003 Selected Acquisition Report (SAR) and interviewed Stryker Program Management Office officials. For our analysis of Stryker vehicle-operating costs, we reviewed the Army’s mileage cost estimates and the Army’s methodology for calculating costs per mile. We did not verify source information the Army used in its calculations. To determine the status and results of Stryker vehicle tests, we reviewed the results of Stryker vehicle developmental and survivability testing from the Army Test and Evaluation Command, Alexandria, Virginia, and the Army Developmental Test Command, Aberdeen Proving Ground, Maryland. We also reviewed the U.S. Army Test and Evaluation Command, Army Evaluation Center’s Stryker System Evaluation Report and OSD Director, Operational Test and Evaluation’s Operational Test and Evaluation and Live Fire Test and Evaluation Report for the Stryker family of vehicles. To determine the ability of C-130 aircraft to transport Stryker vehicles within a theater of operations, we reviewed a Military Traffic Management Command’s, Transportation Engineering Agency study of the C-130 aircraft’s range and payload capabilities and interviewed U.S. Army, Air Force and Transportation Command officials. We notified U.S. Central Command of our objective to review plans for C-130 aircraft transport of Stryker vehicles within the command’s area of operations, but Central Command officials determined that this was an Army issue, rather than a combatant command’s issue. Our review was conducted from July 2003 through June 2004 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairmen and Ranking Minority Members of other Senate and House committees and subcommittees that have jurisdiction and oversight responsibilities for DOD. We are also sending copies to the Secretary of Defense and the Director, Office of Management and Budget. Copies will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-8365, or Assistant Director, George Poindexter, at (202) 512-7213. Major contributors to this report were Kevin Handley, Frank Smith, and M. Jane Hunt. Defense Acquisitions: The Army’s Future Combat Systems’ Features, Risks, and Alternatives. GAO-04-635T. Washington, D.C.: April 1, 2004. Military Transformation: The Army and OSD Met Legislative Requirements for First Stryker Brigade Design Evaluation, but Issues Remain for Future Brigades. GAO-04-188. Washington, D.C.: December 12, 2003. Issues Facing the Army’s Future Combat Systems Program. GAO-03- 1010R. Washington, D.C.: August 13, 2003. Military Transformation: Realistic Deployment Timelines Needed for Army Stryker Brigades. GAO-03-801. Washington, D.C.: June 30, 2003. Military Transformation: Army’s Evaluation of Stryker and M-113A3 Infantry Carrier vehicles Provided Sufficient Data for Statutorily Mandated Comparison. GAO-03-671. Washington, D.C.: May 30, 2003. Army Stryker Brigades: Assessment of External Logistic Support Should Be Documented for the Congressionally Mandated Review of the Army’s Operational Evaluation Plan. GAO-03-484R. Washington, D.C.: March 28, 2003. Military Transformation: Army Actions Needed to Enhance Formation of Future Interim Brigade Combat Teams. GAO-02-442. Washington, D.C.: May 17, 2002. Military Transformation: Army Has a Comprehensive Plan for Managing Its Transformation but Faces Major Challenges. GAO-02-96. Washington, D.C.: November 16, 2001. Defense Acquisition: Army Transformation Faces Weapons Systems Challenges. GAO-01-311. Washington, D.C.: May 21, 2001. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | In its transformation to a more responsive and mobile force, the Army plans to form 6 Stryker Brigade Combat teams equipped with a new family of armored vehicles known as Strykers. The Stryker--which provides transport for troops, weapons, and command and control--was required by the Army to weigh no more than 38,000 pounds and be transportable in theater by C-130 cargo aircraft arriving ready for immediate combat operations. The Army plans to equip its future force with a new generation of vehicles--Future Combat Systems--to also be transportable by C-130s. GAO was asked to assess (1) the current status of Stryker vehicle acquisition, including the most current Stryker vehicle program and operating cost estimates; (2) the status and results of Stryker vehicle tests; and (3) the ability of C-130 aircraft to transport Stryker vehicles within a theater of operations. This report also addresses the transportability of the Army's Future Combat Systems on C-130 aircraft. The acquisition of the Stryker vehicles is about two-thirds complete; with about 1,200 of 8 production vehicle configurations ordered and 800 delivered to units. In addition, limited quantities of two developmental vehicles--the Mobile Gun System and the Nuclear, Biological, and Chemical Reconnaissance vehicle prototypes--have also been ordered for testing. Stryker program costs have increased about 22 percent from the November 2000 estimate of $7.1 billion to the December 2003 estimate of $8.7 billion. Total program costs include acquisition costs--procurement, research, development, and test and evaluation--as well as military construction costs related to Strykers. The Army does not yet have reliable estimates of the Stryker's operating costs because of limited peacetime use to develop data. As of June 2004, testing of the eight production Strykers was mostly complete, with the vehicles meeting Army operational requirements with limitations. However, development and testing schedules of the two developmental Strykers have been delayed, resulting in an over 1-year delay in meeting the vehicles' production milestones and fielding dates. While the Army has demonstrated the required transportability of Strykers by C-130 aircraft in training exercises, in an operational environment, the Stryker's average weight of 38,000 pounds--along with other factors such as added equipment weight and less than ideal flight conditions--significantly limits the C-130's flight range and reduces the size force that could be deployed. These factors also limit the ability of Strykers to conduct combat operations immediately upon arrival as required. With the similar maximum weight envisioned for Future Combat System vehicles intended for the Army's future force, the planned C-130 transport of those vehicles would present similar challenges. |
The financial statements and accompanying notes present fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, the Foundation’s financial position as of September 30, 2005, and 2004, and the results of its activities and its cash flows for the fiscal years then ended. However, material misstatements may nevertheless occur in other information reported by the Foundation on its financial status to its Board of Directors and others as a result of the material weakness in internal control over financial reporting described in this report. As discussed in a later section of this report and in Note 12 to the financial statements, the Foundation continues to experience difficulties in meeting its financial obligations. The Foundation’s continuing financial difficulties raise substantial doubt, for the fourth consecutive year, about its ability to continue as a going concern. The financial statements have been prepared under the assumption that the Foundation would continue as a going concern, and do not include any adjustments that would need to be made if the Foundation were to cease operations. Because of the material weakness in internal control discussed below, the Foundation did not maintain effective internal control over financial reporting (including safeguarding assets) but did have effective control over compliance with laws and regulations. The Foundation’s controls did not provide reasonable assurance that losses and misstatements material in relation to the financial statements would be prevented or detected on a timely basis. Our opinion is based on criteria established in our Standards for Internal Control in the Federal Government. In our report on the results of our audit of the Foundation’s fiscal year 2004 financial statements, we reported that the deteriorating financial condition of the Foundation led to further deterioration in controls over the financial reporting process, impeding its ability to prepare timely and accurate financial statements. At the conclusion of our audit of the Foundation’s fiscal year 2004 financial statements, we stressed to the Foundation’s management the importance of documenting the Foundation’s financial reporting policies and procedures, and further stressed that the policies and procedures should detail such functions as the monthly closing process, preparation of the financial statements, and review of financial data by management. During fiscal year 2005, the Foundation hired an accountant to help ensure that accurate and timely accounting and reporting of financial information occurred. This enabled the Foundation to provide us with a draft of the financial statements within 5 months after the fiscal year-end, something the Foundation had been unable to do in each of the preceding two financial statement audits. However, the Foundation continued to lack appropriate written procedures during fiscal year 2005 for making closing entries in its financial records and for preparing complete and accurate financial statements. The continued lack of written policies and procedures during fiscal year 2005 contributed to errors we identified during our audit of the Foundation’s fiscal year 2005 financial statements. For example, the Foundation did not adequately perform its year-end bank reconciliation and misclassified the forgiveness by vendors of some of its outstanding debt. Both of these issues resulted in audit adjustments to the financial statements. In addition, numerous errors in the financial statements were not detected by management’s review. This resulted in the need for management to make material adjustments to correct errors we identified during our audit. The Foundation was ultimately able to produce financial statements that were fairly stated in all material respects for fiscal years 2005 and 2004, but not without substantial adjustments identified during our audit. Subsequent to fiscal year 2005, the Foundation’s Board of Directors’ newly elected Treasurer worked with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. Since these procedures were not drafted until after fiscal year 2005, and the procedures related to financial reporting were not implemented in fiscal year 2005, they had no effect on the fiscal year 2005 financial statements. However, if properly implemented, they should lead to improvements in financial management going forward. We will evaluate the effectiveness of these new policies and procedures during our audit of the Foundation’s fiscal year 2006 financial statements. Foundation management asserted that, with the exception of the material weakness in financial reporting, its internal control during the period was effective based on criteria established under GAO’s Standards for Internal Control in the Federal Government. In making its assertion, Foundation management stated the need to improve control over financial reporting. Although the weakness did not materially affect the final fiscal year 2005 financial statements as adjusted for errors identified by the audit process, deficiencies in internal control may adversely affect any decision by management that is based, in whole or in part, on other information that is inaccurate because of the deficiencies. Unaudited financial information reported by the Foundation may also contain misstatements resulting from these deficiencies. Our tests for compliance with relevant provisions of laws and regulations for fiscal year 2005 disclosed no instances of noncompliance that would be reportable under U.S. generally accepted government auditing standards. However, the objective of our audit was not to provide an opinion on overall compliance with laws and regulations. Accordingly, we do not express such an opinion. For the fiscal year 2004 audit, our tests for compliance with relevant provisions of laws and regulations disclosed one area of material noncompliance that was reportable under U.S. generally accepted government auditing standards. This concerned the Foundation’s ability to ensure that it had appropriate procedures for fiscal control and fund accounting and that its financial operations were administered by personnel with expertise in accounting and financial management. Specifically, section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. § 804(c)(1)), requires the Director, in consultation with the Congressional Award Board, to “ensure that appropriate procedures for fiscal control and fund accounting are established for the financial operations of the Congressional Award Program, and that such operations are administered by personnel with expertise in accounting and financial management.” The Comptroller General is required by section 104(c)(2)(A) of the Congressional Award Act, as amended (2 U.S.C. § 804(c)(2)(A)), to (1) annually determine whether the Director has substantially complied with the requirement to have appropriate procedures for fiscal control and fund accounting for the financial operations of the Congressional Award Program and to have personnel with expertise in accounting and financial management to administer the financial operations, and (2) report the findings in the annual audit report. For 2004, because the Foundation did not have appropriate fiscal procedures and did not have an individual with expertise in accounting and financial management to routinely administer the procedures and account for the financial operations of the Foundation, we determined that the Director did not substantially comply with the requirements in section 104(c)(1) of the Congressional Award Act, as amended (2 U.S.C. § 804(c)(1)). As discussed earlier, during fiscal year 2005, the Foundation hired an accountant to focus on improving financial management. Subsequent to fiscal year 2005, the newly elected Treasurer and Audit Committee Chair worked with the National Office staff to improve internal control over financial reporting and develop written fiscal policies and procedures for financial operations and reporting. Due to these actions, we were able to conclude that for the year under audit, the Foundation was in compliance with the provisions of the Act. The Foundation incurred a gain (increase in net assets) of about $10,000 in fiscal year 2005 as compared to a loss (decrease in net assets) of almost $168,000 in fiscal year 2004. This difference of approximately $178,000 was due primarily to a reduction in salary expenses in fiscal year 2005. Salary expenses were less in fiscal year 2005 because the National Director, who retired at the end of fiscal year 2004, was not replaced during fiscal year 2005. The Program Director functioned in two positions, serving as the Acting National Director as well as the Program Director. As a result, the Foundation’s salary costs were reduced by over $172,000 between fiscal years 2004 and 2005. Although the Foundation’s overall expenses decreased by over $130,000 between fiscal years 2004 and 2005, operating revenues and other support decreased by over $134,000, attributable in part to a nearly $64,000 decline in contributions. The Foundation attributed this decline in contributions to the fact that the Foundation was not reauthorized by the Congress for fiscal year 2005 which, it believes, discouraged some donors from contributing to the Foundation. The Foundation’s previous authorization expired on October 1, 2004. On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation through September 30, 2009. During fiscal year 2002, the Foundation borrowed $100,000, the maximum amount allowable against its revolving line of credit, due to ongoing cash flow problems associated with its daily operations. This debt, partially secured by a $50,000 certificate of deposit, remained outstanding at September 30, 2005. Note 12 to the financial statements acknowledges the Foundation’s difficulties in meeting its financial obligations. The Foundation has taken steps to decrease its expenditures and liabilities. For example, accounts payable at September 30, 2005, were approximately $16,000, down from $135,500 in fiscal year 2004. This decrease in accounts payable was due to the Foundation using funds from the Congressional Award Fellowship Trust to pay off a substantial portion of its liabilities, and its ability to negotiate with certain of its vendors to cancel about $63,000 in liabilities to these vendors during fiscal year 2005. In addition, the Foundation showed considerable cost reductions as evidenced by the decrease in operating expenses (primarily salaries) from over $594,000 in fiscal year 2004 to about $464,000 in fiscal year 2005. However, these steps may not be sufficient to allow it to continue operations. Unaudited financial data compiled by the Foundation as of March 31, 2006, showed that its financial condition has not improved through the first half of fiscal year 2006. While the Foundation has $112,000 in contributions receivable as of March 31, 2006, $52,000 of this contribution is to be used to cover costs associated with its planned Congressional Award Golf Classic fundraising event in May, and $30,000 is to be used to cover costs associated with the annual Gold Award ceremony in June. The golf fundraising event resulted in net revenues for the first time in fiscal year 2004, so its ability to raise funds annually cannot be assured, and the Gold Award ceremony is not a fundraising event. There are also indications that the Foundation is continuing to have difficulty meeting its obligations; according to the minutes of the January 31, 2006, Board of Directors’ meeting, the Acting National Director and the Controller delayed cashing their pay checks for two pay periods in January 2006 due to cash flow problems at the Foundation. In addition, the Foundation has a $100,000 line of credit that is payable upon demand. If this liability needed to be paid immediately, the Foundation would have to liquidate its $55,000 certificate of deposit, equity securities of about $36,000 (reported as outstanding at March 31, 2006), and its remaining cash balance of about $6,700. In its plan to deal with its financial difficulties and increase its revenues, the Foundation modified its approach to fundraising during the past 2 years by holding more frequent but smaller and less expensive fundraising events than in the past. However, these smaller fundraisers did not increase contributions, which decreased by over $64,000, or 23 percent, from fiscal years 2004 to 2005. In an effort to further improve fundraising efforts, the Foundation stated that its Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The Foundation reported that these committees have raised the visibility of the Foundation. In addition, the Development Committee has increased the number of fundraisers from one in the first half of fiscal year 2005 to three in the first half of fiscal year 2006. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community, including pursuing grant opportunities, and the Foundation continues to work with professional fundraisers to more actively involve congressional members. The Foundation is currently prohibited from receiving federal funds, but is permitted to receive certain in-kind and indirect resources, as explained in Note 5 to the financial statements. The Foundation’s management is responsible for preparing the annual financial statements in conformity with U.S. generally accepted accounting principles; establishing, maintaining, and assessing the Foundation’s internal control to provide reasonable assurance that the Foundation’s control objectives are met; and complying with applicable laws and regulations. We are responsible for obtaining reasonable assurance about whether (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles; and (2) management maintained effective internal control, the objectives of which are the following. Financial reporting–-transactions are properly recorded, processed, and summarized to permit the preparation of financial statements, in conformity with U.S. generally accepted accounting principles, and assets are safeguarded against loss from unauthorized acquisition, use, or disposition. Compliance with laws and regulations–-transactions are executed in accordance with laws and regulations that could have a direct and material effect on the financial statements. We are also responsible for testing compliance with selected provisions of laws and regulations that have a direct and material effect on the financial statements. In order to fulfill these responsibilities, we examined, on a test basis, evidence supporting the amounts and disclosures in the financial statements; assessed the accounting principles used and significant estimates made evaluated the overall presentation of the financial statements and notes; read unaudited financial information for the Foundation for the first 6 months of fiscal year 2006; obtained an understanding of the internal control related to financial reporting (including safeguarding assets) and compliance with laws and regulations; tested relevant internal control over financial reporting and compliance and evaluated the design and operating effectiveness of internal control; and tested compliance with selected provisions of the Congressional Award Act, as amended. We did not evaluate internal control relevant to operating objectives, such as controls relevant to ensuring efficient operations. We limited our internal control testing to controls over financial reporting and compliance. We did not test compliance with all laws and regulations applicable to the Foundation. We limited our tests of compliance to those provisions of laws and regulations that we deemed to have a direct and material effect on the financial statements for the fiscal year ended September 30, 2005. We caution that noncompliance may occur and not be detected by our tests and that such testing may not be sufficient for other purposes. We performed our work in accordance with U.S. generally accepted government auditing standards. In commenting on a draft of this report, the Foundation stressed its efforts to secure funds to adequately support the program. The Foundation noted that contributions and pledges received through April 2006 showed significant increases over funding received in fiscal year 2005. The Foundation attributed this to both the recent reauthorization of the program in December 2005, and the Congress reaffirming its commitment to the Foundation, resulting in donors being more willing to contribute financially. The Foundation also discussed its plans to hold more fundraising events with Members of Congress. Additionally, the Foundation noted its efforts to reduce its operating expenses in order to meet its financial obligations. The Foundation also discussed efforts it has made to improve its internal controls over accounting and financial reporting through its development of written policies and procedures for financial operations and reporting. As we discuss in our report, these written policies and procedures were not drafted until after the period covered by our fiscal year 2005 financial audit. Consequently, they had no impact on the preparation of the Foundation’s fiscal year 2005 financial statements. If properly implemented, however, they should lead to improvements in the Foundation’s financial management. We will evaluate the effectiveness of these new policies and procedures during our audit of the Foundation’s fiscal year 2006 financial statements. The complete text of the Foundation’s comments is reprinted in appendix I. Contributions receivable (note 3) Congressional Award Fellowship Trust (note 4) Equipment, furniture, and fixtures, net Accounts payable (note 9) Line of credit (note 8) Accrued payroll, related taxes, and leave Temporarily restricted (note 6) Total liabilities and net assets The accompanying notes are an integral part of these financial statements. Changes in unrestricted net assets: Operating revenue and other support Contributions - In-kind (note 5) Interest and dividends applied to current operations Net assets released from restrictions (note 6) Total operating revenue and other support Operating expenses (note 11) Salaries, benefits, and payroll taxes Program, promotion, and travel (22,452) (18,548) Unrealized investment gains not applied to current operations Realized investment (losses) applied to current operations (3,279) (1,669) Increase (decrease) in unrestricted net assets (3,785) Changes in temporarily restricted net assets: Net assets released from restrictions (note 6) (3,060) (164,171) (Decrease) in temporarily restricted net assets (3,060) (164,171) Increase (decrease) in net assets (167,956) The accompanying notes are an integral part of these financial statements. Cash flows from operating activities: $10,016 ($167,956) Adjustments to reconcile change in net assets to net cash (38,807) (16,432) Realized loss on sale of investments Certificate of deposit interest not applied to current operations (1,401) (1,572) Change in operating assets: (1,068) Change in operating liabilities: (119,686) (14,840) Accrued payroll, related taxes and leave (47,641) (462) Net Cash (Used) in Operating Activities (172,420) (52,268) Cash Flows from Investing Activities: Proceeds from sale of investments Net Cash Provided by Investing Activities Net Increase (Decrease) in Cash and Cash Equivalents (2,590) Cash and Cash Equivalents, beginning of year Cash and Cash Equivalents, end of year The accompanying notes are an integral part of these financial statements. For the Fiscal Years Ended September 30, 2005 and 2004 The Congressional Award Foundation (the Foundation) was formed in 1979 under Public Law 96-114 and is a private, nonprofit, tax-exempt organization under Section 501(c)(3) of the Internal Revenue Service Code established to promote initiative, achievement, and excellence among young people in the areas of public service, personal development, physical fitness, and expedition. New program participants totaled over 3,000 in fiscal year 2005. During fiscal year 2005, there were approximately 21,000 participants registered in the Foundation’s Award program. The Foundation’s previous authorization expired on October 1, 2004. On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation through September 30, 2009. The financial statements are prepared on the accrual basis of accounting in conformity with U.S. generally accepted accounting principles applicable to not-for- profit organizations. B. Cash Equivalents and Certificate of Deposit The Foundation considers funds held in its checking account and all highly liquid investments with an original maturity of 3 months or less to be cash equivalents. Money market funds held in the Foundation’s Congressional Award Fellowship Trust (the Trust) are not considered cash equivalents for financial statement reporting purposes. The Foundation has a $50,000 certificate of deposit which is pledged as collateral on the $100,000 line of credit (see note 8). Unconditional promises to give are recorded as revenue when the promises are made. Contributions receivable to be collected within less than one year are measured at net realizable value. D. Equipment, Furniture and Fixtures, and Related Depreciation Equipment, furniture, and fixtures are stated at cost. Depreciation of furniture and equipment is computed using the straight-line method over estimated useful lives of 5 to 10 years. Expenditures for major additions and betterments are capitalized; expenditures for maintenance and repairs are charged to expense when incurred. For the Fiscal Years Ended September 30, 2005 and 2004 Upon retirement or disposal of assets, the cost and accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in revenue or expense, as appropriate. E. Congressional Award Fellowship Trust - Investments The Trust investments consist of equity securities and money market funds which are stated at market value. F. Classification of Net Assets The net assets of the Foundation are reported as follows: Unrestricted net assets represent the portion of expendable funds that are available for the general support of the Foundation. Temporarily restricted net assets represent amounts that are specifically restricted by donors or grantors for specific programs or future periods. The Foundation has no permanently restricted net assets. Contribution revenue is recognized when received or promised and recorded as temporarily restricted if the funds are received with donor or grantor stipulations that limit the use of the donated assets to a particular purpose or for specific periods. When a stipulated time restriction ends or purpose of the restriction is met, temporarily restricted net assets are reclassified to unrestricted net assets and reported in the statement of activities as net assets released from restrictions. H. Functional Allocation of Expenses The costs of providing the various programs and other activities have been summarized on a functional basis as described in note 11. Accordingly, certain costs have been allocated among the programs and supporting services benefitedThe preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. For the Fiscal Years Ended September 30, 2005 and 2004 Certain reclassifications have been made to the fiscal year 2004 Statement of Cash Flows to conform to the fiscal year 2005 presentation. In fiscal year 2005, the Foundation changed the format of its Statement of Cash Flows from direct method to the indirect method for purposes of reporting cash flows from operating activities. Accordingly, the Statement of Cash Flows for 2004 contains certain reclassifications to conform to the Foundation’s current financial statement format. For fiscal years 2004 and 2005, the reconciliation of net income to net cash provided by operating activities is included in the Statement of Cash Flows. Note 3. Contributions Receivable At September 30, 2005, and 2004, promises to give totaled $45,000 and $60,573, respectively, none of which was temporarily restricted by the donors. At September 30, 2005, and 2004, $45,000 and $60,573, respectively, were due within 1 year. At September 30, 2005, and 2004, net assets of $28,568 and $31,626, respectively, were temporarily restricted by donors for future periods. Note 4. Congressional Award Fellowship Trust The Congressional Award Fellowship Trust (the Trust) was established in 1990 to benefit the charitable and educational purposes of the Foundation. The Trust Fund received $264,457 of contributions since 1990, which were designated as permanently restricted by the donors when the donations were originally made. During the fiscal year ended September 30, 2004, the trust conditions changed. The Declaration of Trust of the Congressional Award Trust was amended, with the consent of the original declarants of the Trust and the Trustees, effective December 2003. Among other changes, the Amended Trust Declaration removes the permanent restriction on the use of endowment donations. Trust Fund amounts may be distributed to the Foundation at the discretion of the Trustees. During the fiscal year ended September 30, 2005, the Trustees authorized the use of $178,563 of the Trust Fund to support fiscal year 2005 operations. For the Fiscal Years Ended September 30, 2005 and 2004 Activity in the Trust Fund for the fiscal years ended September 30, 2005, and 2004 was as follows: Net realized gains (losses) (3,279) (1,669) Net unrealized gains (losses) Total investment gains (losses) Investments transferred to current operations (178,563) (55,092) Investment earnings applied to current operations Net change in Trust Fund investments (137,020) (34,915) Trust Fund investments, beginning of year Trust Fund investments, end of year During fiscal year 2005, the Foundation received in-kind (non-cash) contributions from donors. Donated professional services are accounted for as contribution revenue and as current period operating expenses. In-kind contributions received also resulted from the forgiveness of debts which were accounted for as contribution revenue. During fiscal year 2005, the Foundation negotiated cancellation of $63,262 of its liabilities with vendors. The vendors offered these balances owed as in-kind contributions to the Foundation. The value of the in-kind contributions recognized was $131,114 for fiscal year 2005 and $94,596 for fiscal year 2004. These non-cash contributions are as follows. For the Fiscal Years Ended September 30, 2005 and 2004 In addition, Section 7(c) of Public Law 101-525, the Congressional Award Amendments of 1990, provided that "the Board may benefit from in-kind and indirect resources provided by the Offices of Members of Congress or the Congress." Resources so provided include use of office space, office furniture, and certain utilities. In addition, section 102 of the Congressional Award Act, as amended, provides that the United States Mint may charge the United States Mint Public Enterprise Fund for the cost of striking Congressional Award Medals. The costs of these resources cannot be readily determined and, thus, are not included in the financial statements. Note 6. Temporarily Restricted Net Assets Temporarily restricted net assets at September 30, 2005, and 2004 were available for the following programs and future periods: Puerto Rico Council development 17,396 17,561 Nevada Council development 10,381 12,282 Oklahoma Council development ___791 1,783 Total net assets temporarily restricted for use: Net assets released from restrictions during the years ended September 30, 2005, and 2004 were as follows: 2005 2004 Contributions released from restriction for use in fiscal years 2005 and 2004, respectively Puerto Rico Council development 166 Nevada Council development 1,901 1,765 Oklahoma Council development 993 2,246 Total temporarily restricted net assets released for use: $ 3,060 $164,171 Note 7. Employee Retirement Plan For the benefit of its employees, the Foundation participates in a voluntary 403(b) tax- deferred annuity plan, which was activated on August 27, 1993. Under the plan, the Foundation may, but is not required to, make employer contributions to the plan. There was no contribution to the plan in fiscal years 2005 and 2004. Note 8. Line of Credit The Foundation has a $100,000 revolving line of credit with its bank that bears interest at 7.75 percent per annum. The line of credit is partially secured by the Foundation’s investment in a $50,000 certificate of deposit held by the same bank. At September 30, 2005 and 2004, the outstanding balance on the line of credit was $100,000. Note 9. Accounts Payable The accounts payable balance is $15,817 at September 30, 2005. The accounts payable balance at September 30, 2004 was $135,503. During fiscal year 2005, $63,262 in amounts owed to vendors for goods and services received primarily in fiscal year 2002 were forgiven by the vendors. These amounts are reflected as in-kind contributions on the Foundation’s Statements of Activities (see note 5). Note 10. Related Party Activities During fiscal year 2005, an ex-officio director of the Board provided pro bono legal services to the Foundation. The value of legal services has been included in the in-kind contributions and professional fees line items (see note 5). In addition, a former Board Member served as portfolio manager with the brokerage firm responsible for managing the Congressional Award Fellowship Trust account during fiscal years 2005 and 2004. During March 2004, the Foundation entered into an agreement with a professional fundraiser. Also in 2004, the spouse of this professional fundraiser was elected to the Board of Directors of the Foundation. The professional fundraiser was retained on a 10 percent commission basis for fiscal year 2004. During fiscal year 2005, the commission basis was increased to 15 percent. Expenses incurred by the Foundation during fiscal year 2005 and 2004 to the related party totaled $12,891 and $9,756, respectively. Note 11. Expenses by Functional Classification The Foundation has presented its operating expenses by natural classification in the accompanying Statements of Activities for the fiscal years ending September 30, 2005, and 2004. Presented below are the Foundation's expenses by functional classification for the fiscal years ended September 30, 2005, and 2004. Note 12. The Foundation’s Ability to Continue as a Going Concern The Congressional Award Foundation is dependent on contributions to fund its operations and, to a far lesser extent, other revenues, interest, and dividends. The Foundation’s net assets increased by $10,016 in fiscal year 2005 and decreased by $167,956 in fiscal year 2004. The increase in net assets in fiscal year 2005 was due primarily to increases in unrealized investment gains. In fiscal year 2005, the Foundation released Trust funds to eliminate past due accounts payable and improve the Foundation’s fiscal position. As a result, the Foundation’s investments decreased $137,020 in fiscal year 2005 from $195,551 to $58,531. The Foundation has taken steps to substantially decrease administrative expenses, and has implemented numerous initiatives to increase fundraising revenue. The Foundation’s ability to continue as a going concern is dependent on increasing revenues. Unaudited financial data compiled by the Foundation as of March 31, 2006, show that the Foundation’s financial condition has not improved from September 30, 2005. During fiscal year 2005, the Board elected several new Members and the Foundation hired an accountant, who was promoted to Controller in fiscal year 2006, to focus on improving financial management. Subsequent to fiscal year 2005, the newly elected Treasurer and Audit Committee Chair worked with the National Office staff to improve internal control over financial reporting by developing written fiscal policies and procedures, and financial reporting guidelines. These efforts are expected to provide more accurate and timely accounting and reporting. To improve fundraising efforts, the Board created a Congressional Liaison Committee, Development Committee, and Program Committee during fiscal year 2005. The newly elected Development Chairperson is leading fundraising initiatives in the corporate community and continuing to work with professional fundraisers to more actively involve congressional members with monthly Capitol Hill fundraising events focused around key Members. These events are generating funds from new donors and providing opportunities to maintain relations with current Foundation supporters. Note 13. Subsequent Events On December 22, 2005, the President signed Public Law 109-143, which reauthorized the Congressional Award Foundation for another five years, “as though no lapse or termination of the Board ever occurred.” Four Foundation Board Members were appointed by the Speaker of the House of Representatives to serve on the National Board on March 30, 2006. One new Foundation Board Member was elected at the April 3, 2006, meeting of the Board of Directors. The Spouse Executive Council, made up of spouses of Congressional members, was created and held its first meeting on February 6, 2006, to assist with fundraising and the overall mission of the Foundation. | This report presents our opinion on the financial statements of the Congressional Award Foundation for the fiscal years ended September 30, 2005, and 2004. These financial statements are the responsibility of the Congressional Award Foundation. This report also presents (1) our opinion on the effectiveness of the Foundation's related internal control as of September 30, 2005, and (2) our conclusion on the Foundation's compliance in fiscal year 2005 with selected provisions of laws and regulations we tested. We conducted our audit pursuant to section 107 of the Congressional Award Act, as amended (2 U.S.C. 807), and in accordance with U.S. generally accepted government auditing standards. This report also includes our determination required under section 104(c)(2)(A) of the Act (2 U.S.C. 804(c)(2)(A)) relating to the Foundation's financial operations. We have audited the statements of financial position of the Congressional Award Foundation (the Foundation) as of September 30, 2005, and 2004, and the related statements of activities and statements of cash flows for the fiscal years then ended. We found (1) the financial statements are presented fairly, in all material respects, in conformity with U.S. generally accepted accounting principles, although substantial doubt exists about the Foundation's ability to continue as a going concern; (2) the Foundation did not have effective internal control over financial reporting (including safeguarding assets) but did have effective control over compliance with laws and regulations; and (3) no reportable noncompliance with the provisions of laws and regulations we tested during fiscal year 2005. |
Several different federal agencies are involved with the implementation of the Subtitle B program, including Labor, HHS, and Energy. However, Labor has primary responsibility for administering the program. Labor receives the claims, determines whether the claimant meets the eligibility requirements, and adjudicates the claim. When considering the compensability of certain claims, Labor relies on dose reconstructions developed by NIOSH, under HHS. To avoid gathering similar information for each claim associated with a particular facility, NIOSH compiles facility-specific information in “site profiles,” which assist NIOSH in completing the dose reconstructions. NIOSH contracted with Oak Ridge Associated Universities and the Battelle Corporation to develop site profiles and draft dose reconstructions. Energy is responsible for providing Labor and NIOSH with employment verification, estimated radiation dose, and facility-wide monitoring data. Labor does not refer all claims to NIOSH for dose reconstruction. For example, reconstructions are not needed for workers in the special exposure cohort. For special exposure cohort claimants, Labor verifies the employment and illness, and develops a recommended compensability decision that is issued to the claimant. The act specified that classes of workers from four designated locations would constitute the special exposure cohort and authorized the Secretary of HHS to add additional classes of employees. Classes of workers may petition HHS to be added to the cohort. A class of employees is generally defined by the facility at which they worked, the specific years they worked, and the type of work they did. NIOSH collects and evaluates the petitions and gives the results of its evaluations to the advisory board for review. The board, in turn, submits a recommendation to the Secretary of HHS to accept or deny the petition. To date, 13 classes of workers have been approved at 10 sites, and petitions from 9 additional sites have been qualified for evaluation. A petition from one site has been evaluated and denied. Our May 2004 report identified various problems with Energy’s processing of Subtitle D cases. Energy got off to a slow start in processing cases but had taken some steps to reduce the backlog of cases waiting for review by a physician panel. For example, Energy took steps to expand the number of physicians who would qualify to serve on the panels and recruit more physicians. Nonetheless, a shortage of qualified physicians continued to constrain the agency’s capacity to decide cases more quickly. Further, insufficient strategic planning and systems limitations made it difficult to assess Energy’s achievement of goals relative to case processing and program objectives, such as the quality of the assistance provided to claimants in filing for state workers’ compensation. We concluded that in the absence of changes that would expedite Energy’s review, many claimants would likely wait years to receive the determination they needed from Energy to pursue a state workers’ compensation claim, and in the interim their medical conditions might worsen or they might even die. We made several recommendations to Energy to help improve its effectiveness in assisting Subtitle D claimants in obtaining compensation. Specifically, we recommended that Energy take additional steps to expedite the processing of claims through its physician panels, enhance the quality of its communications with claimants, and develop cost- effective methods for improving the quality of case management data and its capabilities to aggregate these data to address program issues. Energy generally agreed with these recommendations. Our May 2004 report also identified structural problems that could lead to inconsistent benefit outcomes for claimants whose illness was determined by a physician panel to be caused by exposure to toxic substances while employed at an Energy facility. Our analysis of cases associated with Energy facilities in nine states indicated that a few thousand cases would lack a “willing payer” of workers’ compensation benefits; that is, they would lack an insurer that—by order from, or agreement with, Energy— would not contest these claims. As a result, in some instances, these cases may have been less likely to receive compensation than cases for which there was a willing payer. We identified various options for restructuring the program to improve payment outcomes and presented a framework of issues to consider in evaluating these options. Congress subsequently enacted legislation that dramatically restructured the program, transferred it from Energy to Labor, and incorporated features of some of the options we identified. Labor told us it has taken actions to address each of the recommendations we made to the Secretary of Energy in our report. For example, Labor has compiled a data base of the toxic substances that may have been present at Energy facilities and linked them to medical conditions to help expedite the processing of claims. In addition, Labor has rebuilt its case management system which tracks all Subtitle E claims transferred from Energy and enhanced the system’s performance and reliability. Our September 2004 report on the Subtitle B program found that in the first 2½ years of the program, Labor and NIOSH had fully processed only 9 percent of the more than 21,000 claims that were referred to NIOSH for dose reconstruction. NIOSH officials reported that the backlog of dose reconstruction claims arose because of several factors, including the time needed to get the necessary staff and procedures in place for performing dose reconstructions and to develop site profiles. NIOSH learned from its initial implementation experience that completing site profiles is a critical element for efficiently processing claims requiring dose reconstructions. To enhance program management and promote greater transparency with regard to timeliness, we recommended that the Secretary of HHS direct agency officials to establish time frames for completing the remaining site profiles, which HHS has done. Our February 2006 report discussed the roles of certain federal agency officials involved in the advisory board’s review of NIOSH’s dose reconstructions and site profiles that raised concerns about the independence of this review. The project officer who was initially assigned responsibility for reviewing the monthly progress reports and monitoring the technical performance of the contractor reviewing NIOSH’s dose reconstruction activities for the advisory board was also a manager of the NIOSH dose reconstruction program. In addition, the person assigned to be the designated federal officer for the advisory board, who is responsible for scheduling and attending board meetings, was also the director of the dose reconstruction program being reviewed. In response to concerns about the appearance of conflicting roles, the director of NIOSH replaced both of these officials in December 2004 with a senior NIOSH official not involved in the program. The contractor and members of the board told us that implementation of the contract improved after these officials were replaced. Since credibility is essential to the work of the advisory board and the contractor assisting the board, we concluded that continued diligence by HHS is required to prevent such problems from recurring when new candidates are considered for these roles. With regard to structural independence, we found it appropriate that the contracting officers managing the contract on behalf of the advisory board were officials from the Centers for Disease Control and Prevention, NIOSH’s parent agency, who do not have responsibilities for the NIOSH program under review and are not accountable to its managers. In addition, advisory board members helped facilitate the independence of the contractor’s work by playing the leading role in developing and approving the initial statement of work for the contractor and the independent government cost estimate for the contract. Our February 2006 report identified further improvements that could be made to the oversight and planning of the advisory board’s contracted review of NIOSH’s dose reconstructions and site profiles. We found that this review presented a steep learning curve for the various parties involved. In the first 2 years, the contractor assisting the board had spent almost 90 percent of the $3 million that had been allocated to the contract for a 5-year undertaking. In addition, the contractor’s expenditure levels were not adequately monitored by the agency in the initial months and the contractor’s monthly progress reports did not provide sufficient details on the level of work completed compared to funds expended. The advisory board had made mid-course adjustments to the contractor’s task orders and review procedures, such as by revising task orders to reduce the number of reviews to be completed or extend completion dates. However, the board had not comprehensively reexamined its long-term plan for the overall project to determine whether the plan needed to be modified in light of knowledge gained over the past few years. Finally, without a system to track the actions taken by NIOSH in response to the findings and recommendations of the advisory board and contractor, there was no assurance that needed improvements were being made. We made three recommendations to HHS to address these shortcomings. First, we recommended that HHS provide the board with more integrated and comprehensive data on contractor spending levels compared with work actually completed, which HHS has done. Second, we recommended that HHS consider the need for providing HHS staff to collect and analyze pertinent information to help the advisory board comprehensively reexamine its long-term plan for assessing the NIOSH site profiles and dose reconstructions. HHS is considering the need for such action. Third, we recommended that the Director of NIOSH establish a system to track actions taken by the agency in response to the board and contractor’s findings and recommendations. NIOSH now tracks agency actions to resolve the board and contractor’s comments. As part of our ongoing work, we are examining to what extent, if any, Labor is involved in certain Subtitle B activities. While the director of Labor’s Office of Workers’ Compensation Programs stated that Labor has not taken any actions to implement the options outlined in the OMB memorandum, Labor’s internal correspondence reflects major concerns about the potential for rapidly expanding costs in Subtitle B benefits resulting from adding new classes of workers to the special exposure cohort. One aspect of our ongoing work is determining whether Labor is involved in activities that have been tasked to NIOSH, the advisory board, or the contractor assisting the board, and if so, whether these activities reflect an effort to constrain the costs of benefits. Our work in this area is still ongoing and we have not drawn any conclusions. Nonetheless, we would like to briefly highlight the types of issues we will be analyzing as our work proceeds. NIOSH has, in some cases, shared draft versions of key documents with Labor before finalizing and sending them to the advisory board for review. For example, NIOSH has shared draft special exposure cohort petition evaluations with Labor. Similarly, NIOSH has agreed to allow Labor to review and comment on drafts of various technical documents such as site profiles, technical basis documents, or technical information bulletins, all of which are used to help perform dose reconstructions. Labor has provided comments on some of these draft documents. Labor officials told us that the basis of their involvement is Labor’s designation as lead agency with primary responsibility for administering the program. Labor officials added that their reviews of these documents focus on changes needed to promote clarity and consistency in the adjudication of claims. In addition, Labor has reviewed individual dose reconstructions completed by NIOSH. Labor officials told us that they review all NIOSH dose reconstructions and return them for rework if, for example, they find errors in factual information or in the way the dose reconstruction methodology was applied. We are currently examining the extent, nature, and outcome of Labor’s comments on these various documents. As our review proceeds, we plan to obtain more information on key issues such as the timing, nature, and basis of Labor’s activities in light of the program’s design and assignment of responsibilities. Mr. Chairman, this concludes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have. For further information regarding this testimony, please contact me at (202) 512-7215. Key contributors to this testimony were Claudia Becker, Meeta Engle, Robert Sampson, Andrew Sherrill, and Charles Willson. Department of Energy, Office of Worker Advocacy: Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors. GAO-06-547. Washington, D.C.: May 31, 2006. Energy Employees Compensation: Adjustments Made to Contracted Review Process, but Additional Oversight and Planning Would Aid the Advisory Board in Meeting Its Statutory Responsibilities. GAO-06-177. Washington, D.C.: Feb. 10, 2006. Energy Employees Compensation: Many Claims Have Been Processed, but Action Is Needed to Expedite Processing of Claims Requiring Radiation Exposure Estimates. GAO-04-958. Washington, D.C.: Sept. 10, 2004. Energy Employees Compensation: Even with Needed Improvements in Case Processing, Program Structure May Result in Inconsistent Benefit Outcomes. GAO-04-516. Washington, D.C.: May 28, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Energy Employees Occupational Illness Compensation Program Act (EEOICPA) was enacted in 2000 to compensate Department of Energy employees and contractors who developed work-related illnesses such as cancer and lung disease. Energy administered Subtitle D of the program. Subtitle B of the program is administered by the Department of Labor, which uses estimates of workers' likely radiation exposure to make compensation decisions. The estimates, known as dose reconstructions, are performed by the National Institute for Occupational Safety and Health (NIOSH) under the Department of Health and Human Services (HHS). The act specified that the President establish an Advisory Board on Radiation and Worker Health to review the scientific validity of NIOSH's dose reconstructions and recommend whether workers should be part of special exposure cohorts whose claimants can be compensated without dose reconstructions. A recent memorandum from the Office of Management and Budget (OMB) to Labor has raised concern about potential efforts to unduly contain the cost of benefits paid to claimants. This testimony presents GAO's past work on program performance and the work of the advisory board. It also highlights GAO's ongoing work relevant to issues raised by the OMB memorandum. GAO interviewed key officials and reviewed contract and other agency documents. GAO issued two reports in 2004 that focused on claims processing and program structure. The first report found that Energy got off to a slow start in processing Subtitle D claims and faced a backlog of cases. In addition, limitations in data systems made it difficult to assess Energy's performance. GAO recommended that Energy take actions to expedite claims processing, enhance communication with claimants, and improve case management data. The report also highlighted problems with program structure that could lead to inconsistent benefit outcomes and GAO presented various options for restructuring the program. Congress subsequently incorporated features of some of these options in enacting new legislation that dramatically restructured the program and transferred it from Energy to Labor. Labor has taken action to address the recommendations GAO made to Energy. The second report found that Labor and NIOSH faced a large backlog of claims awaiting dose reconstruction. To enhance program management and transparency, HHS implemented GAO's recommendation to establish time frames for completing profiles of Energy work sites, which are a critical element in efficiently processing claims that require dose reconstruction. GAO's February 2006 report found that the roles of two key NIOSH officials involved with the work of the advisory board may not have been sufficiently independent because these officials also represented the dose reconstruction program under review. In response, NIOSH replaced them with a senior official not involved in the program. Since credibility is essential to the advisory board's work, GAO concluded that ongoing diligence by HHS is required to avoid actual or perceived conflicts of roles when new candidates are considered for these roles. GAO also found that the board's work presented a steep learning curve, prompting adjustments to the work done by the contractor assisting the board. GAO recommended actions to provide the board with more comprehensive data on contractor spending levels compared to work actually completed, assist the board in reexamining its long-term plan for reviewing NIOSH's work, and better track agency actions taken in response to board and contractor findings. HHS has implemented these recommendations. One aspect of GAO's ongoing work especially relevant to the OMB memorandum is the extent to which Labor's concerns over potentially escalating benefit costs may have led the agency to be involved in activities tasked to NIOSH, the advisory board, or the contractor assisting the board. NIOSH agreed to provide Labor with draft versions of some of its evaluations of special exposure cohort petitions and other NIOSH technical documents before sending them for board review. Labor has commented on some of these draft documents. Labor officials told us that their reviews focus on changes needed to promote clarity and consistency in the adjudication of claims. As the review proceeds, GAO plans to obtain more information on key issues such as the timing, nature, and basis of Labor's activities in light of the program's design and assignment of responsibilities. |
Within USDA, FSA has the overall administrative responsibility for implementing agricultural programs. FSA is responsible for, among other things, stabilizing farm income, helping farmers conserve environmental resources, and providing credit to new or disadvantaged farmers. FSA’s management structure is highly decentralized; the primary decision-making authority for approving loans and applications for a number of agricultural programs rests in its county and district loan offices. In county offices, for example, committees, made up of local farmers, are responsible for deciding which farmers receive funding for the Agricultural Conservation Program (ACP). Similarly, FSA officials in district loan offices decide which farmers receive direct loans. These FSA officials are federal employees. Under the ACP, FSA generally paid farmers up to 75 percent of a conservation project’s cost, up to a maximum of $3,500 annually. FSA allocated funds annually to the states on the basis of federally established priorities. The states in turn distributed funds to the county committees on the basis of the states’ priorities. Farmers could propose projects at any time during the fiscal year, and the county committees could approve the proposals at any time after the funds became available. Consequently, county committees often obligated their full funding allocation before receiving all proposals for the year. The district loan offices administer the direct loan program, which provides farm ownership and operating loans to individuals who cannot obtain credit elsewhere at reasonable rates and terms. Each district loan office is responsible for one or more counties. The district loan office’s agricultural credit manager is responsible for approving and servicing these loans. FSA accepts a farmer’s loan application documents, reviews and verifies these documents, determines the applicant’s eligibility to participate in the loan program, and evaluates the applicant’s ability to repay the loan. In servicing these loans, FSA assists in developing farm financial plans, collects loan payments, and restructures delinquent debt. For both the ACP and the direct loan program, as well as other programs, farmers may appeal disapproval decisions to USDA’s National Appeals Division (NAD). FSA’s efforts to achieve equitable treatment for minority farmers are overseen by the agency’s Civil Rights and Small Business Development Staff through three separate activities. First, the Staff investigates farmers’ complaints of discrimination in program decisions through its Civil Rights and Small Business Development Staff. During fiscal years 1995 and 1996, the Staff closed 28 cases in which discrimination was alleged on the basis of race or national origin. In 26 of these cases, the Staff found no discrimination. In the other two cases, the Staff found that FSA employees had discriminated on the basis of race in one case and national origin in the other. At the time of review, USDA had not resolved how it would deal with the employees and compensate the affected farmers. As of January 7, 1997, the Staff had 110 cases of discrimination alleged on the basis of race or national origin under investigation. Ninety-one percent of these cases were filed since January 1, 1995. Second, the Staff conducts management evaluations of FSA’s field offices to ensure that procedures designed to protect civil rights are being followed. During fiscal years 1995 and 1996, the Staff evaluated management activities within 13 states. None of the evaluations concluded that minority farmers were being treated unfairly. And third, the Staff provides equal employment opportunity (EEO) and civil rights training to its employees. Beginning in 1993, the Staff began to present revised EEO and civil rights training to all FSA state and county employees. About half of the FSA employees have been trained, according to the Staff, and all are scheduled to complete this training by the end of 1997. The training covers such areas as civil rights (program delivery) and EEO counseling, mediation, and complaints. In addition to these activities, FSA has specific efforts to increase minority farmers’ participation in agricultural programs. For example, since September 1993, the Small Farmer Outreach Training and Technical Assistance Program has assisted small and minority farmers in applying for loans. Over 2,500 FSA borrowers have been served by these efforts. FSA has also assisted Native American farmers by establishing satellite offices on reservations. More recently, in July 1996, FSA created an outreach office to increase minority farmers’ knowledge of, and participation in, the Department’s agricultural programs. In the 101 counties with the highest numbers of minority farmers, representing 34 percent of all minority farmers in the nation, FSA employees and county committee members were often members of a minority group. As of October 1996, 32 percent of FSA’s employees serving the 101 counties were members of a minority group. In the offices serving 77 of these counties, at least one staff member was from a minority group. Moreover, 89 percent of these minority employees were either county executive directors or program assistants. Minority farmers make up about 17 percent of the farmer population in these 101 counties. In addition, 7 of the 10 county and district loan offices we visited had at least one minority employee. The executive directors of two county offices, Holmes, Mississippi, and Duval, Texas, were members of a minority group, as were the managers of two district loan offices, Elmore, Alabama, and Jim Wells, Texas, and the deputy managers of three district loan offices, Holmes, Jim Wells, and Byron, Georgia. The number of minority employees could change as FSA continues its current reorganization. FSA plans to decrease its field structure staff from 14,683 in fiscal year 1993 to 11,729 in fiscal year 1997—a change of about 20 percent. We do not know how this reduction will affect the number of minority employees in county and district loan offices. We found that for the 101 counties with the highest numbers of minority farmers, 36 had at least one minority farmer on the county committee. In the five county offices we visited, two committees had minority members and the other three had minority advisers. We have previously reported on this issue. In March 1995, in Minorities and Women on Farm Committees (GAO/RCED-95-113R, Mar. 1, 1995), we reported that minority farm owners and operators, nationwide, accounted for about 5 percent of those eligible to vote for committee members, and about 2 percent of the county committee members came from a minority group. According to FSA’s data, applications for the ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at higher rates nationwide for minority farmers than for nonminority farmers. To develop an understanding of the reasons for disapprovals, we examined the files for applications submitted under both programs during fiscal years 1995 and 1996 in five county and five district loan offices. We chose these offices because they had higher disapproval rates for minority farmers or because they were located in areas with large concentrations of farmers from minority groups. We chose the ACP and the direct loan program because decisions on participation in these programs are made at the local level. In addition, nationally, these programs have higher disapproval rates for minority farmers than for nonminority farmers. Nationally, during fiscal year 1995, the disapproval rates for applications for ACP funds were 33 percent for minority farmers and 27 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 25 percent of the ACP applications from Native American and Asian American farmers were disapproved, while 34 percent and 36 percent of the applications from African American and Hispanic American farmers, respectively, were disapproved. To develop an understanding of the reasons why disapprovals occurred, we examined the ACP applications for fiscal years 1995 and 1996 at five county offices. (See attachment I for the number of ACP applications during this period from minority and nonminority farmers in each of the five counties, as well as the number and percent of applications that were disapproved.) When ACP applications were received in the county offices we visited, they were reviewed first for compliance with technical requirements. These requirements included such considerations as whether the site was suitable for the proposed project or practice, whether the practice was still permitted, or whether the erosion rate at the proposed site met the program’s threshold requirements. Following this technical evaluation, if sufficient funds were available, the county committees approved all projects that met the technical evaluation criteria. This occurred for all projects in Dooly County and for a large majority of the projects in Glacier County. In Holmes County, the county committee ranked projects for funding using a computed cost-per-ton of soil saved, usually calculated by the Department’s local office of the Natural Resources Conservation Service. The county committee then funded projects in order of these savings until it had obligated all funds. In the remaining two counties, Russell and Duval, the county committees, following the technical evaluations, did not use any single criterion to decide which projects to fund. For example, according to the county executive director in Russell County, the committee chose to fund several low-cost projects submitted by both minority and nonminority farmers rather than one or two high-cost projects. It also considered, and gave higher priority to, applicants who had been denied funds for eligible projects in previous years. In contrast, the Duval county committee decided to support a variety of farm practices. Therefore, it chose to allocate about 20 percent of its funds to projects that it had ranked as having a medium priority. These projects were proposed by both minority and nonminority farmers. In the aggregate, 98 of 271 applications from minority farmers were disapproved in the five county offices we visited. Thirty-three were disapproved for technical reasons and 62 for lack of funds. FSA could not find the files for the remaining three minority applicants. We found that the applications of nonminority farmers were disapproved for similar reasons. Of the 305 applications for nonminority farmers we reviewed, 106 were disapproved. Fifty-three were disapproved for technical reasons and 52 for lack of funds. FSA could not find the file for the remaining applicant. Approval and disapproval decisions were supported by material in the application files, and the assessment criteria used in each location were applied consistently to applications from minority and nonminority farmers. Nationally, the vast majority of all applicants for direct loans have their applications approved. However, the disapproval rate for minority farmers is higher than for nonminority farmers. From October 1994 through March 1996, the disapproval rate was 16 percent for minority farmers and 10 percent for nonminority farmers. We found some differences in the disapproval rates for different minority groups. Specifically, 20 percent of the loan applications from African American farmers, 16 percent from Hispanic American farmers, 11 percent from Native American farmers, and 7 percent from Asian American farmers, were disapproved. To assess the differences in disapproval rates, we examined the direct loan applications for fiscal years 1995 and 1996 at five district loan offices. (See attachment II for more detailed information on direct loan disapproval rates in five district offices.) Our review of the direct loan program files in these locations showed that FSA’s decisions to approve and disapprove applications appeared to follow USDA’s established criteria. These criteria were applied to the applications of minority and nonminority farmers in a similar fashion and were supported by materials in the files. The process for deciding on loan applications is more uniform for the direct loan program than for the ACP. The district loan office first reviews a direct loan application to determine whether the applicant meets the eligibility criteria, such as being a farmer in the district, having a good credit rating, and demonstrating managerial ability. Farmers who do not demonstrate this ability may take a course, at their own expense, to meet this standard. If the applicant meets these criteria, the loan officer determines whether the farmer meets the requirements for collateral and has sufficient cash flow to repay the loan. These decisions are based on the Farm and Home Plan—the business operations plan for the farmer—prepared by the loan officer with information provided by the farmer. If the collateral requirements and the cash flow are sufficient, the farmer generally receives the loan. In the five district loan offices we visited, 22 of the 115 applications from minority farmers were disapproved. Twenty were disapproved because the applicants had poor credit ratings or inadequate cash flow. One was disapproved because the applicant was overqualified and was referred to a commercial lender. In the last case, the district loan office was unable to locate the loan file because it was apparently misplaced in the departmental reorganization. However, correspondence dealing with this applicant’s appeal to NAD indicates that the application was disapproved because the applicant did not meet the eligibility criterion for recent farming experience. NAD upheld the district loan office’s decision. The Department allows all farmers to appeal adverse program decisions made at the local level through NAD. The division conducts administrative hearings on program decisions made by officers, employees, or committees of FSA and other USDA agencies. The applications of nonminority farmers that we reviewed were disapproved for similar reasons. Of the 144 applications from nonminority farmers we reviewed, 15 were disapproved. Nine were disapproved because of poor credit ratings or inadequate cash flow; five were disapproved because the applicants did not meet eligibility criteria; and one was disapproved because of insufficient collateral. Additionally, in reviewing the 129 approved applications of nonminority farmers, we did not find any that were approved with evidence of poor credit ratings or insufficient cash flow. We also wanted to obtain information on whether FSA was more likely to foreclose on loans to minority farmers while restructuring or writing down loans to nonminority farmers. Between October 1, 1994, and March 31, 1996, we found only one foreclosed loan for a—nonminority farmer—in the five district loan offices we reviewed. We also found 62 cases in which FSA restructured delinquent loans. Twenty-two of these were for minority farmers. Finally, the amount of time FSA takes to process applications from minority and nonminority farmers is about the same. Nationwide, from October 1994 through March 1996, FSA took an average of 86 days to process the applications of nonminority farmers and an average of 88 days to process those of minority farmers. More specifically, for African Americans, FSA took 82 days; for Hispanic Americans and Native Americans, 94 days; and for Asian Americans, 97 days. This completes my prepared statement. I will be happy to respond to any questions you may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its work on the U.S. Department of Agriculture's (USDA) efforts to achieve equitable treatment of minority farmers, focusing on the: (1) Farm Service Agency's (FSA) efforts to treat minority farmers in the same way as nonminority farmers in delivering program services; (2) representation of minorities in county office staffing and on county committees in the counties with the highest number of minority farmers; and (3) disposition of minority and nonminority farmers' applications for participation in the Agricultural Conservation Program (ACP) and the direct loan program at the national level and in five county and five district loan offices for fiscal years 1995 and 1996. GAO noted that: (1) FSA's Civil Rights and Small Business Development Staff oversees the agency's efforts to achieve fair treatment for minority farmers; (2) in fiscal years 1995 and 1996, the Staff closed 28 complaints of discrimination against farmers on the basis of race or national origin and found discriminatory practices in 2 of the 28 cases; (3) the Staff also conducted 13 management reviews of field offices and found no evidence of unfair treatment; (4) finally, according to the Staff, they are in the midst of training all FSA personnel on civil rights matters and the Staff projects that this training will be completed by the end of 1997; (5) GAO did not evaluate the quality and thoroughness of the Staff's activities; (6) with respect to the representation of minority employees in FSA's field offices, USDA's database showed that, as of October 1996, 32 percent of the employees serving the 101 counties with the highest number of minority farmers are members of a minority group; (7) moreover, for the same period, 89 percent of these minority employees were either county executive directors or program assistants; (8) minority farmers makeup about 17 percent of the farmer population in these counties; (9) furthermore, in 36 of the 101 counties, at least one minority farmer is a member of the county committee; (10) the applications of minority farmers for ACP for fiscal year 1995 and for the direct loan program from October 1994 through March 1996 were disapproved at a higher rate nationwide than for nonminority farmers; (11) GAO found that disapproval rates for minority farmers were also higher at three of the five county offices and three of the five district loan offices it visited; and (12) however, GAO's review of the information in the application files at these offices showed that decisions to approve or disapprove applications were supported by information in the files and that decisionmaking criteria appeared to be applied to minority and nonminority applicants in a similar fashion. |
The Internet is a worldwide network of networks made up of servers, routers, and backbone networks. To send a communication from one computer to another, a series of addresses is attached to information sent from the first computer to route the information to its final destination. The protocol that guides the administration of the routing addresses is the Internet protocol. The most widely deployed version of IP is version 4 (IPv4). The two basic functions of IP include (1) addressing and (2) fragmentation of data, so that information can move across networks. An IP address consists of a fixed sequence of numbers. IPv4 uses a 32-bit address format, which provides approximately 4.3 billion unique IP addresses. By providing a numerical description of the location of networked computers, addresses distinguish one computer from another on the Internet. In some ways, an IP address is like a physical street address. For example, if a letter is going to be sent from one location to another, the contents of the letter must be placed in an envelope that provides addresses for the sender and receiver. Similarly, if data are to be transmitted across the Internet from a source to a destination, IP addresses must be placed in an IP header. Figure 1 is a simplified illustration of this concept. In addition to containing the addresses of sender and receiver, the header also contains a series of fields that provide information about what is being transmitted. Limited IPv4 address space prompted organizations that need large numbers of IP addresses to implement technical solutions to compensate. For example, network administrators began to use one unique IP address to represent a large number of users. In other words, to the outside world, all computers behind a device known as a network address translation router appear to have the same address. While this method has enabled organizations to compensate for the limited number of globally unique IP addresses available with IPv4, the resulting network structure has eliminated the original end-to-end communications model of the Internet. Because of the limitations of IPv4, in 1994 the Internet Engineering Task Force (IETF) began reviewing proposals for a successor to IPv4 that would increase IP address space and simplify routing. The IETF established a working group to be specifically responsible for developing the specifications and standardization of IPv6. Over the past 10 years, IPv6 has evolved into a mature standard. A complete list of the IPv6 documents can be found at the IETF Web site. Interest in IPv6 is gaining momentum around the world, particularly in parts of the world that have limited IPv4 address space to meet their industry and consumer communications needs. Regions that have limited IPv4 address space, such as Asia and Europe, have undertaken efforts to develop, test, and implement IPv6 deployments. As a region, Asia controls only about 9 percent of the allocated IPv4 addresses, and yet has more than half of the world’s population. As a result, the region is investing in IPv6 development, testing, and implementation. For example, the Japanese government’s e-Japan Priority Policy Program mandated the incorporation of IPv6 and set a deadline of 2005 to upgrade existing systems in both the public and private sectors. The government has helped to support the establishment of an IPv6 Promotion Council to facilitate issues related to development and deployment and is providing tax incentives to promote deployment. In addition, major Japanese corporations in the communications and consumer electronics sectors are also developing IPv6 networks and products. Further, the Chinese government has reportedly set aside approximately $170 million to develop an IPv6-capable infrastructure. The European Commission initiated a task force in April 2001 to design an IPv6 Roadmap. The Roadmap serves as an update and plan of action for development and future perspectives. It also serves as a way to coordinate European efforts for developing, testing, and deploying IPv6. Europe currently has a task force that has the dual mandate of initiating country/regional IPv6 task forces across European states and seeking global cooperation around the world. Europe’s Task Force and the Japanese IPv6 Promotion Council forged an alliance to foster worldwide deployment. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, IPv6 dramatically increases the amount of IP address space available from the approximately 4.3 billion in IPv4 to approximately 3.4 × 10This large number of IPv6 addresses means that almost any electronic device can have its own address. While IP addresses are commonly associated with computers, they are increasingly being assigned to other items such as cellular phones, consumer electronics, and automobiles. In contrast to IPv4, the massive address space available in IPv6 will allow virtually any device to be assigned a globally reachable address. This change fosters greater end-to-end communications between devices with unique IP addresses and can better support the delivery of data-rich content such as voice and video. In addition to the increased number of addresses, IPv6 improves the routing of data, provides mobility features for wireless, and eases automatic configuration capabilities for network administration, quality of service, and security. These characteristics are expected to enable advanced Internet communications and foster new software applications. While applications that fully exploit IPv6 are still in development, industry experts have identified various federal functions that might benefit from IPv6-enabled applications, such as border security, first responders, public health, and information sharing. The transition to IPv6 is under way for many federal agencies because their networks already contain IPv6-capable software and equipment. For example, most major operating systems, printers, and routers currently support IPv6. Therefore, it is important for agencies to note that the transition to IPv6 is different from a software upgrade because, when it is installed, its capability is also being integrated into the software and hardware. Besides recognizing that an IPv6 transition is already under way, other key considerations for federal agencies to address in an IPv6 transition include significant IT planning efforts and immediate actions to ensure the security of agency information and networks. Important planning considerations include the following: ● Developing inventories and assessing risks—An inventory of equipment (software and hardware) provides management with an understanding of the scope of an IPv6 transition and assists in focusing agency risk assessments. These assessments are essential steps in determining what controls are required to protect a network and what level of resources should be expended on controls. ● Creating business cases for an IPv6 transition—A business case usually identifies the organizational need for the system and provides a clear statement of the high-level system goals. One key aspect to consider while drafting the business case for IPv6 is to understand how many devices an agency wants to connect to the Internet. This will help in determining how much IPv6 address space is needed for the agency. Within the business case, it is crucial to include how the new technology will integrate with the agency’s existing enterprise architecture. ● Establishing policies and enforcement mechanisms—Developing and establishing IPv6 transition policies and enforcement mechanisms are important considerations for ensuring an efficient and effective transition. Furthermore, because of the scope, complexities, and costs involved in an IPv6 transition, effective enforcement of agency IPv6 policies is an important consideration for management officials. ● Determining the costs—Cost benefit analyses and return-on- investment calculations can be used to justify investments. During the year 2000 (Y2K) technology challenge, the federal government amended the Federal Acquisition Regulation and mandated that all contracts for information technology include a clause requiring the delivered systems or service to be ready for the Y2K date change. This helped prevent the federal government from procuring systems and services that might have been obsolete or that required costly upgrades. Similarly, proactive integration of IPv6 requirements into federal acquisition requirements can reduce the costs and complexity of the IPv6 transition of federal agencies and ensure that federal applications are able to operate in an IPv6 environment without costly upgrades. ● Identifying timelines and methods for the transition—Timelines and process management can assist a federal agency in determining when to authorize its various component organizations to allow IPv6 traffic and features. Additionally, agencies can benefit from understanding the different types of transition methods or approaches that can allow them to use both IPv4 and IPv6 without causing significant interruptions in network services. As IPv6-capable software and devices accumulate in agency networks, they could be abused by attackers if not managed properly. For example, IPv6 is included in most computer operating systems and, if not enabled by default, is easy for administrators to enable either intentionally or as an unintentional byproduct of running a program. We tested IPv6 features and found that, if firewalls and intrusion detection systems are not appropriately configured, IPv6 traffic may not be detected or controlled, leaving systems vulnerable to attacks by malicious hackers. Further, in April 2005, the United States Computer Emergency Response Team (US-CERT), located at the Department of Homeland Security (DHS), issued an IPv6 cyber security alert to federal agencies based on our IPv6 test scenarios and discussions with DHS officials. The alert warned federal agencies that unmanaged or rogue implementations of IPv6 present network management security risks. Specifically, the US-CERT notice informed agencies that some firewalls and network intrusion detection systems do not provide IPv6 detection or filtering capability and that malicious users might be able to tunnel IPv6 traffic through these security devices undetected. Further, one feature of IPv6, known as automatic configuration (where a device that is IPv6 enabled will derive its own IP address from neighboring routers without an administrator’s intervention), could allow devices to automatically configure themselves with an IPv6 address without authorization. US-CERT provided agencies with a series of short-term solutions including ● determining if firewalls and intrusion detection system products support IPv6 and implement additional IPv6 security measures and identifying IPv6 devices and disabling if not necessary. The Department of Defense’s transition to IPv6 is a key component of its business case to improve interoperability among many information and weapons systems, known as the Global Information Grid (GIG). The IPv6 component of GIG facilitates DOD’s goal of achieving network-centric operations by exploiting the key characteristics of IPv6, including ● enhanced mobility features, ● enhanced configuration features, ● enhanced quality of service, and ● enhanced security features. The department’s efforts to develop policies, timelines, and methods for transitioning to IPv6 are progressing. In 2004, Defense established an IPv6 Transition Office to provide the overall coordination, common engineering solutions, and technical guidance across the department to support an integrated and coherent transition to IPv6. The Transition Office is in the early stages of its work and has developed a set of products, including a draft system engineering management plan, risk management planning documentation, budgetary documentation, requirements criteria, and a master schedule. The management schedule includes a set of implementation milestones that include DOD’s goal of transitioning to IPv6 by fiscal year 2008. In parallel with the Transition Office’s efforts, the Office of the DOD Chief Information Officer has created an IPv6 transition plan. The Chief Information Officer has responsibility for ensuring a coherent and timely transition and for establishing and maintaining the overall departmental transition plan, and is the final approval authority for any IPv6 transition waivers. Although DOD has made substantial progress in developing a planning framework for transitioning to IPv6, the department still faces several challenges, including developing a full inventory of IPv6-capable software and hardware, finalizing its IPv6 systems engineering management plan, monitoring its operational networks for unauthorized IPv6 traffic, and developing a comprehensive enforcement strategy, including using its existing budgetary and acquisition review process. Unlike DOD, the majority of other federal agencies reporting have not yet initiated transition planning efforts for IPv6. For example, of the 22 agencies that responded to our survey, 4 agencies reported having established a date or goal for transitioning to IPv6. The majority of agencies have not addressed key planning considerations. For example, ● 22 agencies reported not having developed a business case, ● 21 agencies reported not having plans, ● 19 agencies reported not having inventoried their IPv6-capable ● 22 agencies reported not having estimated costs. Agency responses demonstrate that few efforts outside DOD have been initiated to address IPv6. If agency planning is not carefully monitored, it could result in significant and unexpected costs for the federal government. To address the challenges IPv6 presents to federal networks, in our report we recommended that federal agencies begin addressing key IPv6 planning considerations. Specifically, we recommended that the Director of OMB instruct agencies to begin developing inventories and assessing risks, creating business cases for the IPv6 transition, establishing policies and enforcement mechanisms, determining the costs, and identifying timelines and methods for transition, as appropriate. To help ensure that IPv6 would not result in unexpected costs for the federal agencies, we recommended that the Director consider amending the Federal Acquisition Regulation with specific language that requires that all information technology systems and applications purchased by the federal government be able to operate in an IPv6 environment. Finally, because poorly configured and unmanaged IPv6 capabilities present immediate risks to federal agency networks, we recommended that agency heads take immediate action to address the near-term security risks. Such actions could include determining what IPv6 capabilities they may have and initiating steps to ensure that they can control and monitor IPv6 traffic to prevent unauthorized access. In summary, transitioning to IPv6 is a pervasive, crosscutting challenge for federal agencies that could result in significant benefits to agency services and operations. But such benefits may be diminished if action is not taken to ensure that agencies are addressing the attendant challenges, including addressing key planning considerations and acting to ensure the security of agency information and networks. If agencies do not address these key planning issues and do not seek to understand the potential scope and complexities of IPv6 issues—whether agencies plan to transition immediately or not—they will face potentially increased costs and security risks. Mr. Chairman, this completes our prepared statement. We would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact David Powner at (202)-512- 9286 or Keith Rhodes at (202)-512-6412. We can also be reached by e-mail at pownerd@gao.gov and rhodesk@gao.gov respectively. Key contributors to this testimony were Scott Borre, Lon Chin, West Coile, Camille Chaires, John Dale, Neil Doherty, Nancy Glover, Richard Hung, Hal Lewis, George Kovachick, J. Paul Nicholas, Christopher Owens, Eric Trout, and Eric Winter. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Internet protocol (IP) provides the addressing mechanism that defines how and where information such as text, voice, and video moves across interconnected networks. Internet protocol version 4 (IPv4), which is widely used today, may not be able to accommodate the increasing number of global users and devices that are connecting to the Internet. As a result, IP version 6 (IPv6) was developed to increase the amount of available IP address space. The new protocol is gaining increased attention from regions with limited IP addresses. For its testimony, GAO was asked to discuss the findings and recommendations of its recent study of IPv6 (GAO-05-471). In this study, GAO was asked to (1) describe the key characteristics of IPv6; (2) identify the key planning considerations for federal agencies in transitioning to IPv6; and (3) determine the progress made by the Department of Defense (DOD) and other major agencies in the transition to IPv6. The key characteristics of IPv6 are designed to increase address space, promote flexibility and functionality, and enhance security. For example, by using 128-bit addresses rather than 32-bit addresses, IPv6 dramatically increases the available Internet address space from approximately 4.3 billion in IPv4 to approximately 3.4 x 10^38 in IPv6. Key planning considerations for federal agencies include recognizing that the transition is already under way, because agency networks already include IPv6-capable software and equipment. Other important agency planning considerations include developing inventories and assessing risks; creating business cases that identify organizational needs and goals; establishing policies and enforcement mechanisms; determining costs; and identifying timelines and methods for transition. Managing the security aspects of transition is also an important consideration because poorly managed IPv6 capabilities can put agency information and systems at risk. DOD has made progress in developing a business case, policies, timelines, and processes for transitioning to IPv6. Unlike DOD, the majority of other major federal agencies reported that they have not yet initiated key planning efforts for IPv6. In its report, GAO recommended, among other things, that the Director of the Office of Management and Budget (OMB) instruct agencies to begin to address key planning considerations for the IPv6 transition and that agencies act to mitigate near-term IPv6 security risks. Officials from OMB, DOD, and Commerce generally agreed with the contents of the report. |
Sharing information is an important tool in improving the efficiency and integrity of government programs. By sharing data, agencies can often reduce errors, improve program efficiency, evaluate program performance, and reduce information collection burdens on the public. Technological advances have broadened the government’s ability to share data for these uses. Likewise, such advances have enhanced the government’s ability to use computerized analysis to identify and reduce fraud, waste, and abuse. One important analytical technique is computer matching, a term commonly used to refer to the computerized comparison of information, generally including personally identifiable information (PII), such as names and Social Security numbers, in two or more information systems. Agencies use computer matching in a variety of ways to help ensure that federal benefits are distributed appropriately. For example, the National Directory of New Hires, established in 1996 under the Personal Responsibility and Work Opportunity Reconciliation Act, is used to match new-hire information from states with information from other states and federal programs to detect and prevent erroneous payments for the Temporary Assistance for Needy Families program, Supplemental Nutrition Assistance Program, unemployment insurance, Medicaid, and other benefit programs. In another example, according to the Chairman of the House Committee on Ways and Means, SSA collects prisoner data from states and local governments to identify incarcerated individuals who should not receive Supplemental Security Income benefits. The chairman stated that from 1997 to 2009 computer matching had helped SSA identify over 720,000 inmates who were improperly receiving benefits, contributing to billions of dollars in savings to the federal government. Due to the success of this program, prisoner data are now shared with child support enforcement and Supplemental Nutrition Assistance programs as well. Likewise, the chairman also reported that the Public Assistance Reporting Information System was being used to match state enrollment data for the Temporary Assistance for Needy Families program, Supplemental Nutrition Assistance Program, Medicaid, and child care programs with data from participating states and a selected group of federal databases to identify potentially inappropriate payments. According to the Subcommittee on Human Resources of the House Committee on Ways and Means, the State of Colorado realized a return on investment of 4000 percent from using the system, and the state of New York annually saves an average of $62 million through its participation in the system. Much computer matching is done for program integrity purposes, but it has other uses as well. For example, Secure Flight, a program run by DHS’s Transportation Security Administration, matches information about passengers provided by the airlines against government watch lists to detect individuals on the No Fly List and prevent them from boarding aircraft and to identify individuals for additional screening. Another example is E-Verify, an Internet-based system developed by U.S. Citizenship and Immigration Services that allows businesses to determine the eligibility of potential employees to work in the United States. While computer matching programs have been successful in identifying fraud, waste, and abuse in federal benefit programs, if proper controls are not in place, they can also adversely affect the privacy and due process rights of individuals whose records are being matched. The data that are exchanged through matching programs involve personal information such as Social Security numbers and income and employment data. Without adequate protection, individuals’ information could be compromised through inappropriate use, modification, or disclosure. In addition, without effective due process protections, individuals could unfairly lose government benefits if decisions were made to reduce or terminate those benefits based on inaccurate or misleading computer matches. For example, according to a senior policy analyst of the Center of Law and Social Policy, a computer match authorized under the Children’s Health Insurance Program Reauthorization Act of 2009, which allowed states to verify the citizenship of Medicaid and Children’s Health Insurance Program applicants by matching Social Security records rather than using clients’ birth certificates, produced matches of questionable accuracy. Specifically, according to this analyst, in the first year of using this matching program, the state of Alabama incorrectly identified over 1,000 children who would have been denied benefits if the results had not been verified. The major requirements for computer matching and the protection of personal privacy by federal agencies come from two laws, the Privacy Act of 1974 and the privacy provisions of the E-Government Act of 2002. The Privacy Act places limitations on agencies’ collection, disclosure, and use of personal information maintained in systems of records. The act defines a “record” as any item, collection, or grouping of information about an individual that is maintained by an agency and contains his or her name or another individual identifier. It defines a “system of records” as a group of records under the control of any agency from which information is retrieved by the name of the individual or other individual identifier. The Privacy Act requires that when agencies establish or make changes to a system of records, they must notify the public through a system of records notice in the Federal Register that identifies, among other things, the categories of data collected, the categories of individuals about whom information is collected, the intended “routine” uses of data, and procedures that individuals can use to review and contest its content. In 2002, Congress enacted the E-Government Act to, among other things, enhance protection for personal information in government information systems. Toward this end, the act requires agencies to conduct privacy impact assessments before developing or procuring information systems that will collect or process personal information. These assessments provide a means for agencies to analyze and document the privacy protections they have established for uses of automated data, such as computer matching and other data-sharing activities. Because of concerns about agency use of personal information in computer matching programs, Congress passed the Computer Matching and Privacy Protection Act in 1988 as an amendment to the Privacy Act. The provisions were intended to create procedures that would require serious deliberation and prevent data “fishing expeditions” that could reduce or terminate benefits without verifying the information and notifying affected individuals of the matching program. In 1989 and 1990,Congress enacted further amendments to, among other things, require due process procedures for agency computer matching programs, including independent verification of “hits” and a 30-day notice for individuals affected by a matching program. Under these sets of amendments, which we collectively refer to as the Computer Matching Act, computer matching is defined as the computerized comparison of records for the purpose of establishing or verifying eligibility or recouping payments for a federal benefit program or relating to federal personnel management. To ensure procedural uniformity in carrying out matching programs and to provide due process for potentially affected individuals, the law established a number of requirements for covered agency computer matching programs, including agencies must have computer matching agreements with participating agencies that specify, among other things, the purpose and legal authority of the program and a justification for the program, including a specific estimate of any savings; Data Integrity Boards (DIB) must be established to approve and review all agency computer matching programs covered by the Computer Matching Act, including the costs and benefits of such programs; and OMB must prescribe guidance for agencies on conducting computer matching programs as part of implementation of the Privacy Act. These requirements do not, however, apply to all federal agency computer matching activities. For example, the law’s definitions exclude matches of federal agency information with commercial data and matches of federal agency payments, grants, or loans to entities other than individuals. Further, the law exempts a number of matching activities. For example, the initial 1988 amendments included exemptions for matches for statistical or research purposes, law enforcement investigations of specific individuals, and certain tax-related matches. In 1999, an exemption was added for Social Security Act-related matches of prisoner data. In addition, in 2010, the Patient Protection and Affordable Care Act exempted matches by HHS relating to potential fraud, waste, and abuse. Most recently, in January 2013, the Improper Payments Elimination and Recovery Improvement Act (IPERIA) provided, among other things, that data-matching activities conducted by agencies and offices of inspectors general (OIG) that assist in the detection and prevention of improper payments would be subject to requirements that differ from those of the Computer Matching Act. These include a 60-day time limit on DIB review, approvals extended up to 3 years, and a waiver on the requirement for a specific estimate of savings in a computer matching agreement. In addition, IPERIA established in law the Do Not Pay Initiative, coordinated by the Department of the Treasury, to require agencies to reduce improper payments by reviewing a number of databases, including the SSA Death Master File and the Department of Housing and Urban Development Credit Alert System, before issuing any payments. IPERIA also required OMB to ensure the establishment of a working system to provide agencies with access to these databases, and to report to Congress on the operations of the Do Not Pay Initiative. OMB’s August 16, 2013, guidance also contained instructions for agencies on implementing this initiative, including responsibilities for agency DIBs. For example, the guidance states that DIBs should be properly trained and should meet annually to evaluate agency matching programs. OMB is responsible for developing guidelines and providing continuing assistance to agencies on the implementation of the Computer Matching Act, while agencies have a variety of implementation responsibilities. Agency responsibilities can be grouped into three major areas: (1) developing computer matching agreements containing specific elements for each proposed matching program and notifying Congress, OMB, and the public of computer matching activities; (2) conducting cost-benefit analyses for proposed computer matching programs; and (3) establishing DIBs to oversee computer matching programs, including reviewing and approving computer matching agreements. The Privacy Act gives OMB responsibility for developing guidelines and providing continuing assistance to agencies on the implementation of the Computer Matching Act. OMB has periodically published guidance for implementing the act, including documents issued in 1989, 1991, 2000, and 2013. In addition, Circular No. A-130 includes instructions to agencies for reporting on computer matching activities. The 1989 guidance provided explanations for agencies on interpreting various provisions of the 1988 amendments, including examples of activities that should be treated as computer matching programs covered by the act, types of information that should be in computer matching agreements (CMAs), and responsibilities for fulfilling reporting requirements. The 1989 guidance also addressed required cost-benefit analyses and the responsibilities of DIBs. The 1991 guidance was intended to help implement changes made in the 1990 computer matching amendments to simplify several due process requirements after agencies experienced difficulties implementing the requirements established in 1988. OMB Circular No. A-130, Management of Federal Information Resources, includes guidance on implementation of a number of information and information technology laws. According to OMB staff, the Circular A-130 requirements provide guidance to agencies on meeting the reporting requirements for computer matching activities. The circular’s Appendix I, “Federal Agency Responsibilities for Maintaining Records about Individuals,” provides specific instructions for agencies on reporting requirements relating to computer matching. OMB’s 2000 memorandum reinforced existing Privacy Act requirements, while its 2013 memorandum on reducing improper payments provided guidance on implementing the requirements in IPERIA as well as some additional clarifications on computer matching programs. Agencies are required to establish computer matching programs when conducting any computer matches, which are defined as a “computerized comparison of records for the purpose of establishing or verifying eligibility or recouping payments for a federal benefit program or relating to federal personnel management.” Agencies first need to determine whether their planned activity falls within the scope of the law under this definition. If a proposed match is covered by the Computer Matching Act, a CMA must be developed and approved by all participating agencies.Among other things, the act requires that CMAs include the purpose and legal authority for conducting the program; the justification for the program and the anticipated results, including a specific estimate of any savings; a description of the records that will be matched, including each data element that will be used, the approximate number of records that will be matched, and the projected starting and completion dates of the matching program; procedures for providing individual notice at the time of application, and notice periodically thereafter as directed by the DIB (subject to OMB guidance), to applicants or recipients of federal benefits; procedures for verifying information produced in the matching program as required to ensure that no benefits action is taken before the information acquired through computer matching is verified and potentially affected individuals are notified and have an opportunity to contest findings; procedures for the retention and timely destruction of identifiable records created by a recipient agency or nonfederal agency in the matching program; procedures for ensuring the administrative, technical, and physical security of the records matched and the results of the matching programs; and information on assessments that have been made on the accuracy of the records that will be used in the program. After the CMA has been approved by all participating agencies, the agency that receives the data and derives benefit from the matching program is responsible for publishing a notice describing the details of the CMA in the Federal Register and must notify Congress and OMB prior to implementation. The act requires agencies to annually review each ongoing matching program in which the agency has participated during the year and submit a copy of every CMA to the House Committee on Oversight and Government Reform and the Senate Committee on Homeland Security and Governmental Affairs. The Computer Matching Act also requires that agencies conduct cost- benefit analyses in conjunction with the development of CMAs. The act states that agency CMAs must include a specific estimate of any savings from the matching program and that DIBs shall not approve any CMA without a cost-benefit analysis of the proposed program that demonstrates that the program is likely to be cost-effective. According to OMB’s 1989 guidance, the intent of this requirement is to ensure that sound management practices are followed when agencies use records from Privacy Act systems of records in matching programs. According to OMB, cost-effectiveness must be established before a CMA is approved and matching can occur, the goal being to ensure that when agencies are conducting matching programs they do not drain agency resources that could be better spent elsewhere. OMB guidance states that the cost-benefit information from CMAs helps Congress evaluate the effectiveness of statutory matching requirements. The act does not specify the elements of the required cost-benefit analyses, and OMB’s guidance provides only a general outline of the costs and benefits that should be considered. In its 1989 guidance, OMB referred agencies to a GAO report published in 1986costs and benefits of computer matching programs as one source for conducting a computer matching cost-benefit analysis, and stated that it would issue a checklist providing a step-by-step methodology for such analyses at a later date. However, according to OMB staff, it has not issued such a checklist. Officials at three agencies we reviewed stated that they used our report as a source of guidance on the expected contents of cost-benefit analyses for computer matching. Without more recent guidance, our 1986 report is the only guidance available to on assessing the agencies specifically for developing cost-benefit analyses for computer matching programs. While different computer matching programs may have unique costs and benefits, our 1986 report identified the following key elements as common types of costs and benefits associated with computer matching: Personnel costs, such as salaries and fringe benefits, for personnel involved in the matching process, including staff time dedicated to performing the match. Computer costs related to the processing of computer matching programs, such as the maintenance and use of computers at facilities. Avoidance of future improper payments: the prevention of future overpayments by identifying and correcting an error. Recovery of improper payments and debts: the detection of an overpayment or debt already made and the collection of the money owed to an agency. The Computer Matching Act also requires that each agency participating in a computer matching program establish a DIB to oversee computer matching activities. The act requires that the DIBs be composed of senior officials designated by the head of each agency. According to the act, duties of the DIBs include the following: Reviewing, approving, and maintaining all written agreements for receipt or disclosure of agency records under computer matching programs. Determining the agency’s compliance with applicable laws, regulations, guidelines, and agency agreements. Assessing the costs and benefits of matching programs and approving only those for which a cost-benefit analysis demonstrates that the program is likely to be cost-effective. Reviewing all recurring matching programs for continued justification. Annually reviewing all matching programs in which the agency participated during the year, either as source or recipient. Compiling an annual report describing the matching activities of the agency, which is to be submitted to the head of the agency and OMB and made available to the public. The annual report should include a description of matching programs, matching agreements disapproved by the DIB, waivers of a cost-benefit analysis, and any violations of matching agreements. In addition, OMB’s1989 guidance specifies that DIBs are to include the inspector general and a senior official responsible for the implementation of the Privacy Act. The inspector general may not serve as the chairman of the DIB. OMB recommended, but did not require, that the Privacy Act officer serve as the board secretary. According to OMB’s 1989 guidance, reviewing computer matching agreements is the foremost responsibility of the DIBs, and they are required to meet often enough to ensure that the agency’s matching programs are carried out efficiently, expeditiously, and in conformance with the Privacy Act. More generally, OMB’s 1989 guidance noted that the DIBs should serve as an information resource on matching for agencies, be placed at the top of the agency’s organization, be staffed with senior personnel, and ensure that their reasons for either approving or denying a matching program are well documented. Among other things, the guidance also explained that the law’s requirement for annual DIB review of agency matching programs was to (1) determine whether the matches have been, or are being, conducted in accordance with appropriate authorities and under the terms of the matching agreements and (2) assess the utility of the programs in terms of their costs and benefits. The act and OMB guidance also state that if a matching agreement is disapproved by the DIB, any party to such agreement may appeal the disapproval to the Director of OMB. OMB Circular No. A-130 also instructs agencies to submit a biennial report (rather than an annual report, as required by the act) to OMB summarizing the agency’s computer matching activities. The report is to include the names of the DIB members and a list of each matching program, including its purpose, the participating agency, and a brief description of the program. For each matching program, the report is to state whether a cost-benefit analysis provided a favorable ratio or if the cost-benefit analysis was waived, the reason why. The agencies we reviewed have taken a number of steps to implement the requirements of the act. All seven agencies had established processes for creating and approving computer matching agreements, and the agreements they implemented generally included the elements required by the act. However, implementation among these seven agencies was inconsistent in several ways: Agencies differed in their understanding of what circumstances and types of data-sharing the act applied to, such as whether CMAs were required for “front-end” data queries. While these agencies generally developed cost-benefit analyses for their computer matching agreements, they did not consistently address key costs and benefits needed to assess the value of their computer matching programs. Agency DIBs, which are required to review and approve computer matching agreements, did not always regularly meet or thoroughly review proposed CMAs or cost-benefit analyses. DIBs have also not consistently reported to OMB on agencies’ computer matching activities, as required by the act, leading to reduced transparency of these programs. Further, OMB has provided little assistance to agencies in implementing the act, which may contribute to inconsistent implementation. For the matching programs that the agencies believe are covered by the act, the seven agencies we reviewed had 82 CMAs in place that addressed the act’s requirements. All seven agencies also issued agency-wide policies and guidance that address compliance with the act, and the CMAs these agencies had in place met basic requirements, including stating the purpose and legal authority for conducting the match, justification for the program and anticipated results, descriptions of records to be matched, procedures for providing individual notice, procedures for verifying information, procedures for retention and timely destruction of records, procedures for ensuring the physical security of the records, and assessments of the accuracy of the records used. Figure 1 shows the number of active CMAs at each of these agencies. While the seven selected agencies were in compliance with the basic requirements of the act with regard to developing CMAs for activities they identified as covered by the act, they differed in how they interpreted the scope and application of the act to their data-sharing activities. Specifically, three agencies interpreted the law to apply only to the matching of an entire system of records against another database, but not to other types of comparisons. For example: Officials from DHS and VA stated that they interpret the act to apply only to automated comparisons of two complete systems of records (e.g., a batch comparison of two entire databases identified under the Privacy Act as “systems of records”). They believe that single-record comparisons, such as checks performed by front-end verification systems or individual queries of information within a system of records, are exempt. Similarly, no CMAs were established for certain data-sharing arrangements between SSA and VA. Specifically, SSA established information exchange agreements with VA by which it provides information via online queries about individuals for program integrity and benefit accuracy purposes. According to SSA officials, a CMA with VA was not necessary because VA employees directly accessed SSA data using a computer terminal. An SSA official also commented that they preferred using information exchange agreements because they were quicker to process and approve than CMAs. Likewise, DHS offers a web-based service that federal, state, and local benefit-issuing agencies, institutions, and licensing agencies use to verify the immigration status of benefit applicants so that only those entitled to benefits receive them. According to DHS officials, this service is also not covered by the act because it does not involve comparison of two complete systems of records. In contrast, officials from USDA’s Food and Nutrition Service noted that a CMA was established between the states and SSA for performing front- end verification of Supplemental Nutrition Assistance Program eligibility. Similarly, ED officials stated that they require CMAs for front-end queries that establish eligibility for federal student aid. In addition, HHS officials stated that they believe the Computer Matching Act requires CMAs to cover front-end queries. Labor officials indicated that they do not use front-end verification to establish benefits eligibility. Moreover, the Do Not Pay Working System, an online portal run by the Department of the Treasury that can conduct online queries similar to computer matching, is not currently covered by any CMAs. The system is run as part of the Do Not Pay Initiative, which was established by law in IPERIA on January 10, 2013. IPERIA requires federal agencies to use certain databases, which are to be available through the Do Not Pay Working System, for prepayment review of eligibility for payments and awards. Agencies use the portal to perform online queries to verify records related to specific individuals, a process known as front-end verification. Treasury officials stated that the initiative currently has no computer matching agreements in place because the portal operates only as a query system, which they believe does not require CMAs. They stated that in the future, upon establishment of a system of records, they plan to add batch matching for Privacy Act records, at which time they will secure computer matching agreements. Varying agency interpretations of the scope of the act are partially due to unclear guidance from OMB on this subject. OMB’s 1989 matching guidance includes examples of front-end verification programs that are covered by the act, but none of OMB’s guidance documents indicate specifically whether queries are subject to the act. OMB’s 2013 IPERIA guidance addressed the subject indirectly by stating that matches involving “subsets” of systems of records are covered by the act. However, it did not clarify whether front-end verification queries qualify as subsets of systems of records or are otherwise covered, thus continuing to leave the subject unclear. According to OMB, it is up to agencies to adhere to the act and official guidance. OMB staff stated that the types of data-sharing covered by the act are determined on a case-by-case basis, and OMB’s IPERIA guidance states that the act applies to matches involving a “subset” of records from a system of records. However, OMB has not clarified whether the law applies to front-end verification, which generally involves just one record, or only to the matching of larger sets of records against another database. Without clear guidance on the scope of the act, agencies are likely to continue to interpret what the act covers in varying ways, and its privacy protections are likely to continue to be inconsistently applied. While agency CMAs generally included cost-benefit analyses, the completeness of their analyses varied. Of the 82 CMAs from the seven agencies we reviewed, 68 included cost-benefit analyses. Eleven CMAs from the seven agencies were for statutorily required programs that did For the other 3 CMAs, SSA did not not require cost-benefit analyses.conduct cost-benefit analyses because, according to officials, it was the source agency for these matching programs. According to OMB’s 1989 guidance, while recipient agencies are suggested to take the lead in developing cost-benefit analyses, such analyses should be provided to source agencies to assist in their decision to approve or deny a CMA. While most agencies submitted a cost-benefit analysis with their CMAs, they did not always address all four key elements identified by GAO’s 1986 report. More specifically, of the 68 cost-benefit analyses from the seven agencies that we reviewed, 2 included all the key elements, 63 included some but not all key elements, and 3 did not address any of the key elements. Fourteen cost-benefit analyses did not include personnel costs, and 14 did not include computer costs. Additionally, 13 did not include the avoidance of future improper payments, and 33 did not include an estimate of the recovery of improper payments and debts. The DIBs approved all CMAs even though most cost-benefit analyses did not include all key information. Table 1 provides more detail on the seven selected agencies’ inclusion of key elements in their cost-benefit analyses. The act requires that agencies conduct cost-benefit analyses in conjunction with the development of CMAs. The act states that agency CMAs must include a specific estimate of any savings from the matching program and that DIBs shall not approve any CMA without a cost-benefit analysis of the proposed program that demonstrates that the program is likely to be cost-effective. According to OMB guidance, the goal is to ensure that sound management practices are followed when agencies conduct matching programs and that they do not drain agency resources that could be better spent elsewhere. OMB’s general guidance for conducting cost-benefit analyses for federal programs is contained in Circular A-94. However, specific guidance for cost-benefit analyses on computer matching programs, which was promised in OMB’s1989 guidance, has never been developed. In the absence of specific OMB guidance, three agencies developed their own interim guides for cost-benefit analyses, while the others had no established methodology. Specifically, VA, ED, and SSA had policies and procedures on developing cost-benefit analyses: VA had guidance that included formulas staff should use to calculate each of the key elements, and SSA used OMB Circular No. while ED used the prior GAO report;A-94. The other four agencies—DHS, USDA, HHS, and Labor—did not develop or document guidance for conducting cost-benefit analyses. Without guidance from OMB that specifically addresses the necessary elements of cost-benefit analyses for computer matching, agencies are likely to continue to inconsistently assess the costs and benefits of their proposed matches and may be unable to demonstrate that such matches are a cost-effective use of resources. While they varied in size and composition, all seven agencies we reviewed established DIBs as required by the act. As required by the act, all of the DIBs included senior officials and the inspector general, as shown in table 2. All seven agencies also have issued agency-wide policy and guidance that addresses DIB membership and responsibilities, in compliance with the act. According to these agency policies, the DIBs’ primary purpose is to review and provide final approval of CMAs and associated cost-benefit analyses. Each of the 82 CMAs from the seven agencies we reviewed showed evidence that they were reviewed and approved by the DIBs. However, as noted previously, DIBs approved cost-benefit analyses that did not always include all key data elements. For example, the DIB at USDA approved one cost-benefit analysis that did not include any estimate of cost or benefits and provided no estimated value. In addition, DIBs at the seven agencies we selected for review approved 13 cost- benefit analyses that did not identify an estimate of the avoidance of future improper payments, as well as 33 cost-benefit analyses that did not identify an estimate of the recovery of improper payments and debts. Without the DIBs ensuring that cost-benefit analyses include key costs and benefits, agencies will have less assurance that their computer matching programs are a cost-effective use of resources. In addition to reviewing specific proposed CMAs and their associated cost-benefit analyses, the Computer Matching Act requires DIBs to conduct an annual review of agency matching programs. These annual reviews are an important element of the act’s privacy protections and are intended to (1) determine whether matches have been or are being conducted in accordance with appropriate authorities and under the terms of the matching agreements and (2) assess the utility of the programs in terms of their costs and benefits. Appendix I to OMB Circular No. A-130, on the management of federal information resources, includes guidance for implementing the reporting requirements for computer matching agreements. However, the DIBs have not always followed the review and reporting requirements of the act or OMB guidance. Of the seven agencies, only VA provided evidence of an annual DIB review and report of computer matching activities. According to officials at HHS and ED, they do not submit such a report because OMB guidance only requires the submission of a biennial report. Without annual reviews, agencies and OMB have less assurance that matches are being conducted in accordance with the terms of matching agreements and that the programs are justified and viable in terms of cost and benefits. In addition, the transparency of agency computer matching programs may be limited if annual reviews are not conducted. OMB staff agreed that they have required agencies to submit only biennial reports rather than the annual reports required by the act: OMB guidance requires DIBs to report on computer matching activity every 2 years. This guidance is inconsistent with the Computer Matching Act, which requires an annual reporting of computer matching activity. OMB did not revise its guidance to reflect amendments to the act in 1995 and 1998. to conduct annual reviews of all computer matching programs, even if it does not require them to report on those reviews annually as required by the act. However, OMB staff stated that OMB guidance still requires DIBs While only VA submitted annual reports, other agencies submitted the OMB-required biennial reports only intermittently: While the DIBs at VA, ED, and SSA have submitted biennial reports over the last 5 years, HHS did not submit one in 2012. Appendix I of OMB Circular No. 130 (as reflected in 1993, 1996, and 2000 revisions), states that the act requires DIB reporting on computer matching activity every 2 years; however, this is inconsistent with the Computer Matching Act (specifically, 5 U.S.C. § 552a(u) and (s)), as amended by sec. 1301 of Pub. L. No. 105-362 (Nov. 10, 1998), and sec. 3003 of Pub. L. No. 104-66 (Dec. 21, 1995). Labor’s DIB did not submit biennial reports in 2008 or 2012. Officials stated they were waiting for instructions from OMB to send their latest one. USDA did not submit two of the last three biennial reports. USDA officials stated that they were not able to send past reports due to resource constraints. DHS’s DIB has not submitted any biennial reports. However, it reports summary information on computer matching programs annually in the privacy portion of its Federal Information Security Management Act (FISMA) report to OMB. According to DHS officials, this reporting meets the requirements of the act. Table 3 shows submission of biennial reports from 2008 through 2012 by the seven agencies we reviewed. In addition, while the law does not specifically require agencies to publish reports on their websites, it does require they be made publicly available. However, existing reports were not always accessible on six agencies’ websites. Only one agency, VA, had a recent biennial report posted online. DHS had posted its annual privacy report, which includes information on new CMAs, on its website. ED officials stated they are in the process of upgrading their website and plan to post the reports at a future date. SSA and USDA require that individual requests be submitted to gain access to their biennial reports. Labor does not post any reports, and officials said they are not aware of any public requests for them. Also, we found that the agencies submitting biennial reports (USDA, ED, HHS, Labor, VA, and SSA) did not always include all the information required by OMB guidance. For example, VA was the only agency included in our review that submitted biennial reports with cost-benefit analysis ratios; however, for certain programs it was not able to determine cost savings information or whether the program had a favorable cost- benefit ratio. Labor did not include in its biennial report whether the CMAs approved or conducted during the 2 years covered by the report had a favorable cost-benefit ratio. Other agencies (USDA, ED, HHS, and SSA) stated in their biennial reports that all their matching programs had favorable ratios but did not provide specific cost-benefit information for any of the programs. As stated previously, not all CMAs included cost- benefit analyses or savings information; therefore, statements in agency biennial reports that all their matching programs had favorable cost- benefit ratios could be unjustified. Without consistent DIB review and reporting, agencies’ computer matching programs are not being regularly evaluated for effectiveness by agencies and are less transparent to OMB, Congress, and the public. The Computer Matching Act gave OMB responsibility for providing continuing assistance to agencies in their implementation of the act and the other provisions of the Privacy Act. However, agency officials stated that they have not received consistent assistance from OMB. According to USDA, DHS, Labor, VA, and SSA officials, OMB has not provided assistance to them on conducting CMAs or submitting biennial reports. However, officials at ED stated that OMB had briefed them on the CMA process, and HHS officials have not received any specific instruction from OMB on conducting CMAs. In addition, officials at the HHS OIG and SSA stated they had no knowledge of actions taken by OMB with regard to CMAs, notices, or related reports submitted to OMB. According to OMB, it is up to agencies to adhere to the act and OMB guidance. When asked what happens if an agency does not submit a biennial report as required by OMB guidance, OMB staff said they may reach out and discuss it with the agency. However, OMB staff gave no evidence of knowing the extent to which agencies have not submitted the biennial reports or following up with any of the agencies. For example, USDA did not submit a report between 2000 and 2013. Further, Labor officials stated that one reason for not submitting the 2012 biennial report is that they have been waiting for OMB to provide specific reporting instructions. The Labor officials also stated that they do not even know where to send the biennial reports at OMB. When informed of this, OMB staff said that is not consistent with the requirement to submit a report biennially to OMB. Without taking steps to follow up on reporting requirements or to provide assistance to agencies, OMB may be allowing agencies to implement the act inconsistently. Agency officials at six of the seven agencies we reviewed told us that the act’s rigorous requirements and the CMA review processes within and among agencies were lengthy and resource-intensive and that statutory time frames for conducting matching activities were too short, discouraging implementation of CMAs. Similarly, OIG officials at four agencies stated that, given the short duration of CMAs, the typical length of the CMA approval process discouraged them from computer matching, as did the requirement that their proposed agreements be approved by agency DIBs. For example, officials at DHS told us they avoid attempting to implement CMAs because the internal review processes are lengthy and resource- intensive and because of the relatively short duration of approved CMAs. Officials at ED, HHS, Labor, SSA, and VA agreed that the CMA review process is lengthy and resource-intensive. They said that the fact that proposed CMAs must be reviewed by both the source and recipient agencies created extensive review processes that often took a long time to complete. In contrast, officials at USDA did not think the review process was overly lengthy or resource-intensive. To implement the requirements of the act, agencies we reviewed typically adhere to the following CMA process, which involves an extensive sequence of multiple reviews: Development of the Computer Matching Agreement: The agency that wants to run a match on its program records (the recipient) develops a proposed CMA to receive records from another agency (the source) to match against its records. The proposed CMA must include a cost- benefit analysis that adheres to all the act’s requirements, which can add to the time and cost of developing a CMA. Reaching agreement on the CMA frequently involves negotiation between the agencies over what data will be matched and how the data will be transferred. Upon reaching a draft agreement, the proposed CMA is reviewed and approved by multiple offices, including separate legal and privacy office reviews, in each agency. Officials said that the negotiation process and legal and privacy reviews often took many months to complete. Data Integrity Board Review: The proposed CMA is reviewed and must be approved by DIBs at both the source and recipient agencies. Agency Head Approval: Following DIB approval, the proposed CMA must also be approved by both agency heads, requiring that the draft agreement be vetted through officials at additional offices within each agency. Notice to Congress: Recipient agencies must allow an additional 40 days to notify the Senate Committee on Homeland Security and Governmental Affairs, the House Committee on Oversight and Government Reform, and OMB to provide an opportunity for review and comments prior to implementation of the match. Public Notice: A notice of the computer matching program must be published in the Federal Register at least 30 days prior to implementation to provide an opportunity for interested persons to submit comments. (This public notice period can occur at the same time as notice is given to OMB and Congress.) Figure 2 provides an overview of the typical CMA approval process. According to agency officials, following these steps can be a lengthy process, often taking 3 months or longer to complete. For example: An ED official stated that new CMAs usually take 9-10 months and renewals take 6 months to complete. According to officials from the HHS Administration for Children and Families, CMAs with Supplemental Nutrition Assistance Program agencies typically take 6 to 9 months, while those with state workforce programs take up to a year. According to officials from the DHS privacy office, the CMA process at DHS can take up to 6 months. According to officials from VA’s Veterans Benefits Administration, CMAs can take 3 months to 1 year. According to officials from the SSA privacy office, on average, CMAs take about a year to process or to be renewed; however, the process can take longer. Officials at VA and HHS stated that CMAs with SSA must be planned a year in advance. Not all agency officials reported that the CMA process was lengthy. For example, USDA officials stated that the CMA process could take up to 45 days to complete. In addition, agency officials generally believed that CMAs do not last long enough. Given the lengthy internal review processes, agency officials from ED, HHS, DHS, VA, and SSA indicated that the statutory requirement that agreements be effective for only 18 months with a possible extension for 12 additional months was too short. Given such constraints, the approval process can last nearly as long as the proposed matching program itself. These officials said that when they have a continuing need to maintain permanent matching programs they have to restart the approval process nearly as soon as a CMA is approved in order to get either a 12-month extension or to reinstate the CMA as a new agreement after an existing 12-month extension has expired. As a result of the lengthy administrative process, agencies could be discouraged from pursuing CMAs. Similarly, DHS privacy office officials stated that the review requirements and limited duration of CMAs discouraged implementation in the department. They said that the department’s other review processes provided protections that were as good as those afforded by the act. For example, they stated that privacy protections were examined in privacy impact assessments and were assessed for all data-sharing agreements, including those that fell outside of the act. In addition, DHS privacy impact assessments are publicly available on the agency’s website and thus contribute to the transparency of the programs. OIG officials also had concerns with the approval process for CMAs. Specifically, OIG officials at ED, DHS, SSA, and Labor stated that they were reluctant to make the effort to establish CMAs because it could take 6 months to several years to get them approved, which could overly delay their planned audit and investigative work. OIGs that did not have active CMAs, including those at USDA, ED, DHS, and Labor, said they perform computer matches only when they do not need to seek new CMAs, such as when they can use data already obtained by other entities within their departments or gathered by the states. In both such cases, separate CMAs are not required. ED OIG officials also added that although the lengthy computer matching approval process may be acceptable for agency programs that may last for multiple years, OIG's needs generally are confined to investigations and audits with limited time frames, and CMAs are less practical in those circumstances. An OIG official at HHS stated that the HHS OIG was exempt by law from having to prepare CMAs. OIG officials at ED and representatives from the Council of the Inspectors General on Integrity and Efficiency (CIGIE) and Recovery Accountability and Transparency Board (Recovery Board) also expressed concerns about their independence in initiating and conducting computer matching programs. Specifically, they said that because agency management officials sit on the Data Integrity Boards that approve CMAs, the agency is informed of OIG investigations that intend to use computer matching, which could compromise certain investigations. Lastly, an official from the DHS OIG expressed the opinion that because the OIG’s role is advisory in nature and does not involve making official eligibility determinations based on computer matching results, the OIG should be exempt from having to establish CMAs in order to do computer matching. Not all OIG officials agreed that CMAs were problematic. For example, OIG officials from Labor and USDA said they had not experienced independence issues at their agencies. In addition, an official from the VA OIG stated that while the computer matching process usually takes 6 to 9 months, she did not feel the requirements posed a problem for investigative projects that were adequately planned in advance. For example, the VA OIG official pointed out that the act allowed for pilot data matches (under its exemption for statistical matching) that provide an opportunity for investigative methods to be tested in advance of developing a CMA. The official stated that in one case the VA OIG had conducted pilot matches using a small data subset to determine whether it would be productive to perform a match of the entire dataset. After the pilot showed the value of conducting the match, the VA OIG initiated a CMA with the source agency, and matching under this CMA is currently under way. In this case, the length of time required to get the CMA approved was not problematic because the OIG had planned for it in advance. Further, officials from privacy offices in several agencies, such as USDA, ED, and SSA, stated that requirements of the Computer Matching Act were valuable to their agencies as privacy protections and did not discourage use. For example, an official in the USDA Privacy Office stated that USDA ensures that mechanisms similar to those in the Computer Matching Act are incorporated in policies and practices relating to all applicable computer matching and data-sharing activities regardless of whether they are statutorily covered by the act. Similarly, officials from ED said they have applied the CMA process to data-sharing agreements not covered by the act, including a data-sharing agreement with SSA, to ensure that that program had privacy protections comparable to those provided by the act. Furthermore, officials from SSA stated that the provisions play an important role for members of the public by providing protections for their information. The seven agencies we reviewed have responded to the Computer Matching Act by developing policies and procedures that comply with its requirements; however these agencies have also implemented the act inconsistently. Interpretations of the act’s scope have varied, cost-benefit analyses have not always addressed key elements, and DIBs have not always met requirements. Inconsistent implementation has led to reduced transparency of computer matching programs and raises questions of whether privacy is being protected consistently for these agencies’ computer matching activities. OMB has also not taken steps to ensure consistent implementation of the act. For example, OMB guidance does not resolve questions about what types of matching are covered by the act, as well as how to assess costs and benefits, resulting in confusion among the agencies. Without clearer guidance and assistance from OMB, the agencies we reviewed are likely to continue implementing the act inconsistently and potentially conducting computer matching programs that are neither cost-effective nor protective of privacy, as provided for by the act. Further, the act contains a number of provisions that pose challenges for agencies, such as the act’s definitions and limited time frames for conducting computer matches. To the extent that agencies avoid performing matches because of the extensive and time-consuming process for establishing CMAs, they may be losing opportunities to identify improper payments that could result in savings to the government. To make government-wide computer matching program planning efforts more consistent, we recommend that the Director of OMB take the following four actions: revise guidance on computer matching to clarify whether front-end verification queries are covered by the Computer Matching Act, direct agencies to address all key elements when preparing cost- ensure that DIBs prepare and submit annual reports of agency-wide computer matching activities, and ensure that agencies receive assistance in implementing computer matching programs as envisioned by the act. We are also making specific recommendations for the seven agencies in our review to improve the implementation of the act as follows. We recommend that the Secretary of Agriculture develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on the agency’s computer matching activities, as required by the act. We recommend that the Secretary of Education develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the act. We recommend that the Secretary of Health and Human Services develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the act. We recommend that the Secretary of Homeland Security develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the act. We recommend that the Secretary of Labor develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the act. We recommend that the Secretary of Veterans Affairs develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; and ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs. We recommend that the Administrator of Social Security develop and implement policies and procedures for cost-benefit analyses related to computer matching agreements to include key elements such as personnel and computer costs, as well as avoidance of future improper payments and recovery of improper payments and debts; ensure the DIB reviews cost-benefit analyses to make certain cost savings information for the computer matching program is included before approving CMAs; and ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the act. We sent draft copies of this report to the seven agencies covered by our review as well as to the Department of the Treasury and OMB. We received written responses from USDA, ED, DHS, Labor, VA, and SSA. These comments are reprinted in appendices II through VII. All of the agencies to which we made recommendations and received comments concurred with our recommendations, with the exception of ED, which concurred with one of our three recommendations. The agencies also provided technical comments, which we have incorporated as appropriate into the final report. The HHS GAO Intake Coordinator indicated via e- mail that HHS agreed with our recommendations and offered no further comments. The Executive Director of the Bureau of Fiscal Services at Treasury provided technical comments via e-mail, which we have addressed as appropriate. OMB staff provided technical comments via e- mail which we have considered and included as appropriate. The OMB staff did not state whether the agency agreed or disagreed with our recommendations. USDA concurred with all our recommendations and stated that it plans to move forward with implementing them. USDA noted the need for consistent, clear instructions and assistance from OMB on implementing the computer matching programs. ED concurred with one of our recommendations, to ensure the DIB performs annual reviews and submits annual reports on agency computer matching activities, as required by the Computer Matching Act. However, ED did not concur with the other two recommendations. Regarding our recommendation to develop and implement policies and procedures for cost-benefit analyses that include all key elements, ED stated that it agreed that the elements of our recommendation are important but stated that its analyses included appropriate key elements. Specifically, the department argued that not all key elements apply to every computer matching program. For example, ED did not think it appropriate to address the recovery of improper payments and debts for matching programs to establish eligibility. However, we believe all key elements should be addressed in cost benefit analyses, even if only to note that certain types of benefits have been considered and determined not to be applicable in the specific circumstances of a given computer matching program. Without a thorough assessment, the DIB may not have sufficient information to determine whether a thorough cost analysis has been conducted. Regarding our recommendation to ensure that the DIB reviews cost-benefit analyses to make certain cost savings information for CMAs are included before approval, ED did not concur and stated that the DIB has consistently reviewed cost-benefit analyses before approving CMAs and that no change in agency practices was needed. However, our review of ED’s eight cost-benefit analyses showed that two did not address avoidance of future improper payments and five did not address recovery of improper payments and debts. Given that ED’s cost-benefit analyses did not mention these costs, which are key elements of cost savings information, the DIB would not have been able to make a full review of costs and benefits to ensure that cost savings information was included in CMAs before approving them. We continue to believe it is important that agency DIBs perform comprehensive reviews of cost- benefit analyses to ensure that benefits outweigh costs. DHS stated that it will work to update its guidance concerning CMAs and the DIB and that it plans to update instructions on implementing policies and procedures for cost-benefit analyses to include the key elements we identified. In addition, the DHS Privacy Office plans to update its CMA process to clarify the DIB’s responsibilities in assessing cost-benefit analyses and ensure the DIB reviews and reports annually on its computer matching program. In addition to DHS’s written comments, a DHS privacy official provided technical comments in an e-mail, which we have incorporated as appropriate. Labor concurred with our recommendations and provided technical comments. We have taken Labor’s comments into consideration and updated the report as appropriate. Labor also stated that it agreed that the computer matching process is both lengthy and resource-intensive, and we have noted this in the report. VA stated that it would revise its current policy to include the key elements of cost-benefit analyses within the next 12 months. Furthermore, VA also plans to ensure that the DIB reviews cost-benefit analyses to make certain that cost savings information is included in CMAs before approval. SSA stated that it is currently working on an initiative to improve its cost- benefit analysis process and will ensure that all CMAs comply with the act’s requirements and OMB’s guidance. In addition, SSA said it will ensure that the DIB receives cost-benefit analyses for proposed computer matching programs that include cost savings information prior to approval. Lastly, SSA stated that it agrees that its DIB should conduct an annual review but would defer to OMB with regard to complying with the requirement that the DIB report annually. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to interested congressional committees, the Director of OMB, the Secretary of Treasury and the heads of the seven agencies in our review. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6244 or wilshuseng@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VIII. The objectives of our review were to (1) determine agencies’ responsibilities under the Computer Matching Act, (2) determine how selected agencies are implementing that act with regard to federal benefits programs, and (3) describe the views of officials at selected agencies on the process of developing and implementing computer matching agreements (CMA). To describe agencies’ responsibilities under the Computer Matching Act, we reviewed the law, as well as other relevant laws, policies, and guidance that address computer matching for program integrity purposes. We also interviewed agency officials and examined agency documents on computer matching programs and processes. We focused on federal agencies with the highest expenditures in benefits and assistance programs, specifically the Departments of Agriculture (USDA), Education (ED), Health and Human Services (HHS), Homeland Security (DHS), and Veterans Affairs (VA), and the Social Security Administration (SSA). We added the Department of Labor (Labor) because it oversees significant employment benefit programs and there were some indications that the Labor Office of Inspector General (OIG) had faced challenges in using CMAs. Labor is also one of the 10 federal agencies with the highest expenditures in benefits and assistance programs. We also reviewed guidance developed by the Office of Management and Budget (OMB) on computer matching. In addition, we obtained information from the Department of the Treasury on the Do Not Pay Working System and the Do Not Pay Initiative, and their relationship to the computer matching provisions of the Privacy Act. We analyzed the requirements of the act and OMB guidance and confirmed with agency officials the typical process for conducting computer matching programs. In addition, while the provisions of the act established procedural safeguards for benefit programs and federal personnel management, we mainly focused on requirements for agencies to establish or verify eligibility for federal benefits. To determine selected agencies’ implementation of the act with regard to federal benefits programs, we compared the requirements of the act with agencies’ computer matching agreements, including accompanying cost- benefits analyses and documentation of agency processes for reviewing the draft agreements. Specifically, we examined computer matching agreements to determine if the agreements contained information required by the act. In addition, we reviewed the accompanying cost- benefit analyses to determine if they contained relevant information to conclude that the matching program was beneficial to the agency. Specifically we reviewed the 1986 GAO report for criteria on cost-benefit analyses since OMB guidance refers agencies to it and because agencies we reviewed used it. We selected four key elements of costs and benefits (cost: personnel and computer costs; benefits: avoidance of future improper payment and recovery of improper payments and debts) and determined whether the agencies’ cost-benefit analyses included these key elements. We also reviewed the activities and documentation of the Data Integrity Boards (DIB) to determine if they followed the requirements of the law. Specifically, we examined the structure of the DIBs and determined whether they disapproved CMAs that included cost- benefit analyses that lacked key elements. Also, we reviewed the reporting requirements of the DIBs to determine if they issued computer matching reports as required. We also reviewed OMB’s guidance and queried agency officials to determine whether they interpreted the guidance consistently. To describe the views of officials at selected agencies on the process of developing and implementing CMAs, we interviewed agency officials and inspectors general to determine how they implemented the act’s computer matching provisions. Furthermore, we solicited these officials’ views on the requirements of the act and whether they thought improvements could be made. We conducted this performance audit from January 2013 to January 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the individuals named above, key contributions to this report were made by John de Ferrari (Assistant Director), Wilfred B. Holloway, Tammi N. Kalugdan, Lee A. McCracken, Mimi Nguyen, David F. Plocher, and Tina M. Torabi. | Computerized matching of data from two or more information systems is one method of data analysis that can assist in detecting and preventing fraud, waste, and abuse in government programs, and it is commonly used to help identify improper payments in federal benefit programs and activities. However, computer matching may also pose privacy risks to individuals. To ensure that federal agency computer matching programs protect individuals' privacy rights, from 1988 through 1990 Congress enacted amendments to the Privacy Act of 1974 (collectively referred to in this report as the Computer Matching Act). GAO was asked to review issues relating to computer matching. This report examines (1) agencies' responsibilities under the Computer Matching Act, (2) how selected agencies are implementing the act with regard to federal benefits programs, and (3) the views of officials at selected agencies on the process of developing and implementing computer matching agreements. GAO reviewed the act's provisions and OMB guidance. It also interviewed officials and examined documents at seven agencies with high expenditures in benefits and assistance programs. The Office of Management and Budget (OMB) is responsible for developing guidelines and providing assistance to agencies on implementing the Computer Matching Act, while agencies have a variety of implementation responsibilities. Agency responsibilities include (1) developing computer matching agreements (CMA) containing specific elements for each proposed matching program and notifying Congress, OMB, and the public of such activities; (2) conducting cost-benefit analyses for proposed matching programs; and (3) establishing data integrity boards to oversee matching programs. The seven agencies GAO reviewed (the Departments of Agriculture, Education, Health and Human Services, Homeland Security, Labor, Veterans Affairs, and the Social Security Administration) have taken a number of steps to implement the act's requirements. They have all established processes for creating CMAs, and the agreements generally included the elements required by the act. However, implementation among these agencies was inconsistent in several ways. First, the selected agencies differed in their understanding of whether CMAs were required for data queries. OMB's guidance is not clear on whether such queries are covered by the act. Second, while the selected agencies generally developed cost-benefit analyses for their CMAs, they did not consistently address key elements needed to assess the value of computer matching programs. OMB stated in 1989 that it would issue specific guidance for cost-benefit analyses of computer matching programs, but it has not done so. Finally, agency data integrity boards have not consistently reported to OMB on agencies' computer matching activities as required by the act. OMB guidance requires biennial reporting, which varies from the act's requirement for annual reports. The lack of clear guidance from OMB has contributed to the inconsistent implementation of the act at the agencies GAO reviewed. Several agency and office of inspector general officials stated that the act's rigorous requirements and short time frames discouraged them from pursuing CMAs. Officials at six agencies stated that CMA review processes were lengthy and resource-intensive and that statutory durations for conducting matching activities were too short. Similarly, officials from offices of the inspector general at four agencies stated that the length of the approval process and the requirement that proposed agreements be approved by data integrity boards discouraged them from computer matching. GAO is recommending that OMB revise its guidance and that selected agencies develop and implement policies and procedures for cost-benefit analyses and ensure annual reviews and reporting. In their comments, agencies concurred with GAO's recommendations, with the exception of Education. OMB did not state whether the agency agreed or disagreed. GAO continues to believe that the recommendations are valid, as discussed in the report. |
Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government’s operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. It is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. Although this progress is commendable, the federal government was unable to demonstrate the reliability of significant portions of the U.S. government’s accrual-based consolidated financial statements for fiscal years 2010 and 2009, principally resulting from limitations related to certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work. As a result, we were unable to provide an opinion on such statements. Further, significant uncertainties (discussed in Note 26 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 Statement of Social Insurance, prevented us from expressing an opinion on that statement. We were, however, able to render unqualified opinions on the 2009, 2008, and 2007 Statements of Social Insurance. Given the importance of social insurance programs like Medicare and Social Security to the federal government’s long-term fiscal outlook, the Statement of Social Insurance is critical to understanding the federal government’s financial condition and fiscal sustainability. The federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the U.S. government’s accrual-based consolidated financial statements. The underlying material weaknesses in internal control, which generally have existed for years, contributed to our disclaimer of opinion on the U.S. government’s accrual-based consolidated financial statements for the fiscal years ended 2010 and 2009. Those material weaknesses relate to the federal government’s inability to satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the Department of Defense (DOD), were properly reported in the accrual-based consolidated financial statements; reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported; support significant portions of the reported total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain federal entities; adequately account for and reconcile intragovernmental activity and balances between federal entities; ensure that the federal government’s accrual-based consolidated financial statements were (1) consistent with the underlying audited entities’ financial statements, (2) properly balanced, and (3) in conformity with U.S. generally accepted accounting principles (GAAP); and identify and either resolve or explain material differences between (1) certain components of the budget deficit reported in Treasury’s records that are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit, the Statement of Changes in Cash Balance from Unified Budget and Other Activities, and the Fiscal Projections for the U.S. Government (included in the Supplemental Information section of the Financial Report) and (2) related amounts reported in federal entities’ financial statements and underlying financial information and records. These material weaknesses continued to (1) hamper the federal government’s ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; (2) affect the federal government’s ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities; (3) impair the federal government’s ability to adequately safeguard significant assets and properly record various transactions; and (4) hinder the federal government from having reliable financial information to operate in an efficient and effective manner. In addition to the material weaknesses that contributed to our disclaimer of opinion on the accrual-based consolidated financial statements, we found the following three other material weaknesses in internal control. These other material weaknesses were the federal government’s inability to determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to reduce improper payments, identify and resolve information security control deficiencies and manage information security risks on an ongoing basis, and effectively manage its tax collection activities. Also, many of the CFO Act agencies continue to struggle with financial systems that are not integrated and do not meet the needs of management for reliable, useful, and timely financial information. Often, agencies expend major time, effort, and resources to develop financial information that their systems should be able to provide on a daily or recurring basis. Three major impediments continued to prevent us from rendering an opinion on the U.S. government’s accrual-based consolidated financial statements: (1) serious financial management problems at DOD that have prevented DOD’s financial statements from being auditable, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal entities, and (3) the federal government’s ineffective process for preparing the consolidated financial statements. Additional impediments, such as certain entities’ fiscal year 2010 financial statements that, as of the date of our audit report, received disclaimers of opinion or were not audited, also contributed to our inability to render an opinion on the U.S. government’s accrual-based consolidated financial statements. Extensive efforts by DOD and other entity officials and cooperative efforts between entity chief financial officers, Treasury officials, and Office of Management and Budget (OMB) officials will be needed to resolve these obstacles to achieving an opinion on the U.S. government’s accrual-based consolidated financial statements. Given DOD’s size and complexity, the resolution of its serious financial management problems is essential to achieving an opinion on the U.S. government’s consolidated financial statements. Reported weaknesses in DOD’s financial management and other business operations adversely affect the reliability of DOD’s financial data; the economy, efficiency, and effectiveness of its operations; and its ability to produce auditable financial statements. Several DOD business practices, including financial management, continue to be included on GAO’s list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement or in need of transformation. To transform its business operations, DOD management must have reliable financial information. Without it, DOD is severely hampered in its ability to make sound budgetary and programmatic decisions, monitor trends, make adjustments to improve performance, reduce operating costs, or maximize the use of resources. DOD continues to take steps toward resolving the department’s long- standing financial management weaknesses. The department’s Financial Improvement and Audit Readiness (FIAR) Plan, which defines DOD’s strategy and methodology for improving financial management operations and controls, has continued to evolve and mature. DOD’s Comptroller has established two priority focus areas—first, strengthening processes, controls, and systems that produce budgetary information and support the department’s Statements of Budgetary Resources; and second, improving the accuracy and reliability of management information pertaining to mission-critical assets, including military equipment and real property, and validating improvement through existence and completeness testing. In 2010, DOD revised its FIAR strategy, governance framework, and methodology to support the DOD Comptroller’s direction and priorities. We are supportive of this initiative and believe that a focused and consistent approach may increase DOD’s ability to demonstrate incremental progress toward auditability in the short term. Budgetary and asset-accountability information is widely used by DOD managers at all levels. As such, its reliability is vital to daily operations and management. In this regard, the U.S. Marine Corps (USMC) recently underwent an audit of its fiscal year 2010 Statement of Budgetary Resources (SBR). Although the auditors were unable to express an opinion on the USMC SBR, DOD indicated that the lessons learned from the audit will be applied to the fiscal year 2011 USMC SBR audit currently underway and shared with the other DOD components to assist them in their audit readiness efforts. A key element of DOD’s strategy is successful implementation of Enterprise Resource Planning (ERP) systems. However, inadequate requirements management, inadequate systems testing, ineffective oversight over business system investments, and other challenges have hindered the department’s efforts to implement these systems on schedule and within budget. Effective and sustained leadership and oversight of the department’s ERP implementation will be important to ensure that these important initiatives result in the integrated capabilities needed to transform the department’s financial management and related business operations. which requires DOD’s financial statements to be validated as audit ready no later than September 30, 2017. The interim milestones shall include, for each military department and for the defense agencies and defense field activities, interim milestones for (1) achieving audit readiness for each major element of the Statement of Budgetary Resources, and (2) addressing the existence and completeness of each major category of assets, including military equipment, real property, and operating material and supplies; and examine the costs and benefits of alternative approaches to the valuation of DOD assets, select a valuation approach, and begin to prepare a business case analysis supporting the selected approach. Important to the success of DOD’s current priorities and the FIAR program are high-quality, detailed plans, and effective implementation at all levels. Long-term, to achieve financial statement auditability and improve financial management information, it will be important that DOD establish sound strategic planning and effective implementation across the department, and at all levels, with efforts that can be sustained through leadership transitions. We are encouraged by continuing congressional oversight of DOD’s business transformation and financial management improvement efforts and the commitment of DOD’s leaders to implementing sustained improvements in the department’s ability to produce reliable, useful, and timely information for decision making and reporting. We will continue to monitor DOD’s progress in addressing its financial management weaknesses and transforming its business operations. Federal entities are unable to adequately account for and reconcile intragovernmental activity and balances. For both fiscal years 2010 and 2009, amounts reported by federal entity trading partners for certain intragovernmental accounts were not in agreement by significant amounts. Although OMB and Treasury require the CFOs of 35 significant federal entities to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners, a substantial number of the entities did not adequately perform those reconciliations for fiscal years 2010 and 2009. As a result of these circumstances, the federal government’s ability to determine the impact of the unreconciled differences between trading partners on the amounts reported in the accrual-based consolidated financial statements is significantly impaired. GAO has identified and reported on numerous intragovernmental activities and balances issues and has made several recommendations to Treasury and OMB to address those issues. Treasury and OMB have generally taken or plan to take actions to address these recommendations. Treasury continues to take steps to help resolve material differences in intragovernmental activity and balances. For example, during fiscal year 2010, Treasury established additional focus groups, consisting of Treasury and agency personnel, to begin identifying and resolving certain reported material differences. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong commitment by federal entities to fully implement guidance regarding business rules for intragovernmental transactions issued by OMB and Treasury as well as continued strong leadership by OMB and Treasury. While further progress was demonstrated in fiscal year 2010, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with GAAP. For example, Treasury’s process did not ensure that the information in certain of the accrual-based consolidated financial statements was fully consistent with the underlying information in 35 significant federal entities’ audited financial statements and other financial data. To make the fiscal years 2010 and 2009 consolidated financial statements balance, Treasury recorded net increases of $0.8 billion and $17.4 billion, respectively, to net operating cost on the Statement of Operations and Changes in Net Position, which it labeled “Unmatched transactions and balances.” Treasury recorded an additional net $3.8 billion and $8 billion of unmatched transactions in the Statement of Net Cost for fiscal years 2010 and 2009, respectively. Treasury is unable to fully identify and quantify all components of these unreconciled activities. Treasury’s reporting of certain financial information required by GAAP continues to be impaired, and will remain so until federal entities, such as DOD, can provide Treasury with complete and reliable information required to be reported in the consolidated financial statements. A detailed discussion of additional control deficiencies regarding the process for preparing the consolidated financial statements can be found on pages 240 through 243 of the Financial Report. During fiscal year 2010, Treasury, in coordination with OMB, continued implementing corrective action plans and made progress in addressing certain internal control deficiencies we have previously reported regarding the process for preparing the consolidated financial statements. Resolving some of these internal control deficiencies will be a difficult challenge and will require a strong commitment from Treasury and OMB as they continue to execute and implement their corrective action plans. While not as significant as the major impediments noted above, financial management problems at the Department of Homeland Security (DHS) and the Department of Labor (Labor) also contributed to the disclaimer of opinion on the federal government’s accrual-based consolidated financial statements for fiscal year 2010. About $28 billion, or about 1 percent, of the federal government’s reported total assets as of September 30, 2010, and approximately $235 billion, or about 5 percent, of the federal government’s reported net cost for fiscal year 2010 relate to these two agencies. The auditors for DHS and Labor reported that they were unable to provide opinions on the financial statements because they were not able to obtain sufficient evidential support for certain amounts presented in financial statements. For example, only selected DHS financial statements were subjected to audit, and the auditors stated that DHS was unable to provide sufficient evidence to support certain financial statements balances at the Coast Guard and Transportation Security Administration; and auditors for Labor reported that the department was unable to provide sufficient support for certain accounts in Labor’s fiscal year 2010 financial statements. The auditors for DHS and Labor made recommendations to address control deficiencies at the agencies, and management for these agencies generally expressed commitment to resolve the deficiencies. It will be important that management at each of these agencies remain committed to addressing noted control deficiencies and improving financial reporting. Because of significant uncertainties (as discussed in Note 26 to the consolidated financial statements), primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 Statement of Social Insurance, we were unable to, and we did not, express an opinion on the 2010 Statement of Social Insurance. The Statement of Social Insurance presents the actuarial present value of the federal government’s estimated future revenue to be received from or on behalf of participants and estimated future expenditures to be paid to or on behalf of participants, based on benefit formulas in current law and using a projection period sufficient to illustrate the long-term sustainability of the social insurance programs. The significant uncertainties, discussed in further detail in Note 26 to the consolidated financial statements, include: Medicare projections in the 2010 Statement of Social Insurance were based on full implementation of the provisions of the Patient Protection and Affordable Care Act (PPACA), including a significant decrease in projected Medicare costs from the 2009 Statement of Social Insurance related to (1) reductions in physician payment rates totaling 30 percent over the next 3 years and (2) productivity improvements for most other categories of Medicare providers. However, there are significant uncertainties concerning the achievement of these projected decreases in Medicare costs. Management has noted that actual future costs for Medicare are likely to exceed those shown by the current-law projections presented in the 2010 Statement of Social Insurance due to the likelihood of modifications to the scheduled reductions. The extent to which actual future costs exceed the projected current-law amounts due to changes to the physician payments and productivity adjustments depends on both the specific changes that might be legislated and on whether legislation would include other provisions to help offset such costs. Management has developed an illustrative alternative projection intended to provide additional context regarding the long-te rm sustainability of the Medicare program and to illustrate the uncertainties in the Statement of Social Insurance projections. The present value of future estimated expenditures in excess of future estimated revenue for Medicare, included in the illustrative alternative projection, exceeds the $22.8 trillion estimate in the 2010 Statement of Social Insurance by $12.4 trillion. The recent economic recession and the federal government’s actions to stabilize financial markets and promote economic recovery contin significantly affect the federal government’s financial condition. In December 2007, the United States entered what has turned out to be its deepest recession since the end of World War II. Gross domestic produ ct (GDP) fell 4.1 percent from the beginning of the recession through the second quarter of 2009, which marked the recession’s end. Since the end of the reces sion, GDP has grown slowly and unemployment remains at a high level. As of September 30, 2010, the federal government’s actions to stabilize the financial markets and to promote economic recovery resulted in assets of over $400 billion, which is net of about $75 billion in valuation losses. In addition, the federal government reported incurring significant liabilities and related net cost resulting from these actions. Although the federal government has received positive returns from investments in certain large financial institutions, it continues to report significant costs overall related to these actions. Because the valuation of the related assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Actions taken to stabilize financial markets—including aid to the automotive industry—increased borrowing and added to federal debt hel by the public. The revenue decreases and spending increases enacted in the American Recovery and Reinvestment Act of 2009 also added to borrowing and federal debt held by the public. Federal debt held by the public increased from 40 percent of GDP as of September 30, 2008, to 62 d percent as of September 30, 2010. The economic downturn and the nature and magnitude of the actions taken to stabilize the financial markets and to promote economic recovery will continue to shape federal government’s near-term budget and debt outlook. While defic its are projected to decrease as federal support for states and the financial sector winds down and the economy recovers, the increased debt and related interest costs will remain. The ultimate cost of the federal government’s actions to stabilize the financial markets and promote economic recovery will not be known for some time as these uncertainties are resolved and further federal government actions are taken in fiscal year 2011 and later. Looking ahead, it will be important for the federal government to continue to determine the most expeditious manner in which to bring closure to its financial stabilization initiatives while optimizing its investment returns. The 2010 Financial Report includes the first sustainability statement required under new financial reporting standards. This statement presents comprehensive long-term fiscal projections for the U.S. government, expanding on similar information presented in recent years’ financial reports and consistent with the fiscal simulations that GAO has published since 1992. This enhanced reporting will hopefully increase public awareness and understanding of the long-term fiscal outlook: both its overall size and the major drivers of that outlook. Information on the imbalance between revenues and spending currently built into the structure of the budget can help stimulate public and policy debates and help policymakers make more informed decisions about the overall sustainability of government finances. For more than a decade, GAO has been running fiscal simulations to tell more about this longer-term story. The Congressional Budget Office (CBO) has also published long-term simulations for many years. The federal government faced large and growing structural deficits—and hence rising debt—before the instability in financial markets and the economic downturn. Under the projections included in the Financial Report and under the most recent CBO and GAO simulations using a range of assumptions, these structural deficits—driven on the spending side primarily by rising health care costs and known demographic trends—lead to continuing increases in federal debt held by the public as a share of GDP, which is unsustainable. In closing, even though progress has been made in improving federal financial management activities and practices, much work remains given the federal government’s long-term fiscal challenges and the need for the new Congress, the administration, and federal managers to have reliable, useful, and timely financial and performance information to effectively meet these challenges. The recent economic recession and the federal government’s actions to stabilize financial markets and promote economic recovery continued to significantly affect the federal government’s financial condition. The accrual-based consolidated financial statements for fiscal year 2010 include, as they did for fiscal year 2009, substantial assets and liabilities resulting from these actions. The valuation of certain assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions. As such, there will be differences between the estimated values as of September 30, 2010, and the actual results, and such differences may be material. These differences will also affect the ultimate cost of the federal government’s market stabilization and economic recovery actions. Going forward, a great amount of attention will need to continue to be devoted to ensuring (1) that sufficient internal controls and transparency are established and maintained for all financial stabilization and economic recovery initiatives; and (2) that all related financial transactions are reported on time, accurately, and completely. Further, sound decisions on the current and future direction of all vital federal government programs and policies are more difficult without reliable, useful, and timely financial and performance information. In this regard, for DOD, the challenges are many. We are encouraged by DOD’s efforts toward addressing its long-standing financial management weaknesses and its efforts to achieve auditability. Consistent and diligent top management oversight toward achieving financial management capabilities, including audit readiness, will be critical going forward. Moreover, the civilian CFO Act agencies must continue to strive toward routinely producing not only annual financial statements that can pass the scrutiny of a financial audit, but also quarterly financial statements and other meaningful financial and performance data to help guide decision makers on a day-to-day basis. Federal entities’ improvement of financial management systems will be essential to achieve this goal. Moreover, of utmost concern are the federal government’s long-term fiscal challenges that result from large and growing structural deficits that are driven on the spending side primarily by rising health care costs and known demographic trends. This unsustainable path must be addressed soon by policymakers. Finally, I want to emphasize the value of sustained congressional interest in these issues, as demonstrated by this Subcommittee’s leadership. It will be key that, going forward, the appropriations, budget, authorizing, and oversight committees hold the top leadership of federal entities accountable for resolving the remaining problems and that they support improvement efforts. Mr. Chairman and Ranking Member Towns, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Jeanette M. Franzel, Managing Director, or Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-2600. Key contributions to this testimony were also made by staff on the Consolidated Financial Statement audit team. | GAO annually audits the consolidated financial statements of the U.S. government. Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. Over the years, certain material weaknesses in internal control over financial reporting have prevented GAO from expressing an opinion on the accrual-based consolidated financial statements. Unless these weaknesses are adequately addressed, they will, among other things, continue to (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit for fiscal year 2010 and discusses certain of the federal government's significant long-term fiscal challenges. Three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual-based consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) federal entities' inability to adequately account for and reconcile intragovernmental activity and balances, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition to the material weaknesses underlying these major impediments, GAO noted material weaknesses involving billions of dollars in improper payments, information security, and tax collection activities. With regard to the Statement of Social Insurance (SOSI), GAO was unable to, and did not, express an opinion on the 2010 SOSI because of significant uncertainties discussed by management in the consolidated financial statements, primarily related to the achievement of projected reductions in Medicare cost growth reflected in the 2010 SOSI. GAO was, however, able to render unqualified opinions on the 2009, 2008, and 2007 SOSIs. Since the enactment of key financial management reforms in the 1990s, the federal government has made significant progress in improving financial management activities and practices. For fiscal year 2010, 20 of 24 Chief Financial Officers (CFO) Act agencies were able to attain unqualified audit opinions on their accrual-based financial statements within an accelerated reporting timeframe, up from 6 CFO Act agencies for fiscal year 1996. Also, accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. Further, the preparation and audit of financial statements has identified numerous deficiencies, leading to actions to strengthen controls and systems. Much work remains, however, to improve federal financial management. For example, it is essential that the Department of Defense, the Department of the Treasury, and the Office of Management and Budget, along with other federal entities, address the major impediments discussed above. Also, it is important for the individual federal departments and agencies to remain committed to maintain the progress that has been achieved in obtaining positive audit results and to build upon that progress to make needed improvements. The 2010 Financial Report of the United States Government (Financial Report) introduces the first sustainability statement required under a new financial reporting standard, which presents comprehensive long-term fiscal projections for the U.S. government. Such reporting provides a much needed perspective on the federal government's long-term fiscal position and outlook. The Financial Report, like the latest Congressional Budget Office long-term budget outlook and GAO simulations, shows that the federal government is on an unsustainable long-term fiscal path. Over the years, GAO has made numerous recommendations directed at improving federal financial management. The federal government has generally taken or plans to take actions to address our recommendations. |
To respond to your request, we performed work primarily at RHS, FSA, and Agriculture’s Office of the Chief Financial Officer. We also performed work at Treasury and conducted interviews with agency officials at RHS and FSA who are responsible for taking corrective actions to ensure that all eligible delinquent debt is promptly referred to Treasury for collection action. We conducted interviews with Agriculture’s CFO and members of his staff regarding Agriculture’s implementation of AWG. To corroborate information we obtained from interviews, we obtained and reviewed pertinent agency documents including action plans and implementation schedules. We did not verify the reliability of certain information that was provided to us by agencies such as delinquent debt referred to Treasury. We also did not assess the technical adequacy of the specific systems enhancements that have been deemed by the agencies as necessary for addressing the DCIA implementation problems that we identified and discussed. We conducted interviews with Treasury officials who were knowledgeable about the debt collection improvement account provision of DCIA and the status of the account at Treasury. We performed our work from July through September 2002 in accordance with U.S. generally accepted government auditing standards. In December 2001, we testified that, as of September 30, 2000, RHS reported it had referred to Treasury’s offset program $201 million of direct Single Family Housing (SFH) loans but had not referred any amounts to Treasury for cross-servicing, primarily due to RHS’s systems limitations. RHS officials told us that since implementing a new automated centralized loan servicing system in fiscal year 1997, RHS had been unable to readily identify direct SFH loans that are eligible for referral to Treasury for cross- servicing. Essentially, the system did not contain sufficient data to differentiate loans eligible for cross-servicing from those that were not. For example, the system needed to be capable of determining the status of any collateral, because all collateral must be liquidated prior to a loan’s referral to Treasury for cross-servicing. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of RHS to complete development of the software enhancements that will allow automated identification of loans eligible for cross-servicing and promptly refer all such loans to Treasury. RHS has completed and implemented the system enhancements necessary for automated identification of direct SFH loans eligible for cross-servicing and the prompt referral of such loans. In April 2002, RHS made its first automated referral of direct SFH loans to Treasury for cross-servicing. This referral involved about 10,900 loans totaling about $165.6 million. RHS is currently using its enhanced system to identify loans eligible for cross- servicing and electronically refer them to Treasury on a monthly basis. According to RHS documents and Treasury officials, RHS has referred all of the loans that it has reported as eligible for cross-servicing. Moreover, an RHS document indicates and Treasury officials told us that there have been no significant problems regarding eligibility for cross-servicing for the loans that RHS has referred since April 2002. As we stated at the December 2001 hearing, when we attempted to independently verify specific debts that RHS had excluded from referral to Treasury’s offset program as of September 30, 2000, we were told by RHS officials that the supporting documentation for the $182 million of direct SFH loans excluded from referral had not been saved. We subsequently recommended that the Secretary of Agriculture direct the Administrator of RHS to maintain supporting documentation, in an appropriate level of detail that can be made readily available for independent verification, for all SFH debts reported and certified to Treasury as excluded from referral for collection action. At a minimum, the documentation should include, for each exclusion category, such as foreclosure, the total amount reported as excluded on the certified Treasury Report on Receivables Due from the Public (TROR) and a listing of the identities and dollar amounts of the specific loans excluded. Such documentation would facilitate an efficient independent review to determine whether RHS’s exclusions meet relevant legislative and regulatory criteria. The Comptroller General’s Standards for Internal Control in the Federal Government states that all transactions and other significant events need to be clearly documented and that the documentation should be readily available for examination. During our follow-up review, RHS provided us a detailed listing of specific direct SFH loans and the loans’ corresponding dollar amounts that had been reported as excluded from referral to Treasury on the TROR as of September 30, 2001, the last period for which certified data were available. Although we were not requested to and did not test the specific loans excluded to determine whether they met relevant legislative and regulatory criteria, RHS’s ability to provide such listings should facilitate future independent verifications of the validity of its reported exclusions, and is critical for the oversight of the agency’s DCIA implementation. Treasury is the sole operator of a governmentwide centralized debt collection center. As such, it is critical that Treasury obtain accurate information from federal agencies on the status of their nontax debt, particularly the debt over 180 days delinquent, for which DCIA was designed in large part to help agencies collect through centralized collection. During the December 2001 hearing, we stressed that RHS was only reporting the delinquent installment portion of its direct SFH loans as delinquent in its TROR. It was not reporting, as required by Treasury, the accelerated loan balance, which is the total debt due and payable. In the report we issued after our testimony, we stated that, as a result of such reporting, RHS may have underreported to Treasury direct SFH loan amounts delinquent over 180 days by about $849 million and direct SFH loan amounts eligible for Treasury’s offset program by about $348 million as of September 30, 2000. We recommended that the Secretary of Agriculture direct the Administrator of RHS to work with Treasury to resolve any inconsistencies between RHS’s reporting of delinquent debts on its TROR and Treasury’s instructions for such reporting. In addition, we recommended that absent any modifications to Treasury’s instructions for preparing the TROR, RHS report the entire accelerated balance of delinquent direct SFH loans to Treasury as delinquent debt and, absent any allowable exclusions, as debt eligible for referral to Treasury for collection action. After we made our recommendations, Agriculture and Treasury officials met to address the inconsistency that existed between RHS’s reporting of delinquent direct SFH loans on the TROR and Treasury’s instructions for such reporting. In a September 2002 letter, Treasury informed Rural Development that RHS should report the entire unpaid principal balances as delinquent on the TROR, and requested that such reporting begin with the TROR for the fourth quarter of fiscal year 2002. Treasury stated in the letter that once an acceleration notice is sent to the borrower, which has been RHS’s ongoing practice, the entire debt is due and payable and should be reflected as such on the TROR. Treasury also stated that its decision was based on consultation with its legal counsel and recent discussions with Agriculture officials including its CFO. According to RHS officials, the agency will report the entire unpaid principal balances for its direct SFH loans that have been accelerated beginning with the TROR for the fourth quarter of fiscal year 2002. At the December 2001 hearing, we stated that RHS had not referred losses on its guaranteed SFH loans to Treasury for collection action. RHS officials told us that the agency could not pursue recovery from the debtor or utilize DCIA debt collection tools because under the SFH guaranteed loan program, no contract existed between the debtor and RHS. Consequently, RHS did not recognize the losses that it paid to guaranteed lenders as federal debt and could not apply DCIA debt collection remedies to them. We were particularly concerned about DCIA debt collection remedies not being available for RHS’s guaranteed SFH losses because, according to RHS, through September 30, 2000, such losses totaled about $132 million. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of RHS to finalize and implement necessary regulatory changes and modifications to lender agreements so that losses on guaranteed SFH loans could be treated as federal debt and referred to Treasury for collection action. RHS is currently working on making the regulatory changes that are needed to refer losses on guaranteed SFH loans to Treasury’s offset program; however, the agency will not be able to refer such losses until regulatory action is completed and guaranteed loan applications are modified. According to a RHS official, to expedite the regulatory recognition of losses on guaranteed SFH loans as federal debt, Agriculture is currently incorporating the regulatory changes that are needed into the draft final rule for the Section 502 Guaranteed Rural Housing Program. It is important to note, however, that the Office of Management and Budget (OMB) has determined that the final rule for this program will constitute a “significant regulatory action.” As such, the rule will be subject to a more lengthy clearance process that will involve OMB review in the final rulemaking stages. According to a schedule provided by Agriculture, which includes internal agency review as well as OMB review, publication of the final rule for the Section 502 Guaranteed Rural Housing Program is expected by about August 2003. Given that the aforementioned regulation is not expected to be finalized for a considerable time, it is important to note that, as of our fieldwork completion date, RHS also had not modified the guaranteed loan applications for the SFH guaranteed loan program that are needed to establish a contractual relationship between the debtor and RHS so that losses stemming from SFH guaranteed loans can be recognized as federal debt and be subject to the debt collection provisions of DCIA. Initially, an RHS official stated that RHS planned to make changes to the applications when the final rule for the guaranteed loan program is issued. However, we pointed out that that approach could possibly delay RHS’s ability to recognize guaranteed loan losses as federal debt, and we suggested that RHS change the guaranteed loan applications as soon as practicable so that once the rule goes into effect, it may be able to be applied retroactively to cover as many guaranteed loans as possible. As a result, according to an RHS official, RHS consulted with its Office of General Counsel and obtained approval for changing the guaranteed loan applications prior to the issuance of the final rule. Currently, RHS is in the process of revising its guaranteed loan application form to include an acknowledgement that any claim paid by RHS on a guaranteed loan would be subject to provisions of the DCIA. Once the regulations are finalized and RHS makes the necessary modifications to the guaranteed loan application, the agency will need to be able to promptly refer guaranteed losses to Treasury’s offset program. Given the fact that the SFH guaranteed loan program continues to grow significantly, thereby increasing the number of loss claims being processed each year, automated tracking of guaranteed loan losses and referring them to Treasury will be critically important. RHS has initiated a project to automate the tracking of SFH loss claims from lenders and payments made to lenders to cover such claims, which it plans to complete in April 2003. It is important to note, however, that the project does not cover the process for the automated referral of guaranteed losses to Treasury. According to RHS officials, this automated referral process will not be covered until RHS initiates the second phase of the current project after April 2003, and which is estimated to take an additional 9 to 12 months to complete. However, RHS currently tracks guaranteed losses, and RHS officials stated that referrals to Treasury could be done manually if the automated enhancements needed to make such referrals are not complete. At the December 2001 hearing, we stated that FSA did not have a process or sufficient controls in place to adequately identify direct farm loans eligible for referral to Treasury. We emphasized that, as a result, amounts of direct farm loans FSA reported to Treasury as eligible for referral were not accurate and, for certain loans, not only distorted the TROR for debt management and credit policy purposes but also distorted key financial indicators such as receivables, total delinquencies, and loan loss data. Specifically, FSA automatically excluded from referral all judgment debts without any review to identify and refer deficiency judgments, which are eligible for Treasury’s offset program and should be referred. We emphasized that, as of September 30, 2000, FSA’s judgment debts totaled $295 million, and our inquiries prompted the agency to initiate a manual process to identify deficiency judgments eligible for referral. Moreover, FSA’s Program Loan Accounting System did not contain current information from the detailed loan files located at the numerous FSA county field offices that would be key to determining a farm loan’s eligibility for referral to Treasury. In addition, there were no monitoring or review procedures in place to help ensure that FSA personnel routinely updated the detailed loan files that are the source of such key information. The severity of this problem was reflected in the results of our statistical sample of loans that had been excluded by FSA in four large states. Based on our review of this sample, we estimated that about one-half of the excluded loans in the four states had been inappropriately placed in exclusion categories by FSA as of September 30, 2000. One of the most frequently identified inappropriate exclusions pertained to amounts that had been discharged in bankruptcy. Such exclusions involved debts that FSA should have written off and closed out, in many instances, several years prior to our test date. In addition, the written-off and closed-out amounts for such debts should have been reported to IRS as income to the debtor in accordance with the Federal Claims Collection Standards and OMB Circular A-129. After the hearing, to address these problems, we recommended that the Secretary of Agriculture direct the Administrator of FSA to develop and implement (1) automated system enhancements to make the Program Loan Accounting System capable of identifying all judgment debts eligible for referral to Treasury for collection action, (2) oversight procedures to ensure that FSA field offices timely and routinely update the Program Loan Accounting System to accurately reflect the status of delinquent debts, including whether the debts are eligible for referral to Treasury for collection action, and (3) oversight procedures to ensure that all debts discharged through bankruptcy are promptly closed out and reported to the IRS as income to the debtor in accordance with the Federal Claims Collection Standards and OMB Circular A-129. We also recommended that FSA continue to manually identify deficiency judgments eligible for referral until the system enhancements for automated identification were completed and implemented. FSA has developed an action plan to improve its process and controls for identifying and referring eligible debts to Treasury and, based upon our review of documents provided by FSA, the agency has made progress toward implementing such improvements. As of our fieldwork completion date, FSA was using its Program Loan Accounting System and system- generated reports to better track the status of FSA’s delinquent debts, including judgment debts, for the purpose of meeting the DCIA referral requirements. Specifically, FSA was generating an enhanced debt report to include various types of debts under FSA’s farm loan programs, including judgment debts, to facilitate field office review of debts to determine eligibility for referral to Treasury. In September 2002, FSA provided its field offices the initial enhanced debt report and directed the field offices to review the debts for accuracy. FSA plans to routinely use the enhanced debt report in such field office reviews in the future. In addition, actions are being taken to improve field office oversight for DCIA implementation. Beginning in August 2002, county field offices must provide their respective state offices with documentation for loans that they determine are ineligible for Treasury’s offset program because of bankruptcy, foreclosure, or litigation. The state offices, in turn, are responsible for making the final decision regarding the loans’ eligibility for referral and for actually excluding the loans from referral. In addition, FSA has amended its National Internal Review Guide to include specific procedures that are designed to help ensure that state offices, among other things, establish monitoring systems to accurately track borrowers in foreclosure, bankruptcy, and litigation. The procedures are intended to facilitate the timely and routine updating of information in the Program Loan Accounting System to accurately reflect the status of delinquent debts, including whether the debts are eligible for referral to Treasury for collection action, and that all debts discharged through bankruptcy are promptly closed out and reported to IRS. FSA’s policy is to perform its national internal reviews at state offices not less than every 2 years, and the new procedures should improve FSA’s implementation of DCIA’s delinquent debt referral requirements. It is important to note, however, that specific actions in FSA’s action plan that are needed to (1) ensure field offices are routinely reviewing accounts for Treasury’s offset program and cross- servicing referral eligibility; (2) ensure that field offices routinely monitor the status of accounts and properly code them for foreclosure, bankruptcy, and litigation; and (3) ensure discharged bankruptcy accounts are promptly closed out, removed from the farm loan debt portfolio, and appropriately reported to the IRS as discharged debts, have target completion dates of September 2003. We stated at the December 2001 hearing that even though FSA reported having referred $934 million of direct farm loans to Treasury’s offset program as of September 30, 2000, the agency has lost opportunities for maximizing collections on this debt because it does not refer codebtors. We emphasized that the vast majority of direct farm loans have codebtors and pointed out that FSA’s Program Loan Accounting System did not have the capacity to record more than one debtor and that the necessary system modifications to record more than one taxpayer identification number had not been made. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor planned system enhancements to the Program Loan Accounting System to ensure that capacity to record and use codebtor information is available and implemented by December 2002. FSA has acknowledged the need to refer codebtors. Its action plan includes time frames for developing and testing the systems enhancements deemed necessary for recording and reviewing relevant information needed for referring debts to Treasury’s offset program, including the codebtor’s name, address, and taxpayer identification number. Based on our review of documents provided by FSA, the agency has established a codebtor code for its system and has begun to input codebtor information. According to FSA, as of our fieldwork completion date, 254 loans with codebtors totaling about $8.3 million had been identified for initiating the due process required for referral to Treasury’s offset program in December 2002. Given that the vast majority of the agency’s direct farm loans have codebtors, FSA has a substantial challenge ahead to obtain the required information to refer all eligible debt for codebtors to Treasury’s offset program. As we noted at the December 2001 hearing, data provided by FSA officials showed that about $400 million of new delinquent debt became eligible for Treasury’s offset program during calendar year 2000. Although FSA officials acknowledged that debts became eligible relatively evenly throughout the year, debts eligible for offset were being referred to Treasury only once annually, during December. As a result, a large portion of the $400 million of debt likely was not promptly referred when it became eligible. FSA agreed that quarterly referrals could enhance possible collection of delinquent debts by getting them to Treasury earlier. After the hearing, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor effective completion of the planned automated system modifications to refer eligible debt to Treasury’s offset program on a quarterly, rather than annual, basis. FSA plans to make quarterly referrals to Treasury’s offset program and intends to make the first such referral in December 2002. In August 2002, FSA issued guidance to the field offices for review of eligible debts for the December 2002 referral. In September 2002, FSA informed its field offices that quarterly referrals are now required, and the agency has determined that the same due process notification and referral process that has been used annually will be used quarterly, except under a shorter time frame. At the December 2001 hearing, we pointed out that FSA had paid out about $293 million in losses for guaranteed farm loans since fiscal year 1996, but like RHS, FSA had missed opportunities to potentially collect millions of dollars related to guaranteed loan losses because they were not treated as federal debt. We also noted while performing work at FSA that the agency had revised its guaranteed loan application applicable to guaranteed loans made after July 20, 2001, to include a section specifying that amounts FSA pays to a lender as a result of a loss on a guaranteed loan constitute a federal debt. After the hearing, because FSA needed to make revisions to its Guaranteed Loan Accounting System to classify guaranteed farm loan losses as federal debt, we recommended that the Secretary of Agriculture direct the Administrator of FSA to monitor planned system enhancements to the Guaranteed Loan Accounting System to ensure that the software needed to implement the revisions to the lender agreement to establish guaranteed loan losses as federal debt is completed. In addition, we recommended that once FSA establishes guaranteed loan losses as federal debt and deems them to be eligible for referral to Treasury, FSA timely refer such debt to Treasury for collection action in accordance with DCIA. FSA has issued the final regulations for recognizing claims paid on guaranteed farm loans as federal debt and is currently making needed systems modifications to refer such losses to Treasury’s offset program. According to FSA officials, the July 2002 regulations apply to guaranteed farm loans made after July 20, 2001, the date of the revised guaranteed loan application. FSA has established December 2002 as the milestone date for completing the automated systems capability to refer eligible losses to Treasury’s offset program and, according to FSA officials, the agency is on schedule. According to FSA officials, as of our fieldwork completion date, the agency has not paid any loss claims associated with guaranteed farm loans made under the July 20, 2001, revision of the guaranteed loan application, and does not expect to experience such losses in the near future because the loans are relatively new. However, it is important to note that if FSA experiences such losses, it has procedures for the manual referral of guaranteed loan loss debt to Treasury’s offset program. At the December 2001 hearing, we stated that Agriculture and eight other agencies we surveyed still had not utilized AWG as authorized by DCIA to collect delinquent nontax debt even though experts had previously testified before this Subcommittee that AWG could potentially be an extremely powerful debt collection tool. We noted that the agencies, including Agriculture, needed to develop the required regulations to implement AWG. In addition, we emphasized that Agriculture had not established specific dates for implementing AWG and was among five surveyed agencies that said they intended to implement AWG in the future but had no written implementation plan for doing so. After the hearing, we recommended, among other things, that the Secretary of Agriculture direct the CFO to complete and finalize regulations for conducting AWG and prepare a comprehensive written implementation plan that clearly defines, at a minimum, the types of debt that will be subject to AWG, the policies and procedures for administering AWG, and the process for conducting hearings, which are required by Treasury. We also recommended that, when practicable, (1) AWG be used in conjunction with other debt collection tools and (2) debts be referred to Treasury prior to 180 days delinquent when relying on Treasury to perform AWG. Agriculture agrees that AWG has the potential to be a powerful tool for collecting delinquent federal debts and has taken actions to develop needed regulations and has completed a departmentwide AWG implementation plan. As of our fieldwork completion date, Agriculture had drafted AWG regulations and incorporated them into the overall debt collection regulations for the department, which are currently being revised. Agriculture also plans to work with OMB to determine whether Agriculture’s regulatory revisions for debt collection should be considered a “significant regulatory action.” According to Agriculture’s implementation plan, if the regulatory revisions are determined to be a “significant regulatory action,” they will require a more lengthy review process resulting in a target date of May 2003 for final publication. In addition, Agriculture’s implementation plan contains other milestone dates that need to be met and key elements that are needed to implement AWG. In accordance with the implementation plan, the CFO’s office has obtained from component agencies their best estimates of the number of AWG cases they are likely to have each year for loans and administrative debt along with a corresponding estimate for the number of requests for hearings. Agriculture plans to have the Department of Veterans Affairs conduct AWG hearings on Agriculture’s behalf and has had discussions with Veterans Affairs regarding such services. To actually perform AWG, Agriculture plans to rely upon Treasury’s cross- servicing program for the vast majority of its debt types for specific debts of $100 or more. Agriculture believes that Treasury’s private collection agency contractors already have the knowledge, expertise, and resources to seek out debtors, verify employment sources, and pursue debt collection through AWG. Because of Agriculture’s reliance upon Treasury to perform AWG as part of cross-servicing, the CFO’s office plans to incorporate into Agriculture’s due process notifications to delinquent debtors, which are mailed prior to debt referrals to Treasury, the potential use of AWG as part of cross-servicing. In addition, the CFO’s office plans to work with Agriculture’s component agencies to refer debts for cross-servicing prior to the 180-day threshold, when practicable. These steps could serve to accelerate collections of delinquent debt. Although Agriculture has completed its departmentwide AWG implementation plan, components of the plan still need to be carried out. For example, the CFO plans to obtain individual AWG implementation plans from Agriculture’s agencies that include each agency’s timetable for implementation, written policies and procedures, and types of debt subject to AWG. In addition, Agriculture still needs to work with its agencies to provide Treasury with authorization to use AWG as part of cross-servicing and to complete the agreement with Veterans Affairs to conduct AWG hearings on Agriculture’s behalf. DCIA includes a voluntary “gainsharing” provision that allows agencies to deposit a limited and defined portion of their debt collections into a special fund account maintained and managed by Treasury. The law provides that deposits into the special fund are available to the Secretary of the Treasury for gainsharing purposes only in amounts provided in advance in appropriations acts. The Secretary may make payments from amounts appropriated to agencies for purposes related to credit management, debt collection, and debt recovery. However, because collections are routinely deposited into the general fund of the Treasury, appropriations would be required in order to implement this incentive provision. Treasury has established a debt collection improvement account that can be activated if its appropriations authorize the expenditure. To date, only the Small Business Administration (SBA) has requested funding for gainsharing through Treasury’s debt collection improvement account. Based on SBA’s requests, Treasury’s appropriation requests for fiscal years 1998 and 1999 included language for funding the debt collection improvement account for up to $384,000 and $3 million, respectively. However, the Congress made no amounts available in Treasury’s appropriations to fund the account. According to Treasury, because the debt collection improvement account has never been utilized, it is difficult to assess how effective the account could be in enhancing federal agencies’ debt collection or what changes, if any, should be made in the financial incentive area to improve debt collection governmentwide. Although the effectiveness of DCIA’s gainsharing provision cannot be fairly assessed at this time, it is important that the provision be kept in proper perspective relative to the overall effectiveness of DCIA in improving the federal government’s debt collection efforts. DCIA contains specific requirements for federal agencies to improve collection of their nontax debts, namely referral of certain delinquent debts to Treasury for centralized collection. While the pace of implementation has been slow, and collection opportunities have been lost, progress is being made. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. | In December 2001, GAO testified at a hearing, before the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, House Committee on Government Reform, that the Department of Agriculture, primarily the Rural Housing Service (RHS) and the Farm Service Agency (FSA), faced challenges in implementing key provisions of the Debt Collection Improvement Act of 1996 (DCIA). The testimony focused on RHS's and FSA's progress in referring delinquent debt for administrative offset and cross-servicing and Agriculture's implementation of administrative wage garnishment (AWG). During the hearing, Agriculture pledged to place a higher priority on delinquent debt collection and to substantially improve its implementation of DCIA by December 31, 2002. After the hearing, GAO made recommendations The Subcommittee requested GAO to review and provide an update on actions Agriculture has taken to resolve these problems. In addition, the Subcommittee requested that GAO report on the status of Treasury's implementation of a debt collection improvement account, a vehicle authorized by DCIA to give agencies financial incentives to improve their debt collection efforts. Recent actions taken by Agriculture demonstrate increased commitment to DCIA implementation. However, it will take sustained commitment and priority by top management to fully address the problems we identified. RHS has worked to address systems limitations that hampered it from promptly referring debts to Treasury for cross-servicing and is now referring all reported eligible debt. RHS will begin reporting certain loans' entire unpaid principal balances on accelerated debt as delinquent, beginning with its report for the fourth quarter of fiscal year 2002. RHS is working on making regulatory changes needed for it to refer losses on guaranteed loans to Treasury's offset program, but the changes are not expected to be completed until about August 2003. FSA has developed an action plan to improve its process and controls for identifying and referring eligible debts to Treasury. GAO's review of documents related to the plan indicates that FSA has made progress toward implementing the improvements. In addition, by December 2002, FSA expects to be able to begin reporting information for some codebtors when referring delinquent debts for collection action; to begin referring debts quarterly, rather than annually; and to be able to refer eligible losses on guaranteed loans. Agriculture has taken steps toward departmentwide implementation of AWG. Agriculture has completed its AWG implementation plan but still needs to carry out certain elements of the plan, including obtaining from its component agencies specific information on the types of debt subject to AWG and finalizing an agreement with the Department of Veterans Affairs to conduct AWG hearings on Agriculture's behalf. Agriculture has also drafted regulations necessary for implementing AWG, which may not be published until May 2003. Treasury has established a debt collection improvement account but, to date, it has not been activated because no amounts have been made available in Treasury's appropriations to fund the account. Agencies would be allowed to contribute a portion of their debt collections into the account, and amounts could be used to reimburse agencies for certain expenses related to credit management and debt collection and recovery. Because the account has not been activated, it is difficult to assess how effective it might be in improving federal debt collection beyond the debt collection improvements that have resulted directly from DCIA's major debt collection requirements for federal agencies. |
Established under title XIX of the Social Security Act as a joint federal- state health financing program, Medicaid is one of the largest programs in the federal and state budgets. States, in administering their Medicaid programs, must comply with federal requirements. States pay qualified health providers for a broad range of covered services provided to eligible beneficiaries. The federal government then reimburses states for a share of their expenditures. The federal share of each state’s program expenditures is calculated according to a formula specified in the Medicaid statute, which allows the federal share to range from 50 to 83 percent. With Medicaid as payer of last resort, states are responsible for having plans in place to identify Medicaid beneficiaries’ other sources of health coverage, determine the extent of the liability of such third parties, avoid payment of third-party claims, and recover reimbursement from third parties after Medicaid payment if the state can reasonably expect to recover more than it spends in seeking reimbursement. Individuals eligible for Medicaid assign their right to third-party payments to the state’s Medicaid agency, which allows the state to claim payments for medical care directly from third parties. In general, state Medicaid agencies are required whenever possible to avoid paying for services for which the state agency has reason to believe another party is legally liable. Whenever states are reimbursed by third parties, they must ensure that the federal government is given its share of the reimbursement. Third parties that may be liable for payment of services furnished to Medicaid beneficiaries can include private insurers and health plans of employers who self-insure. Private health coverage can be delivered through managed care plans—plans in which enrollees, or their employers, pay a monthly payment in exchange for health care services through affiliated physicians, hospitals, and other providers. In addition, private insurers and health plans often contract with other entities, such as plan administrators or pharmacy benefit managers, to administer part or all of their health care plans. Plan administrators process claims and manage the day-to-day operations of the associated health plan. Pharmacy benefit managers negotiate drug prices with pharmacies and drug manufacturers on behalf of health plans and, in addition to other administrative, clinical, and cost-containment services, process prescription drug claims for the health plans. When a Medicaid beneficiary has pharmacy coverage administered through a pharmacy benefit manager, the state generally bills the pharmacy benefit manager directly for reimbursement instead of billing the insurer or the employer. For states to avoid paying costs for which a third party may be liable, or to recover from a liable third party payments the state may already have made, states need to verify when Medicaid beneficiaries have other health coverage, as well as the services that are covered and the period of eligibility. States obtain information on other health coverage in two common ways: When initially applying for enrollment in a state’s Medicaid program, applicants are asked to report to the state any other sources of health coverage they may have. States then verify the applicant’s coverage with the source of the health coverage, including coverage dates, type, benefits, and limits. State Medicaid programs often have staff who, on receiving information suggesting that a Medicaid applicant has other health coverage, contact the sources of such coverage by phone, mail, or other means to obtain specific coverage information. States also often independently identify and verify health coverage of Medicaid beneficiaries by electronically matching the states’ coverage files with those of the other coverage sources. This type of verification is important because information provided by Medicaid applicants may be incomplete. Applicants may not report other sources of health coverage, or they may not know if they have such coverage; for example, a custodial parent may not realize that his or her child has health coverage through the noncustodial parent’s employment-based health plan. Additionally, Medicaid beneficiaries who do not have other coverage when they first enroll in Medicaid may obtain it later. States may have agreements, called data-matching agreements, through which insurers, health plans, and other potential third parties periodically provide states with an electronic copy of their coverage files or with access to company databases. Third parties that are willing to work with states to electronically share their coverage files facilitate appropriate billings and reduce the administrative burden, on states and on third parties, associated with verifying coverage on a case-by-case basis. Once verification of any available private health coverage occurs, the state can redirect health care providers’ claims to a responsible third party (a process known as cost avoidance), and it can seek reimbursement from the third party for payments it has already made (a process known as “pay and chase”). Identifying and verifying coverage early is important, because it is administratively more costly and time-consuming for states to seek reimbursement for payments that have already been made. If third parties do not readily pay claims for which the state Medicaid agency is seeking payment, it is often not cost-effective for states to spend resources pursuing payment on a claim-by-claim basis, even though substantial total dollars could be involved. For example, the states might not have the resources to further pursue payment through legal action. Conversely, success in verifying coverage, avoiding Medicaid payments for those beneficiaries with private health coverage, and collecting on previously paid claims from third parties can result in substantial Medicaid savings. Of the $5.5 billion that states reported in third-party-related savings in fiscal year 2004, states reported more than $4.9 billion in Medicaid payments avoided and more than $524 million in third-party recoveries. On the basis of self-reported health coverage information from the Census Bureau’s annual CPS covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. Individual state estimates ranged from 9 percent in Alabama, Arizona, and California to 22 percent in Iowa and South Dakota and 23 percent in Wyoming (see table 1). Most often, the source of private health coverage was an employer or union. Nationwide, an estimated 11 percent of Medicaid beneficiaries reported having employment-based health coverage (ranging from about 7 percent in Arizona and Alabama to about 17 percent in Colorado, Michigan, New Hampshire, and Wyoming), whereas about 2 percent reported having individual health coverage (ranging from about 1 percent in 11 states to about 8 percent in Iowa). States also identify and collect information on private health coverage as part of administering their own Medicaid programs, but this information cannot be used to assess Medicaid beneficiaries’ private health coverage on a nationwide basis. State Medicaid agencies capture from their automated systems information on private health coverage they have identified for their Medicaid beneficiaries. According to CMS, however, this information is not reliable for measuring the extent of beneficiaries’ private health coverage nationwide, for comparing among states, or for comparing states’ identified coverage with that identified by CPS. Certain states may, for example, capture information only for those beneficiaries whose coverage has been verified, while other states may capture coverage even though the state has not yet verified the services that are covered or the period of eligibility. Problems states face in ensuring that Medicaid is the payer of last resort fall into two broad categories: problems verifying whether beneficiaries have private health coverage and problems collecting payments (or “paying and chasing”) when such coverage exists. Third-party liability provisions in the Deficit Reduction Act could help address some of these problems, although two issues require resolution in order to aid states as they implement the act. In particular, federal guidance is needed to clarify the time by which states must comply with the relevant provisions and also to clarify the entities covered by requirements to provide states with information regarding third-party coverage. Verification of available private health coverage for Medicaid beneficiaries is key to ensuring that states are able to appropriately avoid paying claims or to collect from those that are liable. Nevertheless, state officials often told us, one of the top three problems they faced in ensuring that Medicaid was the payer of last resort was related to verifying beneficiaries’ other coverage. Some state officials reported their problem broadly, stating, for example, that third parties would not cooperate in providing eligibility or coverage information. Others cited specific problems related to the verification process, stating, for example, that third parties would not assist with the state’s verification process by sharing coverage files electronically. Officials from 27 of the 39 responding states reported one or more different types of problems with verifying the services that were covered and the period of eligibility, which we summarized in two categories (see table 2): (1) verifying coverage information and (2) accessing electronic coverage files. Although most states’ officials were not able to estimate the losses to the Medicaid program due to these verification problems, officials in 10 states did provide an estimate. The estimated loss for these 10 states totaled $54 million–$60 million (the loss is stated as a range because some states estimated their losses as a range rather than as a single dollar estimate). Problems verifying coverage information. Officials in 23 states reported problems verifying coverage information; of these, officials in 8 states were able to estimate their annual losses due to third parties’ failure to provide coverage information, for a total of $47 million–$52 million. State officials reported a range of problems they experienced in verifying coverage information. For example, officials in 12 states indicated that certain third parties or their contractors, such as self-insured plans, pharmacy benefit managers, or plan administrators, ignored the state’s requests for verification information about Medicaid beneficiaries or declined to verify coverage. Four states reported that third parties cited privacy provisions in the Health Insurance Portability and Accountability Act of 1996 as one reason they could not share coverage information with state Medicaid offices. Additionally, an official in 1 state reported that some third parties would not verify coverage for seasonal workers and that some insurance companies limited the number of verifications they were willing to provide during a single phone call. Problems accessing electronic coverage files. Officials in five states reported verification problems specifically related to accessing the electronic coverage files of third parties and their contractors; officials in two of these states were able to estimate their annual losses due to lack of access to electronic coverage files, for a total of $7 million–$8 million. The systematic cross-checking of state and third-party health coverage data, which access to electronic files makes possible, improves states’ ability to identify beneficiaries with third-party health coverage. Officials in two states commented, for example, that data-matching agreements would enhance their discovery of private health coverage or would greatly improve their billing capabilities. Officials in five states reported that third parties would not participate in data-matching agreements or that electronic coverage files were not made available to the states. The potential losses to Medicaid because of lack of verification information, both electronic and other, may be sizable. Officials from the private consulting firm we contacted estimated that its recoveries from a major pharmacy benefit manager increased by more than 200 percent after the pharmacy benefit manager shared coverage information with the consulting firm. Given such an increase from this one-time sharing of information, the consulting firm estimated that recoveries from the four largest pharmacy benefit managers could potentially rise by more than $300 million a year if such information sharing occurred regularly. If a state has not established the existence of third-party coverage at the time a claim is submitted, it must pay the claim and collect its payment from the liable party later, after that coverage has been verified. Officials in 35 of the 39 reporting states listed problems with such “pay-and-chase” scenarios among their top three problems faced in ensuring that Medicaid is the last payer. We summarize these problems in five categories: (1) time limits for filing claims, (2) restrictions imposed by managed care and health plans, (3) inconsistent claiming requirements imposed by third parties, (4) lack of response or cooperation from third parties, and (5) weak or problematic state or federal legislation. Although officials in most states were unable to estimate their losses due to problems associated with collecting payments from third parties, officials in 14 states estimated a total annual loss of $184 million–$196 million (see table 3). (The loss is stated as a range because some states estimated their losses as a range rather than as a single dollar figure.) Problems with time limits for filing claims. Officials in 15 states reported problems related to timely filing of claims; officials in 10 states were able to estimate their annual losses in this category, for a total of $76 million–$77 million. State officials reported that some third parties and their contractors have established specific time limits for filing claims. That is, a third party or its contractor might process a claim only if it is filed within a certain time period after services are provided—such as within 60 or 90 days from the date of service. If a state does not submit its claim for services provided to a Medicaid beneficiary within the specified time, some third parties deny payment of the claim. According to state officials, time limits—such as 60 or 90 days from the date of service—pose a particular problem because of how long it can take to verify Medicaid beneficiaries’ private health coverage. An official in 1 state, for example, estimated that in 1 year (November 2004 through October 2005), third- parties rejected more than $32 million in claims from the state because the state did not submit the claims within the third-parties’ established time frames. Problems with restrictions imposed by managed care and health plans. Officials in 17 states reported problems imposed by managed care and health plan restrictions; officials in 10 of these states were able to estimate their annual losses in this category, for a total of $74 million. State officials reported a range of issues relating to restrictions the plans imposed as to when services are covered or to whom reimbursements for claims can be made. For example, officials in 9 states reported that some third parties or their contractors would not reimburse the state for services provided to covered Medicaid beneficiaries if the Medicaid beneficiaries did not follow requirements established in the third parties’ managed care plans, such as obtaining prior authorization for services. One state official estimated an annual loss to the state’s Medicaid program of more than $11 million per year because of managed care plans’ requirements that the Medicaid beneficiaries also covered under the managed care plan obtain preauthorization for services; if such authorization was not obtained by the beneficiary, the managed care plans would not reimburse the state Medicaid program. Another type of restriction that states reported related to requirements for whom the health plan would reimburse. For example, officials in 2 states reported problems with health plans whose coverage provisions did not allow them to pay state Medicaid programs directly but instead required that payments be made to the Medicaid beneficiaries themselves. An official in 1 state remarked that it was labor intensive and often impossible to recoup such payments from beneficiaries. Problems with inconsistent claims requirements among third parties and limited state capacity to bill electronically. Officials in 13 states reported problems related to third parties’ or their contractors’ inconsistent requirements for claims or problems related to limits in the states’ capacity to bill electronically; officials in 3 states were able to estimate their annual losses in this category, for a total of $13 million. Some third parties or their contractors, for example, required claims to be submitted electronically, while others could not accept electronic claims. Third parties or their contractors also rejected claims because they were not in a format acceptable to the third party or did not contain specific pieces of information. For example, an official in 1 state told us that third parties may require information on their claim forms that Medicaid does not require or collect, such as a unique provider number, and a state can have difficulty obtaining such information after the fact. The official in this state estimated a loss of $600,000 in a single year because of such problems. Administrative problems like these are compounded because states submit claims to many different third parties, each with their own formats and requirements. Problems with lack of response or cooperation from third parties or their contractors. Officials in 12 states reported problems related to third parties’ lack of response to or cooperation with claims filed for payment; of these, 3 states were able to estimate their annual losses in this category, for a total of $4 million–$6 million. Some problems arose, for example, when third parties’ contractors, such as pharmacy benefit managers, were not specifically authorized by the third parties to process or pay the claims on the third parties’ behalf when the claims originated from state Medicaid programs. According to CMS, one problem involves Medicaid beneficiaries who have pharmacy coverage administered through a pharmacy benefit manager that has not been specifically authorized by its contracting health plan or insurer to process Medicaid claims from the state. If the beneficiary provides a pharmacist with information on his or her Medicaid coverage, rather than information on the pharmacy benefit manager, the pharmacist may receive payment from the state Medicaid program, which must then seek reimbursement for its payment from the pharmacy benefit manager (“pay and chase”). Often, the pharmacy benefit manager returns these claims unpaid to the state and suggests that the state bill the third party directly. This situation creates an administrative problem for the state, since beneficiaries’ health plan cards generally identify only the pharmacy benefit manager and not the contracting insurer or health plan. An official in 1 state also commented that third parties created inappropriate denial reasons, such as the state’s failure to submit a copy of a Medicaid beneficiary’s health insurance card with the state’s claim. Officials in 3 states reported that third parties would not respond to their claims. An official in another state observed that third parties can ignore claims submitted to them because no penalty or requirement exists for third parties to reimburse Medicaid. Weak or problematic state or federal legislation. Officials in seven states—responding to our information request before the 2006 enactment of the Deficit Reduction Act—reported that weak or problematic state or federal legislation hindered their efforts to ensure that Medicaid was the payer of last resort; officials in two of these states were able to estimate their annual losses in this category, for a total of $17 million–$26 million. Officials suggested the need for stronger state or federal legislation, which would require third parties to pay Medicaid claims, participate in electronic data matching of coverage information, or extend the time frames for states to file claims. One state official, for example, indicated that stronger legislation, with more comprehensive requirements that third parties doing business in the state reimburse the state, would be helpful. Two other state officials indicated that an existing provision in Medicaid legislation, which requires the states to pay claims under certain circumstances even when the state is aware of other coverage, was problematic. Specifically, this requirement—intended to prevent delays in care for pregnant women and for children—requires states to pay and chase when claims are for prenatal care and preventive pediatric services and when services are provided to a minor for whom the state is enforcing a child-support order against a noncustodial parent. The President’s fiscal year 2007 budget included a legislative proposal to change this requirement. Under the proposal, states would be allowed to avoid costs, rather than pay and chase, for claims for prenatal and preventive pediatric services when a third party is responsible through a noncustodial parent’s obligation to provide coverage, if the states ensure protection for providers and beneficiaries. Although in most cases—21 of 35 states that reported problems collecting from third parties or their contractors—state officials we contacted were unable to estimate the losses to Medicaid due to problems collecting from third parties, the total losses could be sizable. The private consulting firm that works with states reported collecting $60 million for states in 2005 by rebilling third parties for previously unprocessed claims. According to state officials and CMS, many states do not have the resources to follow up repeatedly on claims that have been rejected or otherwise unpaid and so potentially suffer annual losses in the millions of dollars. The Deficit Reduction Act addresses some of the problems reported by state officials. For example, the new law adds to the existing list of entities that may be considered third parties certain entities that were previously not specifically listed, including “self-insured plans”; “managed care organizations”; “pharmacy benefit managers”; and “other parties that are, by statute, contract, or agreement, legally responsible for payment of a claim for a health care item or service.” In addition, the law requires states to have in effect laws requiring certain specified entities, as a condition of doing business in their state, to provide the state, upon request, with coverage and other data, including information on the nature of coverage and the periods of time during which individuals or their spouses or dependents were covered; accept the states’ right of recovery for services and assignment of a Medicaid enrollee’s right to payment by those entities or organizations; respond to inquiries by the state regarding a claim for payment submitted within 3 years after the date a service was provided; and agree not to deny a claim submitted by the state solely on the basis of the date of submission of the claim, the type or format of the claim form, or failure to provide proper documentation at the time of service, as long as the claim is submitted by the state within 3 years of the service date and the state enforces its rights with respect to the claim within 6 years of submitting it. Officials from some states and the private consulting firm that works with states told us that the act’s requirements may help alleviate states’ reported problems with verifying coverage information, time limits for filing claims, and certain third parties’ lack of response or cooperation with claims submitted for payment—three of the problems most often reported by states responding to our questions. Losses due to these problems can be substantial: in response to our information request, 30 states estimated such losses at collectively more than $120 million annually. The private consulting firm reported that, after discussing with pharmacy benefit managers the new Deficit Reduction Act provision related to time limits for filing claims, the firm agreed to loosen its own time frames for filing, resulting in an estimated $2 million dollars in savings for outstanding claims. Because the Deficit Reduction Act requires states to have legislation in effect to implement the new provisions, it is too soon to assess the extent to which the act will address the problems that states reported to us. Further, we identified two issues that require resolution in order to aid states in complying with the act’s requirements: First, the time frame by which states must have their laws in effect is uncertain because of an apparent inconsistency within the Deficit Reduction Act concerning the effective date of that provision. Specifically, the section of the law that determines the date by which states must have these laws in effect references a section of the law that does not exist. In June 2006, CMS officials said they had not determined how to interpret the apparently inconsistent language and whether legislation would be necessary to resolve it. Until this determination is made, states may be uncertain as to the date by which they must comply with this requirement of the Deficit Reduction Act. Some state legislatures, for example, may act upon new Medicaid requirements such as this one only upon notification of a specific implementation date. Second, there is also some disagreement in the industry as to whether the statutory provisions regarding the requirement to provide states with coverage and other information apply to certain entities. According to CMS and officials from the private consulting firm, some entities, such as certain pharmacy benefit managers and plan administrators, have indicated that the requirement that states have laws in effect to require reporting of coverage and related information does not apply to them. For example, private insurers and health plans may hire pharmacy benefit managers and plan administrators to process the claims—that is, to pay the claims on their behalf—and the pharmacy benefit managers and plan administrators may not view themselves as “legally responsible for payment of a claim for a health care item or service.” Without cooperation from these contracted entities in sharing coverage information and in paying claims, states may continue to have many of the problems they reported. CMS officials said that they had met with trade associations representing pharmacy benefit managers and plan administrators to discuss and obtain input about these entities’ responsibilities under the Deficit Reduction Act. With regard to both provisions, in June 2006, CMS officials said that they were determining how best to help states implement the new requirements. The agency was reviewing how to interpret the law to address both the effective date for the requirement to have state legislation in effect and which entities are covered by requirements to provide states with information on coverage and other matters. The effectiveness of the Deficit Reduction Act’s third-party liability provisions in addressing the problems that states identified may depend on the guidance CMS issues and in what manner states carry out the new law’s provisions. In an era of fiscal pressure on both federal and state budgets, it is important to ensure that Medicaid is administered as efficiently and effectively as possible. States have a key role in Medicaid’s successful administration, including efforts to ensure, as Congress intended, that Medicaid does not pay for services when other sources of health care coverage are available. With an estimated 13 percent of Medicaid beneficiaries having private health coverage available to them, significant savings can accrue to both the federal government and the states when states are able to avoid costs and recover payments from liable third parties. We found, however, that states often encounter problems in identifying beneficiaries’ private health coverage and in collecting payments from liable third parties. The Deficit Reduction Act includes provisions related to some of the states’ concerns, and CMS could facilitate states’ efforts to implement the act’s requirements by providing guidance to states as to the time frame under which states must have their laws in effect and the types of entities to which the law applies. To resolve issues that are critical to the implementation of the Deficit Reduction Act’s third-party provisions and to assist states in their efforts to ensure that Medicaid is the payer of last resort, we recommend that the Administrator of CMS take the following two actions: Determine and provide guidance to states with regard to the time frames by which states must have in effect laws that implement relevant third- party requirements of the Deficit Reduction Act. Determine and provide guidance to states with regard to the entities covered by the Deficit Reduction Act’s requirements to provide states with coverage and other information. We provided a draft of this report to CMS for comment and received a written response from the agency (reproduced in app. II). The agency acknowledged that our report identified many of the challenges state Medicaid agencies face in attempting to ensure that Medicaid is the payer of last resort. CMS concurred with both recommendations and said that the agency planned to issue a decision with respect to the effective implementation date of, and the entities covered under, the Deficit Reduction Act. CMS also provided technical comments, including a comment that the report should clarify discussions regarding the provision of both coverage and eligibility data. We clarified our text to indicate that in this report we refer collectively to the process of determining the eligibility period and the services that are covered as “verifying health coverage.” We made a corresponding clarification to our recommendation. Other technical comments were incorporated as appropriate. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Administrator of the Centers for Medicare & Medicaid Services, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff members have any questions, please contact me at (202) 512-7118 or allenk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are acknowledged in appendix III. ppendix I: GAO’s Analysis of the Current urvey Conducted by the U.S. To assess the extent to which Medicaid beneficiaries have private health coverage, we analyzed the Annual Social and Economic Supplement of the Current Population Survey (CPS), conducted by the U.S. Census Bureau for the Bureau of Labor Statistics. This appendix describes CPS, our analysis of CPS, and our results. CPS is designed to represent a cross section of the nation’s civilian noninstitutionalized population. The sample provides estimates for the nation as a whole and serves as part of model-based estimates for individual states and other geographic areas. The supplement is designed to estimate family characteristics, including health coverage, during the previous year. In 2005, about 84,700 households were included in the sample for the Annual Social and Economic Supplement, with a total response rate of about 83 percent. In 2004 about 84,500 households were included with a total response rate of 84 percent. The totals for 2003 were approximately 81,000 and 85 percent, respectively. Each March, CPS gathers information about health coverage that respondents had at any time during the previous calendar year, including government health coverage such as Medicaid and private health coverage such as coverage provided through an employer or union (employment- based health coverage) and coverage directly purchased by the beneficiary (individual health coverage). CPS also asks for the number of months that beneficiaries had Medicaid coverage during that same year. Research has shown that health coverage is underreported in CPS for a variety of reasons; for example, many people may be unaware that a health insurance program covers them or their children if they have not recently used covered services. In addition, CPS underreports Medicaid coverage compared with enrollment and participation data from the Centers for Medicare & Medicaid Services. We analyzed data from the Annual Social and Economic Supplement to CPS from 2003 through 2005, which asked about health coverage during the prior year (2002 through 2004). To prepare official statistics from CPS on type of health insurance coverage, CPS identifies Medicaid beneficiaries by analyzing responses from multiple questions about whether the respondent had Medicaid at any time during the prior year. One of these questions has a related field allowing respondents to report the number of months that Medicaid coverage was provided. To identify individuals who had Medicaid and private health coverage concurrently in the same year, we focused our analysis on individuals who responded positively to the one Medicaid question and also reported having Medicaid coverage in all 12 months of the year. Specifically, we selected individuals who reported that they were covered by Medicaid for the entire prior year and determined the percentage of these Medicaid beneficiaries who reported that they also had employment-based health coverage or individual health coverage at some point in the prior year. To assess the reliability of the CPS data, we discussed with officials from the Census Bureau’s Poverty and Health Statistics Branch the use of this definition of Medicaid beneficiaries, and we reviewed the Census Bureau’s data quality-control procedures and related documentation. We determined that the data were sufficiently reliable for the purposes of this report. For additional information on Census efforts to ensure the reliability of CPS data—including adjustment for nonresponse, controls on nonsampling error, computing composite weights, estimation of variance, and derivation of independent population controls—see U.S. Department of Labor, Bureau of Labor Statistics; and U.S. Department of Commerce, U.S. Census Bureau, Current Population Survey: Design and Methodology, Technical Paper 63RV (Washington, D.C.: March 2002), http://www.bls.census.gov/cps/tp/tp63.htm (downloaded April 13, 2006). Updated survey information is available on the Web at http://www.bls.census.gov/cps. Because CPS is a probability-based sample, estimates derived from it are subject to sampling error: slightly different estimates can result from different samples. We expressed our confidence in the precision of the particular samples’ results as 95 percent confidence intervals (i.e., plus or minus 4 percentage points). This confidence interval is the interval that would contain the actual population value for 95 percent of the samples that could have been drawn. We used CPS’s general variance methodology in the technical documentation to estimate this sampling error for our 3-year average, reported as confidence intervals. All CPS percentage estimates contained in this report have 95 percent confidence intervals within plus or minus 7 percentage points of the estimate itself. In addition to the contact mentioned above, Katherine M. Iritani, Assistant Director; Ellen W. Chu; Kevin Dietz; Kevin Milne; Jill M. Peterson; and Terry Saiki made key contributions to this report. | Medicaid, jointly funded by the federal government and the states, finances health care for about 56 million low-income people at an estimated total cost of about $298 billion in fiscal year 2004. Congress intended Medicaid to be the payer of last resort: if Medicaid beneficiaries have another source of health care coverage--such as private health insurance or a health plan purchased individually or provided through an employer--that source, to the extent of its liability, should pay before Medicaid does. This concept is referred to as "third-party liability." When such coverage is used, savings accrue to the federal government and the states. Using data from the U.S. Census Bureau and the states, GAO examined (1) the extent to which Medicaid beneficiaries have private health coverage and (2) problems states face in ensuring that Medicaid is the payer of last resort, including the extent to which the Deficit Reduction Act of 2005 may help address these problems. On the basis of self-reported health coverage information from the Census Bureau's annual Current Population Surveys covering the 2002 through 2004 time period, an average of 13 percent of respondents who reported having Medicaid coverage for the entire year also reported having private health coverage at some time during the same year. This coverage most often was obtained through employment rather than purchased by individuals directly from an insurer: employment-based coverage averaged 11 percent nationwide, while individual coverage averaged 2 percent. Problems states have faced in ensuring that Medicaid is the payer of last resort fall into two general categories: verifying Medicaid beneficiaries' private health coverage and collecting payments from third parties. Officials from 27 of 39 states responding to GAO's request for information about the top three problems they faced reported problems in verifying beneficiaries' private health coverage--a key step states must take to avoid paying claims for which a third party is liable. In cases where states have paid claims before identifying that other coverage was available, states must seek payment for the claims they have already paid. Officials from 35 responding states had problems collecting such payments. Provisions in the Deficit Reduction Act of 2005 require states to have laws in effect that could help address some of the reported problems, but it is too soon to assess the extent to which the problems will be addressed. Further, GAO identified two issues that require resolution in order to aid states in complying with the Deficit Reduction Act's requirements, specifically, (1) the time frame by which states must have their laws in effect, and (2) which entities are subject to certain of the act's requirements. Regarding both issues, officials from the Centers for Medicare & Medicaid Services (CMS), which oversees Medicaid, said in June 2006 that they were considering how to interpret the law and how to best provide guidance to states to help them implement the requirements. |
The Bureau has less than two years until Census Day. To ensure a successful census, sound risk management will be crucial, particularly given its scope, magnitude, and immutable deadlines of the census. The size of the decennial operation means that small problems can magnify quickly, and big problems could be overwhelming. For example, 60 seconds might seem like an inconsequential amount of time, but in 2000, if enumerators had spent just 1 minute more at each household during nonresponse follow-up, almost $10 million would have been added to the cost of the census. Further, sound risk management is important to a successful census because many risks are interrelated, and a shortcoming in one operation could cause other operations to spiral downward. For instance, a low mail response rate would drive up the follow-up workload, which in turn would increase staffing needs and costs. Of course, the reverse is also true, where a success in one operation could positively affect downstream operations. Nevertheless, rigorous up-front planning and testing, as well as risk mitigation plans, are the best ways to stave off problems. Finally, the census is conducted against a backdrop of immutable deadlines; the census’ elaborate chain of interrelated pre- and post-Census Day activities is predicated upon those dates. To meet legally mandated reporting requirements, including delivery of population counts to the President on December 31, 2010, census activities need to take place at specific times and in the proper sequence. On May 8, 2008 the Bureau issued its plans for conducting the 2010 Census paper-based nonresponse follow-up operation outlining key operational decisions. Among these is the need to develop an information system to manage the workload for a paper-based nonresponse follow-up operation and for additional field infrastructure, such as more telephones and computers to support this operation, to restructure the replacement mailing and the removal of late mail returns from the nonresponse follow- up workload, as well as the need for cognitive testing of the enumerator questionnaire used to collect data from nonrespondents. The contractor carrying out the FDCA program will develop the operations control system, which is designed to manage field operations that rely on paper as well as those that rely upon the handheld computers. The Bureau is particularly concerned about this system because when it was tested as part of earlier dress rehearsal operations—for example, during group quarters validation—it was found to be unreliable. As a result, the workload for these operations had to be supplemented with additional paper-based efforts by local census office staff, instead of electronically as intended. The operations control system is critical because it is intended to provide managers with essential real-time information such as enumerator productivity and the status of workload such as interviews conducted and remaining. Bureau officials said that the manual workaround was manageable for the dress rehearsal with just two local census offices; however, such a manual workaround would be nearly impossible to do when operations are carried out nationwide next year. Officials said that they expect to review computer screen shots of the operations control system reports it will use to manage the nonresponse follow-up operation in January 2009; however, the Bureau has not yet determined when and how testing of the operations control system before nonresponse follow-up, which begins in April 2010, will occur. The Bureau will be using newly developed systems for integrating responses and managing nonresponse follow-up workload that have not yet been fully tested in a census-like environment. The Bureau’s contract for the Decennial Response Integration System, designed to help identify households that have not yet returned census forms and to collect the results from enumerators conducting nonresponse follow-up interviews, will process each mail return and enumerator questionnaire and transmit to the FDCA program the number of questionnaires received. In turn, FDCA will manage the nonresponse follow-up workload, in part by removing initial late mail returns from the list of housing units requiring follow-up visits. Consequently, depending on time and cost considerations, Bureau officials believe that the Bureau must conduct, at a minimum, a small scale simulation of the integration and communication between the Decennial Response Integration System and FDCA for such aspects as load testing for a paper-based operation, and interfaces such as when the paper is processed by the Decennial Response Integration System and when the check-in status is transmitted to individual local census offices through management reports processed by the FDCA program. When or how these tests will be completed is not clear. The Bureau’s plans for nonresponse follow-up will also require changes in local census office infrastructure. The Bureau expects it will need additional hardware, including printing and scanning equipment, computers, and telephones. Further, the Bureau expects to scale the FDCA network to support a system for keying in large volumes of data related to hiring and payroll for over 700,000 field workers it plans to hire for the nonresponse follow-up operation. Previously, the Bureau expected to maintain field worker time reporting using the handheld computer. Also, the Bureau expected to hire fewer field workers. The Bureau’s redesign has also changed the replacement mailing strategy which will be used in 2010. The replacement mailing is a second mailing sent to nonresponding households. Testing has shown that a second mailing increases the overall response rate and reduces costs by increasing the number of returns that come in by mail, decreasing the need for census field workers to collect census data in person. Prior to the redesign, the Bureau planned to send second mailings to all nonresponding households that initially received the census form in the mail. However these plans changed, in part because, according to the Bureau, without using handheld computers for nonresponse follow-up, it would not be able to dynamically remove late mail returns—including those resulting from the replacement mailing—from the enumerator assignments on a daily basis. The Bureau had to devise a way to balance the time available to print replacement questionnaires with the time available to remove late mail returns from the paper-based nonresponse follow-up workload. The Bureau now plans a multi-part approach. First, it will send approximately 25-30 million blanket replacement mailings to census tracts with low response rates, based on historical response rate data from 1990 and 2000 Census and the American Community Survey. As a result, all housing units in these selected census tracts would receive a second census form, regardless of whether or not they returned the initial form. Similarly, the Bureau plans to target a second mailing to an additional 15 million households in census tracts that are in the middle-range of mail response rates. Finally, the Bureau will not send a replacement mailing to households located in census tracts that previously had high mail response rates. This combination “blanket” and “targeted” mailing strategy is a new approach that will not be tested prior to the 2010 Census. If the replacement mailing does not function as planned, this strategy could confuse respondents in the blanket mailing areas and result in multiple responses from the same household that return both forms. It is instructive to consider that the Bureau’s previous experience with a blanket second “replacement” questionnaire sent to all housing units located in the 1998 dress rehearsal sites caused a significant number of households with multiple responses. As a result, the replacement mailing was dropped from the 2000 Census design because the Bureau was concerned that it would have been overwhelming to process multiple census responses during the actual census. Moreover, without the benefit of implementing nonresponse follow-up during the dress rehearsal, the Bureau will not know how well its new system for removal of late mail returns will work. While the Bureau encourages respondents to mail back their census forms quickly, some are not returned until the middle of April or later, after the nonresponse follow-up operation has begun. To reduce the cost of nonresponse follow- up and to minimize respondent burden, it is beneficial to the Bureau to remove these late mail returns from the nonresponse follow-up universe. Because nonresponse follow-up will be paper-based rather than conducted with handheld computers, the Bureau will remove late mail returns with the FDCA program prior to April 20 and manually thereafter; however, the recent Bureau plans provide only timelines for removing late mail returns and the Bureau has not yet finalized the workload estimates or how it will manage this work. Not having an opportunity to rehearse its strategy for removing late mail returns makes difficult any estimate of resulting workload. In addition, Bureau officials said that it will be important to conduct cognitive testing of the questionnaire used by enumerators for nonresponse follow-up. With the change from using handheld computers, a paper questionnaire will be used by census enumerators in the 2010 nonresponse follow-up when making personal visits to housing units to collect census data. When developing this questionnaire, the Bureau plans to draw upon its extensive research and testing of interviewer-conducted questionnaires developed for other censuses and surveys as well as lessons learned in Census 2000. According to its May 8, 2008 plans for conducting the paper-based nonresponse follow-up, the Bureau will conduct this cognitive and usability testing in early summer 2008 and the testing will address both respondent interactions and ease of use for the census enumerators. The Bureau expects the questionnaire will have space for up to six people as in Census 2000 and will link other household members to the address via a continuation form; include coverage questions; meet the Decennial Response Integration System data capture specifications; and collect data on the outcome of the enumeration. Not being able to test the paper-based nonresponse follow-up in the 2008 Dress Rehearsal introduces risk because the dress rehearsal will no longer be a dry-run of the decennial census. While the Bureau has carried out a paper-based follow-up operation in the past, there are now new procedures and system interfaces that, as a result of its exclusion from the dress rehearsal, will not be tested under census-like conditions. We discussed the nonresponse follow-up plan with Bureau officials and they acknowledge the importance of testing new and changed activities of nonresponse follow-up as well as system interfaces to reduce risk. However, because plans have changed for many aspects of the nonresponse follow-up operation, Bureau officials are uncertain about testing and are still trying to determine which activities and interfaces will be tested and when that testing will occur. It is important to note that the Bureau has taken some important initial steps to manage the replannning effort. For example, the Bureau has added temporary “action officers” to its 2010 governance structure. As of April 17, 2008, six action officers had been identified to achieve the six objectives in its Recovery Plan—nonresponse follow-up replan, reduce FDCA risk, improve communications, document decennial program testing, improve program management, and baseline an integrated schedule. Each action officer is assigned to one of the objectives. These action officers are intended to be catalysts, liaisons, and facilitators responsible for ensuring that the tasks and milestones for each objective are met. Also, the action officers meet with the Associate and Assistant Directors to facilitate quick decision-making and on a regular basis provide updates on the status of plans. Weekly, the Bureau’s Director meets with the Department of Commerce’s Deputy Secretary to discuss the status of the replan for the 2010 Census. The Bureau has also issued documents that describe actions it will take to identify and manage risk. The Bureau’s 2010 Census Program Management Plan, issued May 5, 2008, contains information about the risk management process and notes that 24 program-level or high level-risks have been identified, were currently being validated, and that each of these 24 risks would have either mitigation or contingency plans associated with them. However, according to Bureau officials, these 24 risks were associated with an automated operation and the Bureau had not yet developed risks related to the paper-based nonresponse follow-up operation. We requested information on these 24 risks, and on June 4, 2008, the Bureau provided us with an updated program-level risk document. The update now includes 25 program-level risks and identifies several risks related to the redesign including late design changes and testing. However, the Bureau has not updated project-level risks—which are risks specific to an operation or system—for nonresponse follow-up since the change to paper was announced. Once the Bureau provides project-level risk documents, we will assess the Bureau’s actions to identify, prioritize, and manage risk for the replanned nonresponse follow-up operation. The Bureau has taken steps to strengthen the FDCA program office leadership and expertise. The Bureau has recently assigned an experienced Bureau manager to manage the FDCA program office. According to the Bureau, the manager has extensive experience in directing major IT projects. The Bureau has also hired an outside IT expert, to provide advice and guidance to the FDCA program office. The Bureau has also implemented key activities to help improve management and transparency of contractor activities. Bureau officials have established a schedule for daily assessment meetings with contractor personnel; are conducting weekly status assessment and resolution meetings with the Deputy Director and Director; and are holding regular meetings with the Department of Commerce. The Bureau has obtained cost estimates for FDCA from both Harris and MITRE, based on the recent changes to the scope of the program. In particular, these cost estimates include the January 16, 2008 requirements and the decision for a paper-based nonresponse follow-up operation. Harris is estimating that the revised FDCA program will cost roughly $1.3 billion; however, this cost estimate is preliminary and expected to be further refined. At the direction of the Bureau, MITRE developed an independent government cost estimate in April 2008. MITRE’s estimate is about $726 million, which is nearly $600 million less than the contractor’s rough order of magnitude estimate. A comparison of the two estimates reveals significant differences in two areas: software development and common support. In particular, Harris is estimating that software development will be about $200 million greater than MITRE’s independent estimate; and that common support will be about $300 million greater than MITRE’s estimate. Software development ($200 million difference): MITRE officials noted that these differences could be attributed to different assumptions based on abnormal software development (such as starts and stops due to budget instability), labor rates used, amount of additional staff needed in order to maintain the schedule and to address quality and testing issues, as well as cost contingency reserves. Common support ($300 million difference): Although this program element contains the largest cost difference, MITRE officials noted that they could not identify the primary cost drivers that caused the gap. However, possible explanations could be cost contingency reserves that may have been built into the Harris estimate, labor rates used, unexpected high level of change management personnel resulting from budget and requirements changes, and other potential impacts on management resulting from program instability. Harris had originally planned to deliver the cost estimate by August 20, 2008. However, the Bureau requested that this estimate be delivered sooner and Harris recently agreed to deliver this cost estimate by July 15, 2008. The Bureau and contractor plan to reconcile and agree to a final estimate by August 15, 2008. We plan to analyze the independent cost estimate and the Harris final estimate for the program. As part of this analysis, we intend to evaluate the methodology, as well as underlying assumptions, used to develop each estimate. The Bureau needs to act swiftly to finalize the FDCA program’s cost estimate and renegotiate the contract. In particular, it will need to have a final cost estimate from Harris in mid-July, and will need to reconcile this estimate with MITRE’s independent estimate thoroughly and quickly to have a final cost estimate by August 15, 2008. Our body of work on the lessons learned on other major IT acquisitions, highlights the importance of establishing realistic cost estimates (through reconciliation of program and independent cost estimates), using fixed price contract techniques for low risk procurement areas, where appropriate, and establishing management reserve funds for unexpected costs. In moving forward, it is important that the Bureau exercise diligence in finalizing the contract terms to ensure that the FDCA program is conducted in a timely and efficient manner for the 2010 decennial. The Bureau designed its 2010 Census Integrated Schedule, dated May 22, 2008, to provide information on its schedule framework and activity-level design as well as to describe the program complexity and methods that the Bureau will use to manage the 44 interdependent operations, incorporating over 11,000 unique activities, to conduct the 2010 Census. The Bureau briefed committee staff and us on this final integrated schedule last week. Based on this briefing and our preliminary review of the schedule, we can offer some observations. The integrated schedule does identify activities that need to be accomplished for the decennial and the Bureau establishes milestones for completing tasks. However, the schedule does not link those activities with associated risks nor does it capture the cost of operations. We previously recommended to manage the 2010 Census and contain costs, the Bureau develop a comprehensive, integrated project plan for the 2010 Census that should include risk and mitigation plans, updated cost estimates, and detailed milestones that identify all significant relationships. We also observed that testing the handheld computer that will be used in the address canvassing operation—an activity we have previously identified as important in mitigating risks associated with use of new technology—overlapped with its deployment. Specifically, in describing the testing and integrating of handheld computers for the address canvassing operation, the schedule indicates that this activity will begin in December 2008 and be completed in late March 2009; however, the deployment of the handheld device for address canvassing will actually start in February 2009, before the completion of testing and integration. It would appear uncertain that the testing and integration milestones would permit modification to technology or operations prior to the onset of operations. Further, the Bureau’s integrated schedule does not specifically define testing (e.g., system, integration, and end-to-end). Separately, the Bureau on June 6, 200 produced a testing plan for the address canvassing operation. On May 22, 2008, the Bureau also issued the 2010 Census Key Operational Milestone Schedule. This represents a higher level summary of key operations and is linked to the more exhaustive integrated schedule. The Bureau identified about 175 activities that it considers key and that are used by senior management to oversee the 2010 Census. However, there are several notable exceptions to this schedule of key operational milestones. For example, there is no key milestone for identification of program and project risks in light of the significant change in planned operations, nor for developing necessary mitigation or contingency plans. Including key milestones for risk identification and mitigation in its high- level schedule will enable the Bureau to stay focused on activities which can directly impact the quality or cost of the 2010 Census. Nor does the schedule include a milestone for when testing of key activities related to nonresponse follow-up will take place. This is despite the fact that this represents the single largest field operation and will not be part of a dress rehearsal. The Bureau does recognize that it could include in its high-level summary schedule a key milestone for nonresponse follow-up testing activities. Further testing schedules for address canvassing and the operations control system also do not appear as key milestones, though they do appear in the detailed integrated schedule. Including these critical activities as part of the list of key milestones could ensure greater management attention, as well as help in focus oversight. We are currently reviewing in greater detail the summary and integrated schedule of milestones and the recently revised program-level risk document provided on June 4, 2008. In summary, the Bureau has taken some important steps toward managing the changes it plans for conducting the 2010 Census. Yet much remains uncertain and in the absence of a full dress rehearsal, the risks to a successful decennial census are substantial. Risks are especially high for the 2010 Census nonresponse follow-up operation both because the Bureau will not reap the benefits of having a dress rehearsal for this key operation but also because it is changing its approach late in the decade. These make even more compelling the need for the Bureau to specify what tests it plans to conduct in the absence of a dress rehearsal and when such testing will take place. The Bureau will also need to take several next steps to finalize the FDCA program’s cost estimate. In particular, it will need to have a final cost estimate from Harris, as soon as possible, in order to have a sufficient amount of time to complete modifications to the contract by the end of the fiscal year. Our body of work on the lessons learned on other major IT acquisitions, highlights the importance of establishing realistic cost estimates (through reconciliation of program and independent cost estimates), using fixed price contract techniques for low risk procurement areas, such as hardware, and establishing management reserve funds for unexpected costs. In moving forward, it is important that the Bureau exercise diligence in finalizing the contract terms to ensure that the FDCA program can be conducted in a timely and efficient manner. Finally, the Bureau has developed a detailed integrated schedule of activities that need to be conducted during the 2010 Census and established milestones for completing them. It will be important for the Bureau to ensure that among the key milestones and activities that are highlighted for management and oversight are those that represent the greatest impact on the ultimate cost and quality of the 2010 Census. Mr. Chairmen and members of the committee and subcommittee, this concludes our statement. We would be happy to respond to any questions that you or members of the subcommittee may have at this time. If you have any questions on matters discussed in this testimony, please contact Mathew J. Scirè at (202) 512-6806 or David A. Powner at (202) 512- 9286 or by email at sciremj@gao.gov or pownerd@gao.gov. Other key contributors to this testimony include Carol Cha, Betty Clark, Vijay D’Souza, Sarah Farkas, Richard Hung, Andrea Levine, Catherine Myrick, Lisa Pearson, Cynthia Scott, and Niti Tandon. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | On April 3, 2008, the Secretary of Commerce announced significant changes to how the Census Bureau (Bureau) would conduct nonresponse follow-up, its largest field operation, in which census workers interview households that do not return initial census forms for the 2010 decennial census, and to its Field Data Collection Automation (FDCA) contract. The Bureau has since issued a redesigned plan to conduct a paper-based follow-up operation, an integrated 2010 Census project schedule, and is working on revising the FDCA contract. These are major changes late in the decennial census cycle. This testimony discusses (1) the Bureau's plans for conducting a paper-based nonresponse follow-up operation, (2) management of the FDCA contract and its latest cost estimates, and (3) the status of the Bureau's integrated 2010 project schedule. This testimony is based on past work, recent interviews with Bureau officials, and a review of redesign documents. The Bureau has taken important steps to plan for a paper-based nonresponse follow-up operation, but several aspects remain uncertain. On May 8, 2008, the Bureau issued a paper-based nonresponse follow-up plan that details key components of the operation and describes processes for managing it and other operations. However, the plan envisions using an information system to manage the field operation workload, which experienced significant problems when tested earlier in the dress rehearsal. These problems make it more critical to test the system's capabilities for supporting the nonresponse follow-up operation. The Bureau will also institute new strategies--through second mailings and a new approach to remove late mail returns--but has only tested some aspects of these operations and will be unable to test them in a dress rehearsal, making it difficult to estimate their impact on operations in 2010. Ideally, the dress rehearsal should test almost all of the operations and procedures planned for the decennial under as close to census-like conditions as possible. Bureau officials expect that some small-scale testing will occur, particularly integration testing for its operations control system and cognitive testing of the forms used by enumerators for nonresponse follow-up, but what will be tested and when is not yet certain. The Bureau has taken several positive steps to address FDCA program management and oversight, but cost estimates need reconciling. The Bureau has taken actions to strengthen the FDCA program office leadership and expertise. To lead the program office, the Bureau has assigned an experienced Census program manager and hired an outside information technology expert to provide executive level guidance. The Bureau has also taken actions to improve communications and transparency of contractor activities. Further, the Bureau has obtained an independent government cost estimate based on the changes to the FDCA program's scope, which is nearly $600 million less than the contractor's rough order of magnitude estimate. After the contractor develops its detailed cost estimate, then the Bureau will need to reconcile the two cost estimates and renegotiate the contract. The Bureau will need to ensure that the final contract modifications and terms allow for FDCA program activities to be conducted in a timely and accurate manner for the 2010 decennial census. The Bureau's integrated schedule, dated May 22, 2008, identifies over 11,000 activities and milestones for the census. There is overlap in the testing and deployment schedule for the handheld device that will be used to collect address data in the field. Further, the Bureau's summary of key milestones does not include a milestone for when testing of key activities related to nonresponse follow-up will take place. Such milestones are important because nonresponse follow-up is the single largest field operation and will not be part of a dress rehearsal. The Bureau recognizes that it could include a key milestone for nonresponse follow-up testing activities. GAO is reviewing in greater detail the summary and integrated schedule of milestones and a summary of program risks provided on June 4th. |
The administration of federal elections is a massive enterprise, conducted primarily at the state and local level, under applicable state and federal voting laws. Responsibility for holding elections and ensuring that each voter has the ability to fully participate in the electoral process—including registering to vote, accessing polling places or alternative voting methods, and casting a vote—primarily rests with state and local governments, with regulation and oversight from states and the federal government. Each state establishes the requirements for conducting local, state, and federal elections within the state. For example, states regulate such aspects of elections as ballot access, absentee voting requirements, the establishment of voting places, provision of Election Day workers, and the counting and certification of the votes. The states, in turn, have typically delegated responsibility for administering and funding state election systems to the more than 10,000 local election jurisdictions nationwide. Federal laws have been enacted to cover several aspects of the voting process, including some that are designed to help ensure voting accessibility for the elderly and people with disabilities. The relevant provisions of these federal laws are primarily related to the accessibility of polling places, prohibitions on discrimination, and the allowance of voting assistance from a person of the voter’s choice. See appendix II for more detail on federal laws. Multiple federal agencies are involved with issues related to state and local governments’ administration of the election process for long-term care facilities residents, including enforcing election laws, conducting election research, and ensuring that residents’ rights are protected. Justice’s Civil Rights Division and its various sections enforce federal statutes prohibiting discrimination. Specifically, the Disability Rights Section protects the rights of persons with disabilities under the Americans with Disabilities Act of 1990 (ADA) and the Voting Section is responsible for enforcing certain federal statutes protecting voting rights, including certain protections of the voting rights of persons with disabilities, which may also include long-term care facility residents. In addition to Justice’s role, HHS administers certain provisions of statutes related to disabilities and voting. HHS’ Administration on Aging administers a long-term care ombudsman program that assists with complaints and provides advocacy for long-term care residents, while the Administration on Developmental Disabilities administers a federal grant program that distributes HAVA funds to support state and local efforts to ensure that people with disabilities have access to the election process, including grants for making polling places accessible to individuals with disabilities and providing individuals with disabilities with information about the accessibility of polling places. Also, the HHS Centers for Medicare and Medicaid Services (CMS) sets requirements for states to conduct periodic studies on nursing homes that participate in Medicare, and then collects, analyzes, and reports on this data on nursing homes, such as complaints related to residents’ choices and rights, which could include the right to vote. In addition, the EAC, which was established under HAVA, has wide- ranging duties to help improve state and local administration of federal elections. Among other things, the EAC is responsible for serving as a national clearinghouse of election-related information and a resource for information with respect to the administration of federal elections; making HAVA grants for research and development of new voting equipment and technologies, and the improvement of voting systems; and periodically conducting and making publicly available studies regarding methods of ensuring accessibility of voting, polling places, and voting equipment to all voters. In addition, EAC reported that of the payments it has provided to states, states have spent over $800 million on voting systems that comply with HAVA’s requirements for voting system standards. In 2008, the EAC published the Election Management Guidelines (EMG), which provides information on a wide range of election related topics intended to assist state and local election officials in effectively managing and administering elections, and a series of Quick Start guides, designed to highlight and summarize information contained in the chapters of the EMG. In 2007, there were almost 38 million individuals aged 65 or older and the majority had at least one chronic health condition. By 2030, those aged 65 and over are projected to grow to over 72 million individuals (see fig.1), and this group is projected to represent a quarter of the voting age population at that time. Older voters, who consistently vote in higher proportions than other voters, may face challenges exercising their right to vote because disability increases with age. Studies have shown, for example, that the risk of losing mobility doubles with every 10 years after reaching the age of 65. Moreover, it is estimated that 70 percent of people over age 65 will require some long-term care services at some point in their lives, such as residing in a nursing home or assisted living facility. Long-term care facilities provide an array of health care services for individuals who may have difficulty caring for themselves because of a range of physical or mental impairments. The support long-term care facilities provide can range from independent living with little or no personal medical care to nursing homes with 24-hour a day skilled care. While the individuals residing in long-term care facilities are most often elderly, the resident population may also include younger individuals with a disabling chronic illness, severe injury, or disease. According to the most recent National Nursing Homes Survey, in 2004, approximately 88 percent of nearly 1.5 million nursing home residents were age 65 and older. Furthermore, nearly all of these older residents were dependent upon others for assistance with at least one activity of daily living, such as bathing or dressing. Long-term care facility residents may face challenges not only with physical impairments, but also with cognitive impairments. According to CMS, in 2006, 69 percent of nursing home residents demonstrated some form of cognitive impairment, including various stages of dementia. These physical and cognitive impairments can make long- term care facility residents dependent on others—family, friends, facility staff, or election workers—for assistance in exercising the right to vote. The physical and cognitive impairments of long-term care facility residents directly affect the balance between voting participation and the integrity of the voting process. Specifically, the physical and cognitive impairments of many long-term care facility residents may make it more difficult for them to independently drive, walk, or use public transportation to get to their designated polling place. Once at the polling place, they may face challenges finding accessible parking, reaching the ballot area, and casting a ballot privately and independently. Furthermore, they often may not have a valid driver’s license or other form of government-issued photo identification that some states may require to vote. Consequently, the number of elderly people who exercise their right to vote through alternative voting methods, such as absentee, early, and Election Day mail-in ballots may grow as more elderly individuals reside in long-term care facilities. These residents may also have limited dexterity, impaired eyesight, or cognitive impairments, such as dementia, that can make them dependent on others to read or mark a ballot, regardless of where the ballot is cast. This makes them vulnerable to fraud and undue influence from relatives, long-term care facility staff, campaign workers, or candidate supporters, who sometimes provide assistance when casting their vote. Some long-term care facility staff may choose to screen residents to determine their ability to vote using a variety of methods that may include administering a formal cognitive screening test, asking election-related questions, or using prior assessments of the resident’s general mental capacity. In addition, depending on state law, some residents with cognitive impairments may also face legal limitations to their right to vote due to court determinations of mental incompetence or appointment of a legal guardian. Most states have requirements or guidance to facilitate voting for long- term care facility residents. Almost half of the states reported providing training to local election officials specifically on state requirements or guidance to facilitate voting for long-term care facility residents. Additionally, some states conducted one or more oversight activities to ensure that localities were adhering to state requirements or guidance. Some state requirements or guidance for voting in long-term care facilities may help to protect against voter fraud and undue influence, according to researchers. According to our survey, 44 states reported having at least one requirement or guidance to facilitate voting for long-term care facility residents. The most commonly reported state requirements or guidance were to require or provide guidance to election officials to provide long- term care facility residents with accommodations to assist them in absentee voting processes, provide accommodations for voter registration, and provide special accommodations to assist elderly voters in meeting voter identification requirements (see fig. 2). Eleven states reported having requirements or guidance for all three of these activities. According to researchers, without state requirements or guidelines for voting in long- term care facilities, access to voting for residents is largely determined by the practices and attitudes of the long-term care facility staff, which they noted can vary. Accommodations for absentee voting for residents of long-term care facilities was the most commonly reported type of state requirements or guidance. Specifically, 42 states reported having a requirement or guidance for accommodations for absentee voting in long-term care facilities. Some of these states required election workers to deliver absentee ballots to long-term care facilities. For example, in Iowa, election officials reported that they provided guidance to long-term care facility staff on the process of soliciting absentee ballot requests from their residents and required bipartisan election teams to deliver absentee ballots to all long-term care facilities. Other states reported mandating that election officials conduct in-person absentee voting at long-term care facilities. According to state election officials, Illinois law requires that election workers conduct in- person absentee voting at long-term care facilities one to four days before Election Day. Some states reported requiring election workers to facilitate absentee voting at long-term care facilities if a minimum number of absentee ballots are requested or if the number of registered voters residing at a facility exceeds a state-set minimum. Among the states, 24 reported having requirements or guidance to facilitate voter registration for long-term care facility residents. For example, state election officials in Maryland reported that each local election office is required to contact nursing homes and assisted living facilities to offer voter registration assistance and visit facilities with more than 50 residents to facilitate voter registration among facility residents. Election officials in the District of Columbia reported that they visit long- term care facilities several times—first for voter registration and then later for assistance with absentee ballots. Officials from two states said that some long-term care facility residents may benefit from providing accommodations or assistance in changing their voter registration from their previous address, which may be in another state, county, election jurisdiction, or precinct, to the address of the long-term care facility. Also, 16 states reported requiring or allowing special accommodations to assist elderly voters in meeting voter identification requirements. According to some researchers and election officials we interviewed, long- term care facility residents may not have a valid driver’s license or utility bill that can typically be used for identification. Some states accept alternative forms of identification from long-term care facility residents. For example, Massachusetts offers suggestions to municipalities and long- term care facility staff on the acceptable forms of identification—such as a letter from the facility staff stating the individual resides in their facility. In addition, Massachusetts election officials reported first-time voter identification requirements would not apply when they conduct in-person voter registration drives at long-term care facilities. Similarly, one South Dakota election official reported that voter identification and affidavit requirements can be waived entirely for long-term care facility residents receiving in-person absentee voting assistance from an election official at the facility. Lastly, only Puerto Rico reported requiring cognitive screening to assess the ability of a person to vote prior to the casting of his or her ballot. While most states reported that they provide general training to local election officials on assisting voters with disabilities, about half of the states reported providing training to local election officials specifically on state requirements or guidance to facilitate voting for long-term care facility residents. For example, state election officials in Puerto Rico reported that they provided local election officials with general voting accessibility training to improve the interactions between the election officials and the voter, which included sensitivity training and simulations of potential scenarios. Furthermore, 23 states reported providing targeted training to local election officials specifically on state requirements or guidance for facilitating voting for long-term care facility residents. The training that states provided varied, but, in general, included assistance in adhering to state requirements or guidance on voter registration, absentee balloting requests, and assisted absentee voting procedures for long-term care facility residents. For example, in Vermont, state election officials provided training and distributed a handbook to local election officials on guidance for facilitating absentee voting in long-term care facilities, which included information on the role of election officials, public notification requirements, election supplies and forms, the set up of mobile polling stations, and the correct procedures for returning completed absentee ballots. In South Carolina, state officials, upon request, offered a one-on- one training to county election office staff on absentee voting procedures. Connecticut provided training to local election officials on voter registration and absentee ballot application procedures, as well as absentee voting procedures. Among the states, 17 conducted one or more oversight activities to ensure localities were adhering to state long-term care facility voting requirements or following state long-term care facility voting guidance. Of this group, 11 states reported conducting visits to local election jurisdictions or long-term care facilities to monitor local actions to meet state long-term care facility requirements. In Oregon, officials reported that they visited selected localities during an election cycle to observe their practices, suggest improvements, and share best practices. In addition, 8 states reported requiring or requesting localities to report on actions taken to address state requirements or guidance to facilitate voting for long-term care facility residents. For example, in Oklahoma, each county election board reported to the State Election Board after each election the number of voters who requested a ballot in nursing homes, the number of nursing homes visited, and the number of voters who voted in nursing homes. Then, the State Election Board aggregated the information at the state level and provided statistics to the state legislature, the EAC, and the public. In addition, county election boards in Oklahoma also reported to the State Election Board any problems they encountered and what actions they took to address them. The State Election Board may use this information to revise the procedures for absentee voting. Finally, 7 states, reported requiring county officials to report the number of long- term care facility residents who voted for tracking and planning purposes for future elections. See table 1 for a list of the training and oversight activities reported by each state. Most states reported having requirements or guidance to provide absentee voting accommodations for long-term care facility residents, which according to researchers, may help local election officials protect voting integrity in long-term care settings. Because of the relatively high levels of cognitive impairments found in nursing home residents, this population requires assistance with the voting process. This assistance, however, can make the resident susceptible to fraud or undue influence. While the EAC has never completed a national study on the frequency and prevalence of voter fraud in long-term care facilities, there have been several high-profile cases and other anecdotal evidence suggesting this is an issue. Some researchers believe that absentee voting, especially by long-term care facility residents who require assistance casting their absentee ballots, is susceptible to voter fraud and undue influence. Researchers also believe that establishing requirements or providing guidance that local election officials conduct absentee voting in long-term care facilities would help to standardize efforts across facilities and protect against voter fraud. For example, according to researchers, requiring local election officials to deliver absentee ballots in person to facilities or conduct on-site absentee balloting at facilities—which some states require or allow—can decrease the likelihood of fraud and inappropriate influence by eliminating the need for assistance from influential third parties, such as long-term care facility staff, relatives, or candidate supporters. Specifically, research suggests that requiring bipartisan local election teams to deliver, collect, and assist with absentee balloting lowers the risk that election officials from a single party could unduly influence voters. In preparation for the November 2008 federal election, the EAC developed guidance—the Quick Start Management Guide on Elderly and Disabled Voters in Long Term Care Facilities—for state and local election officials on facilitating voting in long-term care facilities. In May 2008, the EAC convened a working group of academics, election officials, and other experts in the field, which we observed, to share information on facilitating voting for long-term care facility residents. The EAC developed the Quick Start guide based on the information discussed at the working group. The EAC then distributed 13,000 copies of its guidance, which focused on facilitating voting for elderly and disabled voters residing in long-term care facilities, to election officials nationally, issued a press release, and posted the guidance on its Web site. The guidance focused on the development of a plan for community outreach, coordination with long-term care facility staff, and implementation of voting assistance to long-term care facility residents; it did not address actions states or localities can take to ensure the integrity of the voting process. EAC officials told us they plan to convene a working group to develop a new chapter in the EMG on voting in long-term care facilities that would expand upon the information provided in the Quick Start guide. To date, the EAC has not collected information nationally nor conducted studies on state or local methods for identifying, deterring, and investigating fraud and undue influence in long-term care facilities; however, they told us that doing so would add value to long-term care voting nationally. According to the EAC, they have not conducted any studies because quantifying the level of voter fraud in long-term care facilities is difficult, as fraud often goes unreported and unprosecuted. However, EAC officials believe that state and local election officials could provide more education and outreach on voting rights and voter fraud to long-term care facilities, including residents’ friends and family, to help reduce the likelihood of voter fraud or undue influence. Moreover, the EAC, which has limited resources—a $16.4 million budget and fewer than 50 staff members for fiscal year 2008—stated it has devoted much of its resources to updating the Voluntary Voting System Guidelines, instituting a voting system testing and certification program, and administering and auditing HAVA funds. Localities we surveyed have taken a variety of actions to facilitate voting access and protect voting integrity for long-term care facility residents. Specifically, they reported facilitating voting for long-term facility residents by supporting facility staff in assisting residents with the voting process and through direct voting services to facility residents, some of which may help to ensure voting integrity. Most commonly, localities we surveyed reported providing early or absentee voting information or guidance to long-term care facility staff. Similarly, the seven localities we visited employed a range of strategies to facilitate and protect the voting process. Moreover, each locality we visited used a somewhat different approach for applying these strategies and some reported challenges in doing so, such as providing assistance at a reasonable cost and assisting residents with cognitive disabilities. Localities we surveyed reported taking a number of actions to facilitate the voting process in long-term care facilities. Specifically, 78 of the 92 localities responding to our survey reported taking at least one action to facilitate the voting process for long-term care facility residents. Of the responding localities, close to half (45 of 92) of responding localities reported taking three or more actions (see fig. 3). Local officials facilitated voting for long-term facility residents through actions that supported facility staff in assisting residents with the voting process and through direct voting services to facility residents (see table 2). Specifically, when supporting facility staff with the voting process, localities we surveyed reported providing support to long-term care facility staff in assisting residents with the absentee or early voting process. Over two-thirds (65 of 92) of responding localities reported providing early and absentee voting information or guidance to long-term care facility staff. For example, in Lincoln County, Kentucky, local election officials reported that they provide information on absentee voting procedures to the long-term care facility staff, including instructions on collecting the names of residents interested in absentee voting and requesting absentee voting applications to be completed and mailed back to the local election office. Researchers suggest that providing guidance to long-term care facility staff can help to ensure that residents are receiving voting assistance that is free of fraud and undue influence. In addition, a slight majority of the localities we surveyed reported delivering absentee ballots to facilities, which may help ensure that residents receive their ballots and reduce the likelihood of fraud. However, one locality reported that election officials were unable to deliver ballots to facilities because state law requires that all absentee ballots be sent by mail. Finally, close to one-third (29 of 92) of responding localities reported that they provide training to long-term care facility staff which, according to researchers, can help to ensure that facility staff are providing voting assistance that is less susceptible to fraud and undue influence. Some localities we surveyed also reported providing voting services directly to long-term care facility residents. Specifically, close to half (45 of 92) of responding localities reported bringing election officials to long-term care facilities to provide voting assistance. For example, in Montgomery County, Maryland, local election officials reported that they sent trained, bipartisan teams of election workers to long-term care facilities to help residents complete their absentee ballots. As noted earlier, for state actions to facilitate voting, some researchers suggest that bringing trained election officials to long-term care facilities can decrease the likelihood that those providing the assistance to residents will unduly influence their votes and ensure that ballots are properly cast. In addition, close to one-third (29 of 92) of the localities we surveyed also reported designating long-term care facilities as Election Day polling places, which allows residents to vote in an official polling place without having to leave their residence. However, local officials from one of these localities reported that they only designate a portion of the long-term care facilities in their election jurisdiction as polling places. Designating long-term care facilities as polling places may provide residents with increased opportunities to vote privately and independently, because HAVA requires each polling place for federal elections to have at least one voting system equipped for people with disabilities. While accessible voting systems provide opportunities for more private and independent voting, only two localities we surveyed—Miami-Dade County, Florida, and Travis County, Texas—reported bringing accessible voting systems to long-term care facilities for absentee or early voting. Furthermore, 15 localities we surveyed—including Miami-Dade County, Florida, and Travis County, Texas—reported providing long-term care facilities with demonstrations of voting systems equipped for people with disabilities, which could facilitate a greater use of these systems at Election Day polling places or for early or absentee voting at long-term care facilities by residents unfamiliar with electronic machinery. Finally, one locality we surveyed— Falmouth, Maine—reported providing long-term care facility residents with transportation to polling places on Election Day. The seven localities we visited commonly implemented targeted efforts to facilitate voting for long-term care facility residents for the November 2008 federal election. However, the characteristics of each locality’s effort varied in a number of ways, including the number of facilities receiving voting assistance, the reported cost, and the number of years the effort had been in practice (see table 3). Localities we visited employed a range of strategies to facilitate and protect the voting process—from voter registration to casting ballots—for long-term care facility residents. Specifically, these strategies included coordination with stakeholders, such as long-term care facility staff and others, deployment of election teams, and implementation of procedures to protect and ensure voting integrity. As figure 4 indicates, these strategies are generally used in conjunction with one another over a two- month period to facilitate the entire voting process—including casting a ballot—for long-term care facility residents before Election Day. While all of the localities we visited employed all three of these strategies—coordination with stakeholders, deployment of election teams, and implementation of procedures to protect and ensure voting integrity— each employed a somewhat different mix of approaches to implement its overall strategy. (See table 4) Localities we visited coordinated with stakeholders relevant to the long- term care voting process in order to develop long-term care voting efforts. For example, in one locality—Kitsap County, Washington—local election officials coordinated with a disability advisory group, that included representatives from disability advocacy organizations, to jointly identify long-term care facilities whose residents may have needed voting assistance. Kitsap County officials also consulted with the advisory group in the development of its long-term care facility voting effort, which recommended that local election workers bring accessible voting machines into facilities. In addition, four localities coordinated with state agencies to identify long-term care facilities to visit. For example, in advance of the November 2008 federal election, officials in the District of Columbia told us they coordinated with District of Columbia Department of Health to obtain a list of facilities and generated a list of registered voters at each facility from the District’s voter registration database. The localities we visited also reported coordinating with long-term care facility staff on pre-election voting activities, such as voter outreach and registration. Generally, these localities did not have election workers visit facilities to conduct voter outreach or voter registration activities, but instead relied on long-term care facility staff to facilitate the process. For example, election officials in Chicago, Illinois, told us that they delivered packets two months before Election Day to all of the long-term care facilities in the city, which included a letter explaining the city’s Nursing Home Voting Program, a list of residents who were registered to vote, new voter registration forms, absentee voting applications, and postage paid return envelopes that facility staff could use to return completed applications. Chicago election officials relied on facility staff to identify interested residents, aid residents in completing the forms, and return the materials. Providing long-term care facility staff with this type of detailed information and guidance on facilitating the voting process may help to ensure that residents are properly registered and receive an absentee ballot. Furthermore, in one locality—Washington County, Oregon— officials told us that election teams visited long-term care facilities during the election registration period to conduct a two-hour voter education presentation on voting access for people with disabilities, including information on voting rights, accessible voting systems, and resources. Election officials and long-term care facility staff in a few localities reported some challenges with coordination. For example, officials from two localities reported that maintaining program knowledge at the facility level from election to election can be difficult due to high turnover among long-term care facility staff. Election officials in Chicago addressed this potential challenge by assigning one election staff person as the central contact for all long-term care facility staff. Long-term care facility staff and election officials in two localities told us that coordinating the voter registration process with local election officials can also be difficult because of the transitory nature of residents. Although many long-term care facility residents reside in facilities for extended periods of time, one long-term care facility staff member explained that some residents may be in the hospital during the voter registration process or may reside in the facility during the registration process, but move before Election Day. Local election officials in the localities we visited deployed election teams before Election Day to provide individualized, in-person voting assistance to long-term care facility residents. To initiate the deployment of these teams, the localities we visited contacted long-term care facility staff well before Election Day to schedule a time to provide in-person voting assistance. For example, in Chicago, election officials told us that they contact facility staff about one month before the election to schedule a voting assistance visit during one of the four days prior to Election Day, as required by state law. In Multnomah County, Oregon, election officials told us they contacted facility staff to schedule a day to provide voting assistance once all mail-in ballots were mailed, which is 18 days before Election Day. To facilitate the voting process, all of the localities trained election workers or officials to provide voting assistance to people with disabilities and sent teams of election workers to selected long-term care facilities to assist individual residents in the reading, marking, and sealing of absentee, early, or other mail-in ballots. This assistance allowed residents to overcome visual, hearing, and dexterity impairments in casting their ballots. For example, in Burlington County, we observed election workers assisting a resident with hearing and dexterity impairments in completing a ballot by using a handheld white board to communicate. In general, these voting assistance activities took place in a common area in the facility, such as an activity room or library, which often provided limited privacy due to restricted space. In particular, residents often communicated ballot selections in loud voices to election workers, which may have compromised their voting privacy. In most of the localities, election teams also went to individual rooms to provide bedside voting assistance. For example, in Multnomah County, teams of election workers went to the rooms of bedridden residents to provide voting assistance. Similarly, election teams in Shelburne, Vermont, provided in-room assistance to residents living in the memory-loss unit to provide a more familiar and accommodating setting to facilitate the voting process. In some of the localities we visited, election workers providing bedside voting assistance were accompanied by facility staff to help meet resident needs during the voting process. Long-term care facility staff in some localities we visited noted that, without assistance from election teams, many of the residents in the facilities would have had to rely on facility staff, relatives, or volunteers to read, mark, and seal their ballots. In some localities we visited, local election workers and facility staff faced challenges in providing voting assistance to residents with cognitive limitations. During our observations, none of the localities we visited conducted cognitive screenings—assessing a resident’s ability to vote prior to casting a ballot by asking election-related questions or based on an assessment of a resident’s general mental capacity. Generally, election workers gave any resident registered to vote the opportunity to cast a ballot if they showed willingness and the intent to vote. Despite this approach, in some cases, residents who were registered to vote may have been unable to do so, apparently due to cognitive impairments. For example, election workers in one locality attempted to provide voting assistance to a resident who was registered to vote, but after 20 minutes the resident was unable to articulate any ballot selections. Election workers observed that she was unable to vote, but encouraged her to vote in the next election. The fluidity of residents’ health may inhibit their ability to make a choice at a specific time. While we did not observe cognitive screenings being performed during our site visits, long-term care facility staff in some of the localities performed cognitive screenings of residents before asking them to register to vote or assisting them in applying for early or absentee ballots. For example, one long-term care facility staff member explained that she did not ask residents who she deemed were cognitively unable to vote if they were interested in registering to vote. In order to determine each resident’s cognition, she tested the residents’ ability to articulate their name and awareness of their surroundings. According to researchers, if long-term care facility staff are not trained to address some of the unique issues of voting by the elderly, such as determining cognitive ability to vote, they may inadvertently disenfranchise some residents who are actually able to vote. Election officials in some localities told us that providing individual voting assistance to long-term care facility residents is resource intensive. Some local election officials told us that it was difficult to provide individualized voting assistance at a reasonable cost. For example, local election officials in one locality told us that their voting assistance funding and scope had been cut to reduce the locality’s costs. As a result, the locality no longer conducts as much voter outreach to long-term care facilities as it used to. In two other localities, election officials supplemented the cost of providing long-term care voting assistance with HAVA funds. In addition to requiring significant monetary costs per individual served, election officials and long-term care facility staff from a few localities told us that providing individual voting assistance is a very time-consuming process. Most localities brought several election teams to each facility to provide voting assistance, which generally took most of the morning or afternoon. Part of the time commitment relates to election workers having to read each ballot aloud multiple times to residents who may have hearing and/or cognitive impairments. Moreover, this process is more resource intensive for localities that require bipartisan voting assistance. For example, in one locality two election officials spent an hour with one resident reading and marking a lengthy ballot with a number of ballot measures. Officials in all seven of the localities we visited implemented various procedures to protect long-term care facility residents against fraud and undue influence. Figure 5 provides examples of protections that can help to ensure voting integrity. Most of the localities we visited provided residents with bipartisan voting assistance when deploying election teams, which consisted of teams of two election workers with different political party affiliations providing voting assistance to each resident. According to some researchers, this practice can lower the risk of one political party unduly influencing the resident. However, residents may face undue influence from others, such as facility staff and family members. For example, at one long-term care facility, a resident told the bipartisan team of election workers assisting her that she was not sure whether she could vote for the candidate she preferred because her child told her to vote for an opposing candidate. Most localities we visited also set up privacy screens on tables to shield residents’ ballots from the view of others. In addition, most localities collected completed ballots in a ballot box, and in a few cases, the boxes were locked with padlocks. Also, four localities we visited required residents to sign affidavits documenting that voting assistance was requested and noting who provided the assistance. In Chicago, the election teams included election observers from law enforcement agencies such as the U.S. Attorney’s Office or Cook County State’s Attorney’s Office. These observers generally handle and inspect affidavits for voting assistance and check poll watcher credentials. While none of the localities required residents to provide identification, in Washington County, some residents with physical impairments were able to sign their ballots using a fingerprint, which was on file at the election office. In addition, in one locality, election teams sometimes asked residents for their Social Security numbers to verify that the correct resident was receiving the ballot. Some localities implemented additional procedures, which may have helped ensure voting integrity by promoting independent voting. Election teams in Kitsap County and Washington County brought electronic accessible voting systems to long-term facilities, which provided residents with disabilities the opportunity to complete a ballot independently without election worker assistance. Chicago election teams provided residents with sample ballots to demonstrate how to complete the official ballot. We observed that this practice allowed residents and election workers to assess whether voting assistance was needed to complete the ballot. Additionally, the election team in the District of Columbia brought portable voting booths to each facility, which allowed residents to attempt to vote independently. We observed election teams in this locality allowing residents to choose whether to complete a ballot independently in the portable voting booths or with assistance from an election worker at a table. A few localities faced challenges fully implementing procedures to protect and ensure voting integrity and independence. Specifically, some local election officials told us that residents were reluctant to use unfamiliar voting methods, such as an accessible voting system. For example, we observed only one resident use an accessible voting system in the three localities we visited that reported using accessible voting systems in facilities. Election workers in two of these localities told us that the accessible voting system was seldom used by residents, who preferred one-on-one voting assistance using a paper ballot. In one instance, local election workers faced difficulties providing bipartisan assistance. In this locality, we observed election workers providing assistance to residents individually rather than in bipartisan teams in order to provide assistance more quickly to the growing number of residents waiting to vote. Many states and local jurisdictions appear to be moving in the direction of facilitating voting for long-term care facility residents, primarily older voters, by providing alternative voting methods, such as absentee or early ballots and, in some cases, Election Day mail-in ballots. However, at the same time, states and localities vary in the extent to which they ensure that the ballots of these voters in long-term care facilities are not fraudulently completed by someone else, or that these voters are not subjected to undue influence by facility staff or family members. The EAC’s plans to develop a new chapter in the EMG on voting in long-term care facilities is a step in the right direction, but remains a work in progress. For the future, state and local accommodations to address physical and cognitive disabilities of long-term care facility residents will directly affect the balance between voting access and the integrity of the voting process. That is, providing accommodations to facilitate voting for long-term care facility residents has advantages for these residents by increasing their access to vote, but can also present challenges for election officials. Officials must balance providing increased access to voting with ensuring that ballots are cast by the appropriate voter, and completed without undue influence from long-term care facility staff, relatives, or other politically interested parties. A number of localities we visited have taken some actions that attempt to strike this balance. We acknowledge that facilitating voting for long-term care facility residents can be a costly and challenging undertaking, but given the increasing size of the elderly population, it will become progressively more important to implement cost-effective approaches to meet the growing demand for voting accommodations and assistance outside of traditional polling places. Further guidance on how to cost-effectively provide greater voting access for long-term care facility residents, while also ensuring voting integrity, may assist some states and localities in providing voting access and reducing opportunities for fraud and undue influence of a vulnerable and dependent population. However, to the extent that states and localities do not have the opportunity or resources to learn from each other’s success and challenges, progress across the nation could be hampered. We recommend that, as the EAC works with stakeholders to develop guidance on voting in long-term care facilities, the EAC also collect and disseminate information on cost-effective promising practices for providing voting access while also ensuring voting integrity. We provided a draft of this report to EAC, HHS, and Justice for review and comment. In its comments, EAC indicated agreement with our findings and recommendation. Specifically, EAC stated that it shared our concern that current voting practices in long-term care facilities must be improved and enhanced, and indicated that it plans to produce a full chapter on this topic for its EMG on serving voters in long-term care facilities. HHS and Justice provided no formal comments. HHS provided technical comments, which we incorporated into the report as appropriate. EAC’s comments are reproduced in appendix III. We are sending copies of this report to the EAC, HHS, Justice, relevant congressional committees, and other interested parties. In addition, the report will be made available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact Barbara D. Bovbjerg at (202) 512-7215 or bovbjergb@gao.gov, or William O. Jenkins at (202) 512-8777 or jenkinswo@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix VI. Our objectives were to identify the actions taken to facilitate and protect voting for long-term care facility residents at (1) the state level and (2) the local level. For both of our objectives, we interviewed officials of the Department of Justice (Justice), the Department of Health and Human Services (HHS), national organizations that represent election officials, and multidisciplinary researchers. We also reviewed relevant federal laws, regulations, guidance, and other documentation. We did not analyze state requirements or guidance, but instead relied on states’ responses to our survey. In addition, we interviewed officials at the Election Assistance Commission (EAC) and reviewed EAC guidance on facilitating voting in long-term care facilities. We interviewed multidisciplinary researchers in the area of long-term care voting and reviewed relevant literature to identify practices at the state and local level that may facilitate voting in long-term care facilities while ensuring voting integrity. To obtain information on state actions, we administered a Web-based survey of election officials in all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and three U.S. territories (American Samoa, Guam, and the U.S. Virgin Islands). To obtain information on local actions, we administered a survey of local election officials in 104 local election jurisdictions and conducted site visits to seven localities. We conducted our work from April 2008 through November 2009 in accordance with all sections of GAO’s Quality Assurance Framework that were relevant to our objectives. The framework requires that we plan and perform the engagement to obtain sufficient and appropriate evidence to meet our stated objectives and to discuss any limitations in our work. We believe that the information and data obtained, and the analysis conducted, provide a reasonable basis for any findings and conclusions. To gather information on the actions states and localities are taking to facilitate and protect voting in long-term care facilities, we interviewed federal officials, multidisciplinary experts, representatives of national organizations, and reviewed relevant documentation. Specifically, we spoke with officials in the Voting and Disability Rights Sections of the Civil Rights Division from Justice and in the Administration on Aging and the Centers for Medicare and Medicaid Services from HHS to better understand the federal government’s role in facilitating voting for long- term care facility residents. To examine available guidance to state and local election officials on facilitating and protecting voting in long-term care facilities, we interviewed EAC officials, observed an EAC working group meeting on facilitating voting in long-term care facilities, and reviewed the EAC Quick Start Management Guide on Elderly and Disabled Voters in Long Term Care Facilities. To gain perspectives of management, improvement, and challenges to the facilitation of voting to long-term care residents, we spoke with representatives of the National Association of Secretaries of State (NASS) and National Association of State Election Directors (NASED). We also reviewed relevant research literature and interviewed principal, multidisciplinary researchers in the area of long-term care voting, including researchers from the American Association of People with Disabilities, the American Association of Retired Persons, the American Bar Association Commission on Law and Aging, the University of Pennsylvania Institute on Aging, and the National Academy for State Health Policy to identify practices that may facilitate voting in long-term care facilities and whether they may protect against fraud and undue influence. We found this research literature to be sufficiently reliable for the purposes of this report. To gather information on state actions to facilitate and protect voting for long-term care facility residents, we administered a Web-based survey of officials responsible for overseeing elections from the 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and three U.S. territories (American Samoa, Guam, and the U.S. Virgin Islands). The survey included questions about state and local actions to facilitate voting in long-term care facilities. The survey was conducted using a self- administered electronic questionnaire posted on the Web. We collected the survey data between December 2008 and February 2009. We received completed surveys from all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, and three U.S. territories for a 100 percent response rate. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors, such as variations in how respondents interpret questions and their willingness to offer accurate responses. To minimize nonsampling errors, we pretested draft survey instruments with state election officials in Kansas, Virginia, and Wisconsin to determine whether (1) the survey questions were clear, (2) the terms used were precise, (3) respondents were able to provide the information we were seeking, and (4) the questions were unbiased. We made changes to the content and format of the questionnaire based on pretest results. Because respondents entered their responses directly into our database of responses from the Web-based surveys, the possibility of data entry errors was greatly reduced. We also performed computer analyses to identify inconsistencies in responses and other indications of error. In addition, a second independent GAO analyst verified that the computer programs we used to analyze the data were written correctly. We contacted election officials in some states to gain a deeper understanding of selected survey responses, and obtained and reviewed relevant documentation for selected states. The scope of this work did not include contacting election officials from each state and local jurisdictions to verify all survey responses or other information provided by state officials. Similarly, we did not analyze reported state requirements to verify what they require, but instead relied on the states’ responses to our survey. To gather information on local actions to facilitate and protect voting for long-term care facility residents, we surveyed 104 local election officials. The survey asked local election officials to identify whether their election jurisdiction was taking any action to facilitate voting in long-term care facilities and to identify any actions taken. We conducted the survey by e-mail. We collected the survey data between September 2008 and February 2009 and received an 88 percent response rate. The sample of local election jurisdictions was taken from a related GAO study examining polling place accessibility for voters with disabilities that used a two-stage sampling method to create a nationally representative random selection of polling places in the contiguous United States, with the exception of those in Oregon. Specifically, the local election jurisdictions used for the survey were those which had one or more of their polling places randomly selected in the sample of polling places. The survey estimates calculated for this report did not have a low enough margin of error to allow us to generalize results to localities nationally. In addition, the scope of this work did not include contacting election officials from each local jurisdiction to verify all survey responses or other information provided by local officials. To obtain a more detailed understanding of local actions to facilitate voting in long-term care facilities, we conducted site visits to seven localities —Burlington, Vermont; Shelburne, Vermont; Chicago, Illinois; the District of Columbia; Kitsap County, Washington; Multnomah County, Oregon; and Washington County, Oregon. We selected localities generally regarded as innovative or potentially effective in their approach to facilitate voting for long-term care facility residents based on interviews with agency officials, representatives of professional organizations, and multidisciplinary researchers. We conducted all of the site visits in October and November 2008, before the federal election on November 4, 2008. In each locality, we interviewed local election officials and long-term care facility staff. During interviews with local election officials and long-term care facility staff, we used a standard interview protocol that we developed which enabled us to obtain detailed and comparable information. In each locality, we discussed with local election officials the process for facilitating voting for long-term care facilities, including program history, coordination with stakeholders, and challenges. At each locality, we selected one or two long-term care facilities to visit based on input from local election officials. In total, we visited 10 long-term care facilities and at each we met with facility staff responsible for coordinating with local election officials regarding the voting process for residents, which was typically the facility’s Activity Director. During these interviews, we discussed the voting process for facility residents, including coordination with local election officials and the unique voting challenges for residents. While we met with local election officials and long-term care facility staff in all the localities we visited, in a few instances, we were unable to complete our interviews during our site visit, but conducted interviews afterwards over the telephone. We also observed the administration of the voting process prior to Election Day at each of the long-term care facilities we visited. During these observations we used a standard protocol we developed that enabled us to collect uniform and detailed information that was comparable across all of the long-term care facilities we visited. We collected information on the number of election workers, number of facility residents voting, and the types of voting assistance provided. Although state and local governments are responsible for administering elections, several federal laws set forth requirements that must be met during the federal election process. Specifically, federal laws have been enacted in major areas of the voting process, including several that are designed to help ensure that voting is accessible for the elderly and people with disabilities. The Voting Rights Act of 1965 (VRA), as amended, provides for voting assistance to voters with disabilities. Specifically, the VRA, among other things, authorizes voters who require assistance to vote by reason of blindness, disability, or inability to read or write to be given assistance by a person of the voter’s choice, other than the voter’s employer or agent of that employer or officer or agent of the voter’s union. In 1984 Congress enacted the Voting Accessibility for the Elderly and Handicapped Act (VAEHA), which requires that political subdivisions responsible for conducting elections assure that all polling places for federal elections are accessible to elderly voters and voters with disabilities, with limited exceptions. One such exception occurs when the chief election officer of the state determines that no accessible polling places are available in a political subdivision, and that officer ensures that any elderly voter or voter with a disability assigned to an inaccessible polling place will, upon advance request, either be assigned to an accessible polling place or will be provided with an alternative means to cast a ballot on the day of the election. Under the VAEHA, the definition of “accessible” is determined under guidelines established by the state’s chief election officer, but the law does not specify standards or minimum requirements for those guidelines. Additionally, the Act requires states to make available voting aids for elderly and disabled voters, including instructions printed in large type at each polling place, and information by telecommunications devices for the hearing impaired. The VAEHA also contains a provision requiring public notice, designed to reach elderly and disabled voters, of absentee voting procedures. The VAEHA also contains provisions that make absentee voting more accessible by prohibiting, with limited exceptions, the requirement of a notarization or medical certification of disability when granting an absentee ballot. The Help America Vote Act of 2002 (HAVA) contains a number of provisions designed to help increase the accessibility of polling place voting for individuals with disabilities. In particular, Section 301(a) outlines minimum standards for voting systems for federal elections. The provision states that the voting system must be accessible for people with disabilities, including nonvisual accessibility for the blind and visually impaired, in a manner that provides the same opportunity for access and participation as for other voters. To satisfy this requirement, each polling place must have at least one direct recording electronic device or other voting system equipped for people with disabilities. HAVA may apply to assisted voting provided to long-term care facility residents, if the long- term care facility is considered a “polling place,” which is generally designated at the state and local level. In addition, there are several federal laws that provide broad protections of the rights of people with disabilities, which indirectly apply to voting. The Older Americans Act of 1965 (OAA), as amended, supports a wide range of social services and programs for older persons. The OAA authorizes grants to agencies on aging to serve as advocates of, and coordinate programs for, the older population. Such programs cover areas such as caregiver support, nutrition services, and disease prevention. Importantly, the OAA also provides assistance to improve transportation services for older individuals, which may include transportation to polling places. Title II of the Americans with Disabilities Act of 1990 (ADA) and its implementing regulations require that people with disabilities have access to basic public services, including the right to vote. However, it does not strictly require that all polling place sites be accessible. Under the ADA, public entities must make reasonable modifications in policies, practices, or procedures to avoid discrimination against people with disabilities. Moreover, no individual with a disability may, by reason of the disability, be excluded from participating in or be denied the benefits of any public program, service, or activity. State and local governments may comply with ADA accessibility requirements in a variety of ways, such as by redesigning equipment, reassigning services to accessible buildings or alternative accessible sites, or altering existing facilities or constructing new ones. However, state and local governments are not required to take actions that would threaten or destroy the historic significance of a historic property, fundamentally alter the nature of a service, or impose undue financial and administrative burdens. In choosing between available methods of complying with the ADA, state and local governments must give priority to the choices that offer services, programs, and activities in the most integrated setting appropriate. Title III of the ADA covers commercial facilities and places of public accommodation. Such facilities may also be used as polling places. Under Title III, public accommodations must make reasonable modifications in policies, practices, or procedures to facilitate access for individuals with disabilities. They must also ensure that no individual with a disability is excluded or denied services because of the absence of “auxiliary aids and services,” which include both effective methods of making aurally and visually delivered materials available to individuals with impairments, and acquisition or modification of equipment or devices. Public accommodations are also required to remove physical barriers in existing buildings when it is “readily achievable” to do so; that is, when it can be done without much difficulty or expense, given the entity’s resources. In the event that removal of an architectural barrier cannot be accomplished easily, the accommodation may take alternative measures to facilitate accessibility. All buildings newly constructed by public accommodations and commercial facilities must be readily accessible; alterations to existing buildings are required to the maximum extent feasible to be readily accessible to individuals with disabilities. Brett Fallavollita, Assistant Director and Amber Yancey-Carroll, Analyst- in-Charge managed this assignment. Ryan Siegel, Katherine Bowman, Carolyn Blocker, and Laura Heald made significant contributions to this report in all aspects of the work. Josephine Perez provided assistance with site visit data collection. Carl Barden, Cathy Hurley, Stuart Kaufman, and Walter Vance provided analytical assistance; Alex Galuten and Sarah Cornetto provided legal support; Jessica Orr provided assistance on report preparation; James Bennett developed the report’s graphics; and Anna Bonelli verified our findings. Voters with Disabilities: Additional Monitoring of Polling Places Could Further Improve Voting Accessibility. GAO-09-941. Washington, D.C.: September 30, 2009. Voters with Disabilities: More Polling Places Had No Potential Impediments Than in 2000, but Challenges Remain. GAO-09-685. Washington, D.C.: June 10, 2009. Elections: States, Territories, and the District Are Taking a Range of Important Steps to Manage Their Varied Voting System Environments. GAO-08-874. Washington, D.C.: September 25, 2008. Elections: 2007 Survey of State Voting System Programs. GAO-08-1147SP. Washington, D.C.: September 25, 2008. Elections: Federal Program for Certifying Voting Systems Needs to Be Further Defined, Fully Implemented, and Expanded. GAO-08-814. Washington, D.C.: September 16, 2008. Election Assistance Commission—Availability of Funds for Purchase of Replacement Voting Equipment. B-316107. Washington, D.C.: March 19, 2008. Elderly Voters: Some Improvements in Voting Accessibility from 2000 to 2004 Elections, but Gaps in Policy and Implementation Remain. GAO-08-442T. Washington, D.C.: January 31, 2008. Elections: All Levels of Government Are Needed to Address Electronic Voting System Challenges. GAO-07-741T. Washington, D.C.: April 18, 2007. Older Driver Safety: Knowledge Sharing Should Help States Prepare for Increase in Older Driver Population. GAO-07-413. Washington, D.C.: April 11, 2007. Elections: The Nation’s Evolving Election System as Reflected in the November 2004 General Election. GAO-06-450. Washington, D.C.: June 6, 2006. Elections: Federal Efforts to Improve Security and Reliability of Electronic Voting Systems Are Under Way, but Key Activities Need to Be Completed. GAO-05-956. Washington, D.C.: September 21, 2005. Transportation-Disadvantaged Seniors: Efforts to Enhance Senior Mobility Could Benefit from Additional Guidance and Information. GAO-04-971. Washington, D.C.: August 30, 2004. Elections: Electronic Voting Offers Opportunities and Presents Challenges. GAO-04-975T. Washington, D.C.: July 20, 2004. Elections: Perspectives on Activities and Challenges Across the Nation. GAO-02-3. Washington, D.C.: October 15, 2001. Elections: A Framework for Evaluating Reform Proposals. GAO-02-90. Washington, D.C.: October 15, 2001. Voters with Disabilities: Access to Polling Places and Alternative Voting Methods. GAO-02-107. Washington, D.C.: October 15, 2001. Elections: The Scope of Congressional Authority in Election Administration. GAO-01-470. Washington, D.C.: March 13, 2001. | Voting is fundamental to the U.S. democratic system and federal law provides broad protections for people with disabilities, including older voters. Many long-term care facility residents, who often have physical or cognitive impairments, vote by absentee or early ballot. Concerns have been raised about the extent to which states and localities are helping the increasing number of facility residents exercise their right to vote, especially those requiring voting assistance, who may be subject to undue influence or unauthorized completion of their ballot by facility staff or relatives. Given these concerns, GAO was asked to identify the actions taken to facilitate and protect voting for long-term care facility residents at (1) the state level and (2) the local level. To address these objectives, GAO interviewed federal officials, national organizations, and researchers; reviewed Election Assistance Commission (EAC) guidance on voting in long-term care facilities; surveyed state and local election officials; and visited seven localities in the weeks prior to the November 2008 federal election to observe the voting process in long-term care facilities. Most states have requirements or guidance to facilitate voting for long-term care facility residents, and some states also provide training and conduct oversight of localities' adherence to state requirements or guidance. States reported that they most commonly provided requirements or guidance for accommodations for absentee voting for residents of long-term care facilities, followed by accommodations for voter registration and voter identification procedures. Almost one-half of the states reported providing training to local election officials specifically on state requirements or guidance to facilitate voting for long-term care facility residents. Additionally, 17 states reported that they conducted one or more oversight activities to ensure that localities were adhering to state long-term care voting requirements or guidance. According to researchers, some of these state requirements or guidance for voting in long-term care facilities may help to protect against voter fraud and undue influence. Localities also used a variety of actions to facilitate voting for long-term care facility residents, including some that may decrease the likelihood of fraud and undue influence. In our survey, 78 of the 92 localities reported taking actions to facilitate voting for long-term care facility residents. The most common actions included supporting facility staff in assisting residents with the absentee or early voting process, including providing staff with early and absentee voting information or guidance. Localities also reported providing services directly to residents. For example, close to one-half of localities we surveyed brought election officials to facilities to assist with the voting process. The seven localities we visited prior to the November 2008 federal election used a range of strategies to facilitate voting for long-term care facility residents, including coordination with facility staff and other stakeholders; the deployment of election teams to facilities; and implementation of procedures to protect and ensure voting integrity, such as requiring bipartisan voting assistance and signed affidavits to document voting assistance. Some local officials reported challenges to implementing these strategies, such as difficulty providing voting assistance to residents with cognitive impairments. |
As of January 2017, there were 567 federally recognized American Indian and Alaska Native tribes and villages. According to BIA, there were approximately 326 Indian land areas in the United States that are administered as federal Indian reservations or other tribal lands (e.g., reservations, pueblos, rancherias, missions, villages, communities, etc.). These land areas can generally be referred to as Indian country, which spans more than 56 million acres and 36 states, and varies in size, demographics, and location. For example, the Navajo Nation consists of approximately 27,000 square miles, whereas certain areas of Indian country in California comprise less than 1 square mile. The 2010 Census found that approximately 169,000 Native Americans lived on the Navajo reservation, while other areas of Indian country have fewer than 50 Native American residents. Indian country is often in remote, rural locations, or may also be located near urban areas. Indian country may have a mixture of Native American and non-Native American residents. Figure 1 illustrates where Indian country is located in the contiguous United States as of 2010. According to the 2010 Census, 5.2 million people in the United States identified as Native American, either alone or in combination with one or more other races. Out of this total, 2.9 million people—0.9 percent of the U.S. population at the time—identified as Native American alone. At the time of the 2010 Census, more than 1.1 million Native Americans resided on tribal lands. Figure 2 shows where Native Americans resided in the United States at the time of the 2010 Census. Federal law generally recognizes two forms of human trafficking—sex trafficking and labor trafficking. The Trafficking Victims Protection Act of 2000 (TVPA), as amended, defines human trafficking under the term “severe forms of trafficking in persons.” Pursuant to the TVPA, as amended, sex trafficking is the recruitment, harboring, transportation, provision, obtaining, patronizing, or soliciting of a person for the purpose of a commercial sex act. Sex trafficking is a “severe” form of trafficking when it involves force, fraud or coercion, or where the victim has not attained 18 years of age, in which case force, fraud or coercion are not necessary elements. The TVPA, as amended, defines labor related trafficking generally as the recruitment, harboring, transportation, provision, or obtaining of a person for labor or services, through the use of force, fraud, or coercion for the purpose of subjection to involuntary servitude, peonage, debt bondage, or slavery. Federal efforts to combat and prevent human trafficking in the United States have evolved over time, including various laws that have established federal agencies’ roles in these efforts. During the 1990s, the United States began to take steps to address human trafficking at home and abroad. Over the past few decades, Congress has taken numerous legislative actions to help combat human trafficking and ensure that victims have access to needed services. In October 2000, the TVPA was enacted to combat trafficking in persons, ensure just and effective punishment of traffickers and protect trafficking victims. Among other things, the TVPA, as amended, makes it illegal to knowingly or recklessly use force, fraud, or coercion to recruit, entice, harbor, transport, provide, obtain, advertise, maintain, patronize, or solicit any person to engage in a commercial sex act. In addition, the TVPA makes it a crime to use certain means, including force, threats of force, physical restraint, or serious harm or threats of such harm, to knowingly provide or obtain persons for any labor or services. TVPA reauthorization acts were enacted in 2003, 2006 and 2008; and, in 2013, provisions of the TVPA, its reauthorizations, and other related laws, were further amended. In 2015, the President signed into law the Justice for Victims of Trafficking Act of 2015. Among other things, this act required the Attorney General to ensure that law enforcement officers and federal prosecutors receive anti-trafficking training; required the Federal Judicial Center, the research and education agency of the federal judicial system, to provide training for judges on ordering restitution for victims of certain trafficking-related offenses under chapter 77 of title 18, U.S. Code; mandated that the Secretary of Homeland Security implement a human trafficking training program for department personnel; required the Attorney General to implement and maintain a national strategy for combating human trafficking; established the Domestic Trafficking Victims’ Fund to supplement existing statutorily authorized grants or activities; and amended the federal definition of child abuse to include human trafficking. As a general principle, the federal government recognizes Native American tribes as “distinct, independent political communities” with inherent powers of self-government to regulate their “internal and social relations,” which include enacting substantive law over internal matters and enforcing that law in their own forums. However, the Supreme Court has recognized that Congress has plenary and exclusive authority to regulate or modify the powers of self-government that tribes otherwise possess, and has exercised this authority to establish an intricate web of jurisdiction over crime in Indian country. As determined by relevant statutes, the exercise of criminal jurisdiction in Indian country depends on several factors, including the Native American status of the victim and alleged offender, the nature of the crime, and whether jurisdiction has been conferred on a particular entity (e.g., the state in which Indian country is located) by, for example, federal treaty or statute. The General Crimes Act, as amended, extends the criminal laws of the federal government into Indian country and generally establishes federal criminal jurisdiction where either, but not both, the alleged offender or the victim is Native American. In addition, federal criminal jurisdiction may attach to a crime, such as a human trafficking offense committed in Indian country, if it affects interstate or foreign commerce. With the exception of certain circumstances involving domestic or dating violence offenses or violations of protection orders, tribal governments do not have jurisdiction to prosecute non-Native American offenders, even if the victim is Native American and the crime occurred in Indian country. Rather, non-Native American offenders who commit crimes against Native Americans may be prosecuted by the federal government, or by a state government, where jurisdiction has been conferred on a state. Several components within DOJ, DHS, and DOI have responsibility for investigating and prosecuting human trafficking crimes in Indian country, as shown in figure 3. The FBI has investigative responsibilities for Indian country where the federal government has criminal jurisdiction, and has assigned more than 100 agents and 40 victim assistance staff, located in 19 of its 56 field offices, to work Indian country cases full time. In addition, the FBI’s headquarters-based Indian country Crimes Unit promotes liaison and intelligence sharing through its Safe Trails Task Forces and working groups and provides training to Indian country law enforcement in partnership with DOJ and BIA. BIA is statutorily responsible for enforcing federal law and, with the consent of the tribe, tribal law in Indian country. BIA supports tribes in their efforts to ensure public safety and administer justice within Indian country, as well as to provide related services directly or to enter into contracts or compacts with federally recognized tribes to administer the law enforcement program. To that end, BIA’s Office of Justice Services (OJS) provides direct law enforcement services for 40 tribes. Specifically, BIA provides both uniformed police and criminal investigative services for 32 of these tribes, and criminal investigative services for 8 of these tribes, with a total of 301 uniformed police, 62 criminal investigators, and 19 victim assistance staff. Two hundred three tribes have their own law enforcement agencies that are operated by the tribes and funded either by contracts or compacts, or by the tribes, themselves. Further, the agency is responsible for developing and providing training and technical assistance to tribal law enforcement, and for consulting with tribal leaders to develop regulatory policies and other actions that affect public safety and justice in Indian country. Unlike FBI and BIA, ICE is not generally involved in criminal investigations in Indian country but may assist with criminal investigations at the request of the tribe, according to ICE HSI officials. Forty-nine of the 94 U.S. Attorney’s Offices (USAO) include Indian country within their jurisdiction. Each of these USAOs has at least one Assistant U.S. Attorney appointed as Tribal Liaison. Each Tribal Liaison is responsible for most dealings with tribes in their district. Officials noted that some districts with large amounts of Indian country have more than one Assistant U.S. Attorney assigned to the position of Tribal Liaison. According to Executive Office for United States Attorneys (EOUSA) officials, there are approximately 168 attorneys, including 62 attorneys who have been designated as Tribal Liaisons, who handle a significant portion of Indian country cases as part of their work duties in these 49 offices. Also in these offices, there are 78 victim assistance staff, including 12 victim assistance staff who are exclusively assigned to work Indian country matters, who assist victims and work on cases arising from Indian country. However, the other attorneys and victim assistance staff may also assist with Indian country cases, when needed. The Civil Rights Division and Criminal Division within DOJ may also prosecute human trafficking cases; however, officials from these offices stated that any Indian country human trafficking prosecutions they conduct would be done in collaboration with the U.S. Attorney’s Offices that have jurisdiction in the geographical areas where the crime took place. In addition to investigating and prosecuting human trafficking crimes, federal agencies, primarily DOJ and HHS, support efforts to combat human trafficking and assist victims. Several components within DOJ, including the Office on Violence Against Women (OVW) and the Office of Justice Programs, which includes the Office of Juvenile Justice and Delinquency Prevention (OJJDP), the Office for Victims of Crime (OVC), the Bureau of Justice Assistance (BJA), and the National Institute of Justice (NIJ), provide grants to help state, local, and tribal law enforcement agencies combat human trafficking and to support nongovernmental organizations and others in assisting trafficking victims or conducting research on human trafficking in the United States. HHS provides grant funding to entities to provide services and support for trafficking victims, primarily through the Administration for Children and Families (ACF), which includes the Office on Trafficking in Persons (OTIP), the Children’s Bureau, the Family and Youth Services Bureau, and the Administration for Native Americans. These services include housing, employment, education, food, clothing, job training, medical care, and child care. Further, OTIP coordinates anti-trafficking responses across multiple systems of care. Specifically, HHS builds the capacity of health care providers, child welfare, social service providers and other first responders likely to interact with potential victims of trafficking through a variety of grant programs. All four agencies that have the authority to investigate or prosecute human trafficking in Indian country—FBI, BIA, ICE HSI, and the U.S. Attorneys’ Offices (USAO)—are required to record in their case management systems if a human trafficking offense was involved in the case. Three of these agencies—FBI, BIA, and the USAOs—also record in their case management systems whether the crime took place in Indian country. According to officials from these three agencies, they record whether the crime took place in Indian country to help establish whether they have jurisdiction to investigate or prosecute the crime. ICE HSI officials explained that they do not have a field for Indian country in their case management system because, unlike BIA and the FBI, ICE HSI is not generally involved in criminal investigations in Indian country; rather, ICE HSI would only conduct an investigation in Indian country if specifically invited by a tribe to do so. Prosecutions are cases where a charging document has been filed in district court. GAO-16-555. According to USAO officials, one of the two prosecutions resulted in a conviction. applicability of those efforts to the Native American population.) Table 1 provides the number of federal human trafficking investigations and prosecutions in Indian country, by agency, from fiscal years 2013 through 2016. Three of the four federal agencies that investigate or prosecute human trafficking-related crimes do not require their agents or attorneys to consistently collect or record the race or ethnicity, including Native American status, of victims in their cases. Therefore, the total number of federal human trafficking investigations and prosecutions that involved Native American victims is unknown. Agents and attorneys may voluntarily collect this information and record it in their case management systems when there is a designated data field. The FBI and USAOs that have Indian country in their jurisdiction are statutorily required to collect and report information on victims’ Native American status when they decline to refer or prosecute an Indian country case, but not otherwise. Based on the limited data that were available, federal agencies initiated a minimum of 6 human trafficking investigations that involved Native American victims from fiscal years 2013 to 2016—the FBI Civil Rights Unit initiated 5 investigations and BIA initiated 1. Table 2 shows the policies of the investigative and prosecutorial agencies with respect to collecting information on victims’ Native American status. Federal investigative and prosecutorial agencies provided two primary reasons why they do not collect information on the Native American status of victims, including concerns about relevance of Native American status to the substance of the case and victim privacy. For example, officials told us that Native American status of victims is only relevant for Indian country cases because it is necessary for establishing which law enforcement agency has jurisdiction over the case. According to EOUSA officials, Native American status has no impact on whether the federal government can investigate or prosecute cases outside of Indian country. Additionally, EOUSA officials said that when prosecutors have to determine the Native American status of victims in Indian country, they do not base that determination on the victim’s appearance or self-reporting. Instead, prosecutors must review tribal enrollment documents or obtain information on the victim’s blood quantum, and carrying out this process for victims outside of Indian country would be arduous. Similarly, FBI officials reported that they only collect information that is necessary for the investigation, which does not include the victim’s race or Native American status. Further, officials from all of the investigative and prosecutorial agencies raised concerns related to either the sensitivity of asking victims about their race or Native American status or collecting additional personal information about the victim that could make them identifiable to the defendant or others during the discovery phase of a criminal trial. DOJ, HHS, and DHS administered at least 50 grant programs from fiscal years 2014 through 2016 that could help address human trafficking in Indian country or of Native Americans. Of the 50 grant programs, 45 specifically mention addressing human trafficking as an allowable use of funding and identify tribal entities as eligible recipients. The remaining five specifically mention assisting Native American crime victims as an allowable use, although human trafficking is not explicitly identified, as shown in figure 4 below. However, the total number of Native American human trafficking victims who received services under these grant programs is unknown. Of the 45 grant programs that explicitly mention addressing human trafficking as an allowable use, 2 exclusively address human trafficking of Native Americans. In fiscal year 2016, OVC established two Project Beacon grant programs that are designed to increase the quantity and quality of services available to Native American victims of sex trafficking who reside in urban areas. One program offers qualified grant award recipients the opportunity to develop comprehensive, culturally appropriate services for Native American victims, while the other program was intended to provide an award to a qualified organization to provide training and technical assistance to organizations that received a direct services award. OVC made three awards under the direct services Project Beacon program fiscal year 2016, but was unable to make an award under the Project Beacon training and technical assistance program. The 50 grant programs provide funding for various categories of activities, including collaboration activities, research, victim services, public awareness and training or technical assistance. A breakdown of the allowable uses is outlined in figure 5 below. (See app. II for a list of all grant programs and how the funding can be used.) Collaboration and partnerships: 42 of the 50 grant programs allow funds to be used for collaboration between or within law enforcement and service providers through mechanisms such as task forces, coalitions, and partnerships. For example, the Tribal Governments Program, administered by OVW, strengthens the tribal criminal justice system’s response to human trafficking of Native American women by facilitating collaborative agreements between tribal law enforcement and tribal prosecution, and federal, state, or local partners to address sex trafficking, among other crimes. Another example is ACF’s Domestic Victims of Human Trafficking grant program, which requires grantees to provide a strategy for expanding victim service partnerships to enhance community response, including victims in historically marginalized populations like tribal communities. Data, Research, and Evaluation: 19 of the 50 grant programs include an element of data collection on human trafficking cases, research on human trafficking, or evaluation of best practices. OVC’s Fellowship Program was established in 2002. Fellowships are competitively awarded through the OVC grant process. Fellows provide direct operational assistance to OVC in designing and developing innovative or enhanced service initiatives, management systems, training programs, capacity-building initiatives, and program evaluation efforts. Victim services: 21 of the 50 grant programs can be used to provide services directly to victims of human trafficking, including Native Americans. Services include housing, health care, mental health and substance abuse services, and legal services. For example, the Social and Economic Development Strategies grant program, administered by ACF, can be used to develop and implement culturally appropriate strategies to provide outreach and services for Native American victims of sex trafficking. Public awareness: 26 of the 50 grants may be used to raise public awareness of human trafficking. For example, OVW administers the Tribal Domestic Violence and Sexual Assault Coalitions program, which works to design and conduct public education campaigns to increase the awareness of crimes against Native American women, including sex trafficking. Training and technical assistance: 40 of the 50 grant programs may be used to provide training and technical assistance to service providers or law enforcement stakeholders on elements of identifying and serving victims of human trafficking. For example, the Defending Childhood American Indian/Alaska Native Policy Initiative program, administered by OJJDP, awards funding to entities that will design and implement training and technical assistance for tribal sites according to their needs. Among the 21 grant programs administered by DOJ and HHS that allowed for the provision of victim services, the number of Native American human trafficking victims who received services is unknown because agencies generally did not require grantees to report the Native American status of victims served. For example, 3 of the 21 grant programs—all of which are administered by OVW—currently require grantees to report the Native American status of victims served; that is, if the information is available and can be provided without compromising the victim’s safety or confidentiality. The remaining 18 grant programs do not require grantees to report the Native American status of victims served; however, 5 of these programs exclusively fund services for Native American victims, in which case the Native American status of victims served would have been determined for the purpose of program eligibility. However, even when grantees are required to report the Native American status of victims served or it is inherent in their reporting, grantees are only required to do so in the aggregate and not by the type of crime to which the victim was subjected. Therefore, the grantee data cannot be used to determine the number of Native American human trafficking victims that were served. Table 3 describes whether the agencies and components require grantees to report the Native American status of victims served. In fiscal year 2015, HHS began its Human Trafficking Data Collection Project to establish uniform data collection across OTIP grant programs. According to HHS officials, the intent was to ultimately develop an interoperable platform that would ensure standard collection of data among a broader group of HHS grantees—including grantees that receive funding from other HHS components—that provide services to victims of trafficking and populations at high risk for trafficking. Grantees will be asked to report data on demographics and predisposing factors, services provided, costs of victim and survivor care, and unmet service needs. This would include capturing data on victims’ race and ethnicity, such as Native American status and tribal affiliation. HHS expects to pilot test these uniform data elements and make them available for public comment in fiscal year 2017, after which HHS may make revisions, submit the revised tool to the Office of Management and Budget for review, and then make the tool available to grantees. According to OVC and OJJDP officials, they do not require grantees to collect and report victims’ Native American status because it is generally not an eligibility requirement for receiving victim services. They also raised concerns about whether including the victims’ race or Native American status in grant reports, which could be made available to the public, could compromise the victims’ confidentiality. According to OJJDP, its grantees are required to submit descriptive demographic data for youth victims served, and those data are included in OJJDP’s performance measurement system. However, this system does not include data on the Native American status of youth victims served; rather, grantees identify whether or not they provided services to any Native American youth victims during the reporting period. According to OVC, beginning in fiscal year 2017, OVC provided an optional category in the Trafficking Information Management System (TIMS) to allow grantees of human trafficking-specific grant programs—that is, grant programs funded by the Trafficking Victims Protection Act—to report the race or Native American status of victims served. However, OVC does not require grantees to report the race of human trafficking victims because race is not a performance measure for OVC grantees. Also, OVC officials stated that in communities with few members of a particular race, if grantees have just one victim of that race in their data, people may correctly guess the identity of that victim. Similarly, OVW noted the importance of balancing the need for monitoring data with the provision of timely, accessible, and confidential services. OVW officials stated that OVW maintains this balance by collecting an aggregate number of Native American victims served during each 6-month reporting period rather than collecting this information for each type of victimization—including sex trafficking—which OVW officials believe could jeopardize victim confidentiality, especially in rural tribal communities. We understand the importance of maintaining victim confidentiality, in which case for grantees concerned that reporting the number of Native American human trafficking victims served could reveal the identity of those victims, OVC, OJJDP, and OVW could consider exempting them from any such reporting requirement on a case-by-case basis. Also, while Native American status is generally not a factor for determining whether a victim can receive services or relevant for current performance measures, it may be a factor for determining how best to assist this particular demographic. According to the 2013-2017 Federal Strategic Action Plan on Services for Victims of Human Trafficking in the United States, expanding human trafficking data collection and research efforts for vulnerable populations, which include Native Americans, is an area for improvement for the federal government. The plan also states that vulnerable populations, including Native Americans, are often under- identified as victims, which leads to unreliable statistics. The plan states that the federal government acknowledges that it currently does not have enough information on human trafficking and service provision to Native Americans and other vulnerable populations to begin making recommendations on evidence-based practices to the field. It goes on to state that vulnerable populations require more attention and focus so that responses to human trafficking are effective and federal agencies are committed to spending the time and resources to learn more. The plan establishes goals to provide and improve services to vulnerable populations. Standards for Internal Control in the Federal Government state that quality information should be used to achieve objectives based on relevant data from reliable sources. Agencies are expected to identify the information requirements needed to meet their objectives and on a timely basis obtain the relevant data based on the requirements. Without collecting data on the Native American status of victims served, federal agencies will not know the extent to which they are achieving government-wide strategic goals to provide and improve services to vulnerable populations, including Native American crime victims. In addition, awareness about whether a victim of human trafficking is Native American can be helpful to ensure culturally appropriate practices are made available in the healing and recovery process. HHS’ Administration for Native Americans reported that there is a need for culturally relevant and trauma-informed approaches when assisting victims. For example, using women’s circles and other culturally appropriate practices have proven helpful in the healing process for Native American victims. According to a Trafficking in Indian Country brief released by the National Congress for American Indians, many Native American human trafficking victims felt they owed their survival to Native cultural practices and most wished for Native healing approaches to be integrated with mainstream services. Native Americans experience several risk factors that make them vulnerable to becoming victims of human trafficking. Federal agencies responsible for addressing human trafficking have acknowledged that Native Americans are a vulnerable population and have set agency and government-wide goals to help ensure public safety in Indian country and protect Native Americans from human trafficking and other crimes. Federal agencies that have the authority to investigate and prosecute human trafficking crimes in Indian country generally record in their case management systems whether the crime took place in Indian country. They do not always record the Native American status of victims, however, because that information may not generally be relevant to the case or it may have the potential to identify particular victims. Native American status may have relevance with respect to the provision of services, nonetheless. While victim confidentiality must be protected accordingly, the absence of data collection by granting agencies regarding the Native American status of human trafficking victims served hinders their ability to determine whether their victim assistance goals are being met. It may also make it difficult to determine where to focus their efforts on providing culturally appropriate services that have been shown to aid in the healing and restoration of Native American victims of crime. To help ensure that DOJ is contributing to efforts to improve data collection and service provision to Native Americans, we recommend that: the Director of OVW require grantees to report the number of human trafficking victims served using grant funding, and, as appropriate, the Native American status of those victims; and the Assistant Attorney General for OJP direct OVC and OJJDP to require their grantees to report the number of human trafficking victims served using grant funding, and, as appropriate, the Native American status of those victims. We provided a copy of our report to HHS, DHS, DOI, and DOJ for review and comment. DHS and DOI stated that they did not have any comments on our report. HHS and DOJ provided technical comments, which we incorporated as appropriate. DOJ also provided written comments, which are reproduced in appendix III. DOJ partially agreed with our recommendations. In its comments, DOJ indicated a willingness to implement the first part of the recommendations, which is to require grantees to report the number of human trafficking victims served with grant funding. However, DOJ disagreed with the second part of the recommendations, which is to require grantees to report the Native American status of those victims. As we stated in our report, OVC currently requires its grantees to report the number of human trafficking victims served through the Trafficking Information Management System (TIMS). According to DOJ, OJJDP could require grantees for its human trafficking-related grant programs to report the number of human trafficking victims served through OJJDP’s Data Collection and Technical Assistance Tool (DCTAT). Similarly, DOJ stated that OVW will begin asking grantees to include the number of sex trafficking victims served in their grantee progress reports. However, DOJ identified several reasons why OVC, OJJDP, and OVW should not require grantees to report the Native American status of human trafficking victims served, including concerns about overburdening grantees, having a chilling effect on the delivery of services, and victim confidentiality. With respect to overburdening grantees, DOJ stated that it would be hard to justify collecting Native American status solely for victims of human trafficking and not for victims of others types of crime. Therefore, according to DOJ, implementing our recommendation would lead the components to collect demographic information for all types of victimizations, thereby greatly increasing the burden on service providers. We believe that collecting demographic information on victims of all types of crimes could be very informative; however, our recommendation is that DOJ collect demographic data specific to its human trafficking programs, as appropriate. DOJ has identified combating human trafficking as a priority for the department, and the Federal Strategic Action Plan on Services for Victims of Human Trafficking in the United States identifies Native Americans as a vulnerable population. Therefore, we believe that collecting additional information specifically on Native American human trafficking victims is justifiable. In addition, based on preliminary results of a survey we conducted as part of a related review, it appears that some of the DOJ- and HHS-funded victim service providers do collect information on the Native American status of victims served by type of victimization. We surveyed 315 victim service providers that received funding from either DOJ or HHS in fiscal year 2015; 162 of the providers responded. Of the 162, 67 reported that they provided services to at least one human trafficking victim, and 58 were able to tell us whether any of the human trafficking victims they served were Native American; 9 were not able to tell us. Concerning the potential chilling effect on service delivery, according to DOJ, asking victims about their race could cause confusion, fear, or make the individual less likely to engage in services. Therefore, DOJ is opposed to requiring victims to disclose their race, but acknowledged that if victims voluntarily disclose this information, grantees could include victims’ race when reporting to DOJ. Similarly, with respect to victim confidentiality, DOJ stated that collecting Native American status by type of victimization creates a much greater—and unnecessary—risk that a particular victim could be publicly identified, especially in rural tribal communities. Also, according to DOJ, OVW grantees are statutorily prohibited from reporting a victim’s personally identifying information to OVW for grant monitoring purposes. It is not our position that victims should be required to disclose their race in order to receive services, and that certainly was not the intent of our recommendation. However, we do think there are situations where it may be appropriate to ask the victim about their race. We also understand that there may be instances where reporting the Native American status of human trafficking victims could, on its own, or in conjunction with other information, identify individual victims. As we stated in our report, the components could exempt grantees from reporting Native American status on a case-by-case basis if such instances arise. To help ensure that our recommendation is not interpreted to mean that DOJ must require human trafficking victims to disclose their Native American status or that grantees must report Native American status, even if doing so significantly increases the risk that the victim could be identified, we modified our recommendation. Specifically, we clarified that agencies should require grantees to report the Native American status of human trafficking victims “as appropriate.” DOJ identified other reasons why requiring grantees to report the Native American status of human trafficking victims was not necessary. One benefit to collecting this information that we cited in our report is that DOJ would be able to help ensure that Native American victims are receiving culturally appropriate services. However, DOJ stated that OVC and OVW already use grantee progress reports to monitor whether grantees are providing culturally appropriate services and to identify promising practices for doing so. Further, DOJ stated that it funds training and technical assistance for grantees on providing culturally appropriate services to Native Americans. We are encouraged by DOJ’s efforts related to ensuring that Native Americans are receiving culturally- appropriate services, and we think having information on which of their grantees are serving Native American victims, and how many victims there are, could enhance their efforts. Finally, DOJ stated that the utility of the data that grantees would report on Native American status of human trafficking victims would be limited because it would not be statistically relevant. Specifically, grantee data would not identify all Native American human trafficking victims, but just those served with DOJ funding. DOJ said that efforts underway by the Bureau of Justice Statistics and the National Institute of Justice would produce more meaningful data. We recognize that grantee data cannot be used to determine the prevalence of human trafficking of Native Americans nationwide. That was never the intent of the recommendation, especially considering the challenges that DOJ and others have previously identified with respect to estimating prevalence of human trafficking, in general. Rather, we recognized that the federal strategic action plan articulated a need for more information on Native American victims of human trafficking, and collecting information on the extent to which DOJ funding is being used to provide services to this population is an incremental step towards bridging this information gap. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, copies of this report will be sent to the appropriate congressional committees; the Attorney General; the Secretaries of Health and Human Services, Homeland Security, and the Interior. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8777 or goodwing@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Federal agencies have several efforts under way that either assess the prevalence of human trafficking for a particular subgroup of the population or aim to develop a methodology or tool that could be used to determine prevalence, in general. From fiscal years 2012 through 2015, the National Institute of Justice (NIJ) awarded Trafficking in Persons grants to San Diego State University, Abt Associates, Inc. and Northeastern University for this purpose. While none of the current efforts are designed to determine prevalence among Native Americans, specifically, grantees told us some of the methodologies could have potential to be used for such an effort. Between 2009 and 2015, San Diego State University has been involved in three projects to determine prevalence of labor and sex trafficking for specific populations. The Labor Trafficking among Migrant Workers in North Carolina project sought to identify indicators that could be used by state and local law enforcement as signals that labor trafficking may be taking place in their communities. The goals of the study were to: (1) document the characteristics and indicators of labor trafficking, including component crimes, collateral crimes, and other community impacts; and (2) provide law enforcement with actionable knowledge to help identify labor trafficking. Researchers interviewed 380 farmworkers, who were attending migrant worker and Hispanic/Latino festivals or living at farm labor camps, and collected data on demographic characteristics (age, sex, race/ethnicity), citizenship and language spoken at home, unemployment and agricultural business patterns, crime, communicable disease, and pregnancy and infant mortality. According to researchers, these data allowed them to develop a comprehensive description of farmworkers who are being exploited and may be in labor trafficking situations. The study was completed in August 2013. The second San Diego State University project, Looking for a Hidden Population: Trafficking of Migrant Laborers in San Diego County, applied respondent-driven sampling and unique access to migrant communities in San Diego County, California, to produce valid estimates on the scope of labor trafficking activities in one of the largest Spanish-speaking immigrant destinations. The study found that 30 percent of undocumented migrant laborers were victims of trafficking, 55 percent were victims of other abuses, and about half of these victimization experiences occurred within the past 12 months. The study found that the rate of trafficking violations varied markedly across business sectors that typically hire unauthorized migrant workers. The construction and janitorial services sector had the most reported trafficking violations and labor abuses across these business sectors. The third project, Sex Trafficking in Tijuana, Mexico, involved in-depth interviews with semi-structured and open-ended questions, field observations, and conversations with major players in the prostitution business, law enforcement and advocacy groups. The main emphasis in the recruitment of participants in the project was to maximize the range and variety of the search for discernable patterns of trafficking activities and the operation of the sex industry in Tijuana. According to documentation from the study, although hundreds of interviews were conducted with a wide variety of individuals, the study does not intend to produce statistical estimates about the scope of sex trafficking activities or any other aspect of the sex industry in Tijuana. The identified cases of sex trafficking happening in Tijuana were limited to individual pimps (male and female) who were adept at seeking out women in vulnerable situations and controlling them through emotional manipulation, social isolation, and/or violence. In 2015, NIJ also awarded a Trafficking in Persons grant to Abt Associates. The purpose of Abt’s research project, Advancing Human Trafficking Prevalence Estimation, is to develop a methodology to calculate prevalence of human trafficking. Abt has selected county-level sites to test a methodology that, if successful, could be used to estimate human trafficking at the city, state, or national level. Further, according to Abt, if targeted appropriately or conducted on a large enough scale, the methodology could be used to estimate human trafficking of Native Americans or in Indian country. Abt researcher told us they plan to use a screening tool developed by the Vera Institute of Justice to determine how many individuals who are in jails, shelters, or have recently visited emergency rooms are human trafficking victims (i.e., potentially unknown human trafficking victims). Then they plan to compare this number to the known human trafficking victims to see if this approach identifies additional victims. Abt is currently in the first year of a 3-year plan. The Abt researcher noted that to accurately measure the prevalence of human trafficking in Indian country using a similar methodology, a study must oversample the Native American population. Based on the small sampling size being used to test the current methodology, Abt told us the current study can likely report the number of Native Americans and the number of human trafficking victims on its test sites, but would not be able to generalize results from this study to the entire Native American population. Northeastern University’s research project, Capturing Human Trafficking Victimization through Crime Reporting is a 3-year study to test a multiple system list estimation methodology to estimate the prevalence of human trafficking in three sites, which are expected to be selected by mid- October 2016. According to the program manager, this methodology consists of comparing human trafficking reporting from the FBI’s Uniform Crime Reporting System to the data systems of non-law enforcement entities─ welfare, victim service providers, domestic violence shelter, licensing and inspection agencies, among others. Any differences or similarities across the data would help determine whether victims are being captured in multiple areas (systems) and the results could be used to develop prevalence estimates for the tests sites. According to the program manager, if the methodology works in the test sites, the U.S. government could replicate it to estimate prevalence nationally or at other levels of government. The coordinators of these research projects noted that there are major obstacles that hinder the estimation of human trafficking in the United States, including a lack of systematic information about the existence of victims in areas where human trafficking activities are known to exist. Abt and San Diego State University stated that even though their methodologies are not specifically designed to assess prevalence of human trafficking in Indian country or of Native Americans regardless of location, their approaches could be modified to achieve that goal. However, Abt noted that to correctly measure the prevalence of human trafficking in Indian country, a study must oversample the Native American population. Awareness Department of Health and Human Services (8 Grant Programs) (41 Grant programs) (1 Grant Program) In addition to the contact name above, Kristy Love, Assistant Director; Kisha Clark, Analyst-in-Charge; Jessica Ard; Paulissa Earl; Marycella Mierez; Susan Hsu; Jon Najmi; Michele Fejfar; and David Blanding made significant contributions to the work. Human Trafficking: State Has Made Improvements in Its Annual Report but Does Not Explicitly Explain Certain Tier Rankings or Changes. GAO-17-56. Washington, D.C.: December 5, 2016. Human Trafficking: Implementation of Related Statutory Provisions, Law Enforcement Efforts, and Grant Funding. GAO-16-748T. Washington, D.C.: June 28, 2016. Human Trafficking: Agencies Have Taken Steps to Assess Prevalence, Address Victim Issues, and Avoid Grant Duplication. GAO-16-555. Washington, D.C.: June 28, 2016. Human Trafficking: Actions Taken to Implement Related Statutory Provisions. GAO-16-528R. Washington, D.C.: May 26, 2016. Human Trafficking: Oversight of Contractors' Use of Foreign Workers in High-Risk Environments Needs to Be Strengthened. GAO-15-102. Washington, D.C.: November 18, 2014. Human Trafficking: Monitoring and Evaluation of International Projects Are Limited, but Experts Suggest Improvements. GAO-07-1034. Washington, D.C.: July 26, 2007. Human Trafficking: A Strategic Framework Could Help Enhance the Interagency Collaboration Needed to Effectively Combat Trafficking Crimes. GAO-07-915. Washington, D.C.: July 26, 2007. Human Trafficking: Better Data, Strategy, and Reporting Needed to Enhance U.S. Antitrafficking Efforts Abroad. GAO-06-825. Washington, D.C.: August 14, 2006. | Human trafficking—the exploitation of a person typically through force, fraud, or coercion for such purposes as forced labor, involuntary servitude or commercial sex—is occurring in the United States. Traffickers seek out persons perceived to be vulnerable. Native Americans (i.e., American Indians or Alaska Natives) are considered to be a vulnerable population. DOJ, DHS, and the Department of the Interior investigate human trafficking crimes. Primarily, DOJ and HHS provide grants to fund victim services. GAO was asked to examine Native American human trafficking. This report focuses on federal efforts to address human trafficking, including the extent to which (1) agencies collect and maintain data on investigations and prosecutions of human trafficking in Indian country or of Native Americans regardless of location and (2) federal grant programs are available to help address such trafficking, and how many Native American trafficking victims have received assistance through these programs. GAO reviewed human trafficking investigation and prosecution data from fiscal years 2013 to 2016; reviewed solicitations for human trafficking-related grant programs; and interviewed grant program officials. All four federal agencies that investigate or prosecute human trafficking in Indian country—the Federal Bureau of Investigation (FBI), the Bureau of Indian Affairs (BIA), U.S. Immigration and Customs Enforcement (ICE), and the U.S. Attorneys' Offices (USAO)—are required to record in their case management systems whether a human trafficking offense was involved in the case. With the exception of ICE, these agencies are also required to record in their case management systems whether the crime took place in Indian country. ICE officials explained that the agency does not record this information because, unlike BIA and the FBI, ICE is not generally involved in criminal investigations in Indian country. Typically, ICE would only conduct an investigation in Indian country if specifically invited by a tribe to do so. Further, with the exception of BIA, these agencies do not require their agents or attorneys to collect or record Native American status of victims in their cases due to concerns about victim privacy and lack of relevance of the victim's race to the substance of the investigation or prosecution. The Departments of Justice (DOJ), Health and Human Services (HHS), and Homeland Security (DHS) administered at least 50 grant programs from fiscal years 2013 through 2016 that could help address Native American human trafficking. For example, 21 of these grant programs, which were administered by DOJ and HHS, could be used to provide services to Native American human trafficking victims. However, the total number of Native American victims who received services under these grant programs is unknown. HHS is developing a data collection tool that grantees can use to report information on human trafficking victims served, including Native American status of victims. DOJ's Office on Violence Against Women (OVW) requires grantees to report Native American status of victims served, but not by type of crime. DOJ's Office for Victims of Crime (OVC) and the Office of Juvenile Justice and Delinquency Prevention (OJJDP) do not require grantees to collect and report Native American status of victims served. However, in fiscal year 2017, OVC began providing recipients of human trafficking-specific grant programs the option to report the race or Native American status of victims served. While Native American status may not generally be a factor for determining whether a victim can receive services, it may be a factor for determining how best to assist this particular demographic. According to the 2013-2017 Federal Strategic Action Plan on Services for Victims of Human Trafficking in the United States, expanding human trafficking data collection and research efforts for Native Americans and other vulnerable populations is an area for improvement for the federal government. Additionally, Standards for Internal Control in the Federal Government states that quality information should be used to achieve objectives based on relevant data from reliable sources. Without collecting data on the Native American status of victims served, federal agencies will not know the extent to which they are achieving government-wide strategic goals to provide and improve services to vulnerable populations, including Native American human trafficking victims. GAO recommends that DOJ require its grantees to report the number of human trafficking victims served and, as appropriate, the Native American status of those victims. DOJ partially concurred with the recommendation. GAO clarified the recommendation and maintains action is needed. |
This section discusses the unique nature of living in remote communities in Alaska, the history and administrative structure of the Commission, its funding, and its annual work plan and grants program. Alaska is the largest U.S. state—one-fifth the size of the lower 48 contiguous states combined—but with a small population, the lowest population density in the country, and large travel distances between cities (see fig. 1). About 700,000 people live in Alaska, nearly half of whom reside in the three largest cities of Anchorage, Fairbanks, and the capital of Juneau. The remainder of the population lives in smaller, often isolated communities scattered throughout the state. Most of these remote communities are not connected to the power grid and must generate their own electricity and provide for their own heating locally. In communities that burn diesel fuel to generate electricity and use heating oil to heat their homes, these fuels must be stored in bulk fuel tanks, and fuel delivery to some of these communities can only occur during 3 or 4 months out of the year. In addition, Alaska’s mountain ranges, glaciers, and vast wilderness create natural barriers to transportation and communications, including coastal areas of the state that are completely iced-in most of the year. Alaska’s transportation system is different from that of the contiguous 48 states, with many Alaskan cities and villages accessible only by air or water. Highway and rail infrastructure is primarily located in the south central region of the state, and many communities are not connected to the rest of the state by road or rail. Consequently, the dominant modes of transportation around the state are air and barge services along coastal and inland waterways. (See fig. 2 for a view of Alaska’s transportation network.) Many parts of Alaska have an approximately 4-month summer construction season, due in part to the state’s extreme weather conditions. While some types of construction can be done at other times of year, such as excavating in permafrost—ground that is permanently frozen year-round in Arctic regions—and bogs, other types of construction either cannot be done or would be highly inefficient, such as erecting steel structures. In most cases, construction materials and equipment must be transported to the building site by sea during a brief time period in the summer. An exception to this is in the southeast part of the state, where shipping and construction can take place during most of the year. After the passage of the Oil Pollution Act of 1990, which required the issuance of regulations to establish procedures, methods, equipment, and other requirements to prevent discharges of oil from vessels and onshore the U.S. Coast Guard declared it would no facilities, among other things,longer allow fuel delivery to Alaskan communities with fuel tanks that were leaking or otherwise contaminating the soil and water. Meeting the new requirements was well beyond the reach of many rural communities. Nearly 100 villages were in jeopardy, facing winter without electricity or home heating oil. In this context, the Denali Commission was established in 1998 as a federal agency to provide, among other things, infrastructure and economic development services to rural Alaskan communities. The Denali Commission Act of 1998 established a 3-fold purpose for the Commission: (1) delivering federal services in the most cost-effective manner practicable by reducing administrative and overhead costs; (2) providing job training and economic development services in rural communities; and (3) promoting rural development and providing infrastructure. Since the Commission’s inception, the act has been amended several times, to among other things, authorize the Commission to undertake construction of health care facilities, surface transportation infrastructure, and waterfront development projects. Most recently, the act was amended to authorize the Commission to accept certain transfers of funds from other federal agencies, as well as conditional gifts or donations for the purpose of carrying out the act. The Denali Commission has a Federal Cochair and six other commissioners who are not agency employees. For these six commissioner positions, the following individuals designated by statute, or someone selected from nominations that they submit, may serve: the Governor of Alaska, who serves as the State Cochair; the president of the University of Alaska; the president of the Alaska Municipal League; the president of the Alaska Federation of Natives; the executive president of the Alaska State American Federation of Labor and Congress of Industrial Organizations; and the president of the Associated General Contractors of Alaska. The Commission office is located in Anchorage, Alaska, and its staff work at the direction of the Federal Cochair to carry out day-to-day operations. Since the inception of the Commission, there have been three Federal Cochairs. On April 21, 2014, the third Federal Cochair began his second 4-year term. Under the Denali Commission Act, a Federal Cochair’s term is 4 years but the Federal Cochair can be reappointed. The act states that any vacancy in the Commission shall not affect its powers but must be filled in the same manner as the original appointment. To appoint a Federal Cochair, the act establishes a two-step process. First, the President pro tempore of the Senate and the Speaker of the House of Representatives each submits a list of nominations to the Secretary of Commerce. Second, the Secretary of Commerce appoints the Federal Cochair from among the list of nominations submitted. The act specifies that the Federal Cochair is an employee of Commerce. Accordingly, Commerce officials review and approve his or her time card. The act also requires the Secretary of Commerce to review the Commission’s annual work plan, which includes programs and rural energy projects approved for funding. According to Commerce officials, officials in Commerce’s Economic Development Administration generally conduct this review. In addition, the act authorizes, but does not require, other federal agencies (including Commerce) to make personnel and services available to the Commission upon the Commission’s request. In October 2006, the Commission’s Federal Cochair wrote a letter to the Department of Justice’s (Justice) Office of Legal Counsel to request guidance about federal ethics provisions that would be applicable to the commissioners. Specifically, the Federal Cochair wrote that he understood he was subject to the federal statutes and regulations governing employee ethics as a Commerce employee; however, the other six commissioners needed guidance as to which federal ethics provisions applied to them. In late 2006, Justice determined that the six commissioners were special government employees for purposes of ethics laws and regulations and therefore subject to the principal federal criminal conflict-of-interest law. Justice based its determination, in part, on the requirement in the Denali Commission Act that the commissioners receive pay for their work. The principal financial conflict-of-interest law prohibits regular and special government employees from participating personally and substantially in an official capacity in a “particular matter” that may have a direct and predictable effect on their financial interest. Under the law and implementing regulations, the commissioners’ financial interest includes the financial interest of their employers. Therefore, commissioners are prohibited from participating in any particular matter that has a direct and predictable effect on the organization that employs them, unless granted a waiver by the Federal Cochair. A waiver—which can only be granted under certain circumstances—permits an employee to participate in a particular matter that would otherwise be prohibited under federal law. For purposes of this report, we refer to this third Inspector General as “the former Inspector General.” of the designated federal entity for purposes of the Inspector General Act. The Commission receives direct appropriations, which are sometimes referred to as its base funding. In addition to this base funding, the Commission also receives statutorily directed transfers and grants from other agencies and entities. These other agencies and entities have varied over time and have included the following, among others: Trans-Alaska Pipeline Liability Fund; U.S. Department of Agriculture; U.S. Department of Health and Human Services; U.S. Department of Transportation; U.S. Environmental Protection Agency; U.S. Department of Housing and Urban Development; U.S. Department of Labor; U.S. Department of the Interior; Alaska Mental Health Trust Authority; and Alaska Department of Transportation and Public Facilities. Funding for the Commission steadily increased until fiscal year 2005 and peaked in fiscal year 2007 at $141 million. However, from fiscal years 2008 to 2014, funding steadily decreased, reaching a low of $14 million in fiscal year 2014—a level below fiscal year 1999 funding and an overall decrease of 90 percent since its peak in fiscal year 2007—with funding decreases from nearly all of the Commission’s funding sources (see fig. 3). For example, the Commission’s direct appropriations decreased by more than 50 percent from fiscal years 2007 to 2008 and decreased by nearly 50 percent from fiscal years 2008 to 2009, falling to $10 million for fiscal year 2014. Similarly, since fiscal year 2007, funds from other agencies and entities, which were made available to or designated for use by the Commission, generally decreased or ceased entirely. In fiscal years 2013 and 2014, the Commission received funds from only one source other than its direct appropriation—the Trans-Atlantic Pipeline Liability fund. Until fiscal year 2010, some of the Commission’s direct appropriations were identified for specific programs or projects. For example, in fiscal year 2004, the appropriations conference committee directed the Commission to spend $10 million for teacher housing in remote villages where there is limited housing available for teachers. In 2012, the Commission received broad authority to accept transfers of funds from any federal agency authorized to carry out an activity within the Commission’s authority and conditional gifts for purposes of carrying out the Denali Commission Act. Commission funding also includes matching funds from the state of Alaska for certain projects. The act requires (1) the commissioners to develop, annually, a proposed work plan for Alaska and submit that work plan for review and approval and (2) Commerce to review and approve the annual work plan after providing for public review and comment. Through the work plan—which authorizes the Federal Cochair to enter into grant agreements, award grants and contracts, and obligate federal funds—the Commission outlines its priorities and funding recommendations for each fiscal year. The process of developing and adopting the work plan generally occurs sequentially as follows: 1. Project proposals are solicited from local government and other 2. Commission officials draft the work plan and provide to the 3. Commissioners forward an approved draft version of the work plan to 4. Upon preliminary approval by the Federal Cochair, the draft work plan is published in the Federal Register for a 30-day public comment period and disseminated to the Commission’s program partners. If no revisions are made, the Federal Cochair provides notice of preliminary approval of the work plan to the commissioners, and forwards it to the Secretary of Commerce for approval; 5. The Secretary of Commerce, through the Economic Development Administration, reviews and then approves, partially approves, or disapproves the work plan (the work plan is revised as necessary to gain approval); and 6. The Federal Cochair awards grants and contracts based upon the approved work plan. Since its inception, the Commission has issued over $1 billion in grants to help rural and remote communities in Alaska. Over 800 grants have funded more than 2,300 projects. The Commission has sometimes awarded large grants to “program partners” such as state agencies to fund multiple projects. For example, the Commission used a single grant to provide over $100 million to the Alaska Energy Authority to, among other things, plan and construct energy generation facilities. The Alaska Energy Authority, a public corporation created by state law, used the The Commission has also provided grant to fund over 200 projects.grants directly to small, village-level organizations. For example, the Commission provided about $9,000 to the community of Quinhagak to fund the study of an extension of the airport’s runway, among other things. The Commission faces two key challenges in fulfilling the statutory purpose to promote rural development and provide for infrastructure needs, but there are options to assist the Commission in addressing them.making to achieve the rural development portion of its statutory purpose in light of significant funding decreases and (2) the application of the conflict-of-interest law which sometimes prevents commissioners—who hold key specialized knowledge—from being actively involved in developing the annual work plan. Significant decreases in funding have raised questions about whether the Commission can sustain its current approach of grant making alone to fulfill its statutory purpose. Stakeholders have identified several key options the Commission could take to fulfill its statutory purpose. Amid questions about the future of the Commission, its management has begun efforts to reassess the Commission’s approach in light of its funding challenge. In the face of a 90 percent decrease in funding from its peak in fiscal year 2007, the Commission may no longer be able to rely largely on grant making to pursue its statutory purpose, according to Commission management and stakeholders. One purpose of the Denali Commission Act is to provide economic development services in rural communities, promoting rural development, and providing infrastructure needs. However, Commission management and several stakeholders have raised concerns that the Commission’s current approach as primarily a grant-making agency cannot fulfill the statutory purpose in the current budget environment. Specifically, funding levels cannot support grant making on the scale and pace the Commission has done in the past. In addition, the number of program areas that the Commission has been able to fund through grant making has also decreased. By 2013, nearly all Commission spending went to only two program areas—transportation and energy—and the Commission no longer funded new economic development or health care facilities projects, among others. As Commission funding has decreased, administrative expenses have consumed a larger percentage of its budget, creating a challenge since the Denali Commission Act, as amended, prohibits the Commission from using more than 5 percent of the funds appropriated under the act’s authority for administrative expenses. Under this cap, the amount available to the Commission for administrative expenses, such as grants management and oversight, has declined from approximately $7 million in fiscal year 2007 to less than $700,000 in fiscal year 2014. In practice, however, this cap has been waived each of the last 10 fiscal years in appropriations laws. According to Commission management, the waiver occurred because the Commission could not realistically safeguard the funds in its portfolio of grants under such budgetary constraints. The Commission’s December 2013 independent public audit highlighted the need for the Commission to adopt practical internal controls to ensure proper accounting and safeguarding of its funds—a key administrative activity. In this context, the Commission obligated $3.34 million for administrative expenses in fiscal year 2014—or 24 percent of its overall budget—according to Commission management. We previously found that spending caps can only work if they are realistic and that such caps “are not likely to bind if they are seen as totally unreasonable given current conditions.” Without a statutory change to the Denali Commission Act to permanently eliminate the 5-percent cap, it is unlikely that the Commission will have flexibility to plan and budget for essential administrative activities. According to the Federal Cochair, as of February 4, 2015, the Commission had on staff 11 permanent federal employees; six intermittent federal employees; and the Federal Cochair, who is a Commerce employee. associated projects. Underscoring this concern, the Commission’s December 2013 independent public audit (1) cautioned that internal controls deficiencies would be created if the Commission was to lose any of the three members of its finance staff and (2) raised concerns that the Commission’s diminishing staff could impact all areas of the Commission, including origination and monitoring of grants. Key stakeholders we interviewed—primarily commissioners and program partners—have identified a variety of options the Commission could take for how to approach fulfilling its statutory purpose in the future. These options are not mutually exclusive and could be combined in different variations, depending on strategic priority and funding. All options involve the Commission being more strategic in how it expends its diminishing funds—whether by prioritizing which program areas to continue or by increasing its nongrant activities. The options stakeholders identified include, but are not limited to: Retain status quo of grant making. The Commission could continue to focus primarily on grant making, which includes funding traditional, “shovel-ready” construction projects as well as some atypical projects needing further Commission discussion before approval. Limit number of grants. The Commission could limit the total number of grants it awards each year, particularly if it continues to primarily focus on grant making. Limit scope of grants. The Commission could continue to narrow the scope of the program areas (such as energy, transportation, and training) in which it awards grants each year, particularly if it continues to primarily focus on grant making. Focus on facilitation. The Commission could shift its approach to act more as a facilitator of grants. As a facilitator, the Commission could help bring together the relevant players—including rural Alaskan communities and potential project funders—in a coordinated effort to help communities in need and agencies with funding capacity effectively collaborate on infrastructure and economic development projects, including projects that identify or address needs on a community-wide scale. As part of this approach, the Commission could also award small grants to use as leverage to help rural communities obtain additional funds from other entities. The Commission has, to a limited extent, served as a facilitator in the past. For example, in funding the construction of health clinics, the Commission initially brought together key players—funders, government regulators, service providers, and community members— to determine how to address community needs. Focus on technical assistance. The Commission could shift its approach to serve more as a provider of technical assistance to help better position rural Alaskan communities to compete for infrastructure and economic development funds from other entities. Such an approach may include a focus on predevelopment, such as helping communities design their projects in preparation for applying for construction and other infrastructure grants. The Commission provides such technical assistance to a limited extent as part of its existing predevelopment program—a collaborative effort that offers guidance and technical resources to communities for planning new facilities and renovating or expanding existing ones and for developing the documentation needed for competitive funding applications. Maintain existing infrastructure. The Commission could shift its focus from grants that fund new projects to grants that fund work to help sustain and maintain the infrastructure in which the Commission and its program partners have already invested. Since Justice’s 2006 determination that commissioners were subject to the principal federal conflict-of-interest law, Commission management and commissioners have attempted to implement the Denali Commission Act—which requires the Commission to develop a work plan—while also taking steps to ensure that commissioners did not violate the conflict-of- interest law—which prohibits commissioner participation in matters that would have a direct and predictable effect on their or their employers’ financial interests. Potential conflicts of interest are considered prior to each Commission meeting and commissioners recuse themselves accordingly. The Commission’s ethics official and officials from Office of Government Ethics (OGE)—the agency responsible for developing regulations to implement the conflict-of-interest laws and issuing guidance on granting waivers—noted, however, that the Commission’s structure lends itself to concerns about conflict of interests for commissioners because the Denali Commission Act requires that officials and directors from organizations receiving grants serve as commissioners. In addition, the restrictions on commissioner participation resulting from the conflict- of-interest law and the act’s silence on commissioner roles have led to a decade of frustration and concerns about the commissioners’ inability to contribute their expertise. Based on our legal analysis and information provided by Commission management and the attorney assisting the Commission, we identified four options that would better leverage commissioner expertise in developing the annual work plan. The 2006 Justice determination that the six commissioners are subject to the principal federal conflict-of-interest law significantly changed how commissioners participated in Commission decision making. Prior to this determination, according to the ethics official and several commissioners and staff, commissioners considered each proposed project, discussed the merits of proposed projects without reservation, and voted on work plans. OGE concluded that, in light of the 2006 determination, commissioners needed to “significantly alter how they participated in the Commission’s decision-making processes to avoid violating the criminal conflict-of-interest law.” Specifically, according to the ethics official, if commissioners’ organizations had applied for funding, a commissioner’s acceptance or rejection of a project would have “a direct and predictable effect” on his or her organization’s financial interest in having its own project funded. The ethics official explained that this is a conflict of interest, because decisions to fund one program area, such as energy, would be at the expense of awarding grant funds to another program area, such as transportation. In response to OGE’s conclusion, the ethics official and the Federal Cochair said they must determine if commissioners have a conflict of interest on a case-by-case basis. Specifically, they have had to consider (1) whether commissioners have a conflict of interest (or the appearance of a conflict of interest) before discussions or votes, and, (2) if they do, whether they must recuse themselves or qualify for a waiver from the conflict-of-interest law. The ethics official stated that he has tried to give the commissioners ethics advice so that they do not violate the criminal conflict-of-interest law. In 2007, the Federal Cochair granted waivers for all six commissioners to participate in discussions of that year’s work plan, funding allocations, and program priorities, after consulting with OGE. These waivers recognized, among other things, that the act “envisions the commissioners as having a meaningful role in the direction of the Commission” and that the act directs individuals designated for their expertise to use this expertise to drive the Commission’s work. Subsequently, OGE officials advised the Federal Cochair that granting such waivers was not a viable option. Thereafter, waivers have been granted only for the State Cochair but not for other commissioners. As a result, commissioners have had to recuse themselves periodically from discussions and votes, so the Commission often barely has had a quorum to conduct business, according to the ethics official. Given such restricted participation, commissioners no longer discuss or vote on the relative merits of individual projects, voting instead on broadly worded work plans, according to current and former commissioners and Commission management. Some commissioners told us that they were unsure about the extent of allowable participation, given the conflict-of- interest law and have been advised not to participate in discussions and votes. Furthermore, several commissioners told us their fear of criminal prosecution—stemming in part from allegations by the former Inspector General, prior to his resignation, that they violated the conflict-of-interest law—has led them to substantially limit their participation and, in some instances, disengage from the Commission. One commissioner told us that meaningfully participating in the Commission under its current structure would mean doing so in possible violation of conflict-of-interest laws and is not worth the risk. Consequently, the development of the annual work plan is sometimes deprived of commissioner expertise on the sustainability or viability of proposed projects, according to the ethics official and several commissioners. The ethics official and OGE officials noted that the Commission’s structure lends itself to concerns about conflict of interests for commissioners because the Denali Commission Act requires that officials and directors from named organizations receiving grants serve as commissioners and the principal conflict-of-interest law prohibits commissioners from participating in matters that would have a direct and predictable effect on their employer’s financial interests. In contrast, the Appalachian Regional Commission and the Delta Regional Authority are not subject to the same concerns because the laws establishing them exempt their commissioners and members, respectively, from the principal federal conflict-of-interest law and instead subject them to an alternative conflict-of-interest standard, which does not prohibit them from participating personally and substantially in matters that the state—their employer—has a financial interest. The restrictions on commissioner participation resulting from the conflict- of-interest law and the Denali Commission Act’s silence on commissioner roles have led to nearly a decade of frustration and concerns about the commissioners’ inability to contribute their expertise, according to several current and former commissioners and staff. All commissioners acknowledged that their role since the 2006 Justice determination has decreased, with some characterizing their role as being a “rubberstamp” for the work plan developed by Commission staff, and others characterizing it as being “neutered” or “muzzled” by the application of the conflict-of-interest law. According to the Federal Cochair, the Commission’s success depends on the shared expertise of involved commissioners and precluding participation by experts in discussions about which projects to fund puts the Commission at risk for making faulty, but avoidable, funding decisions. For example, one commissioner told us of an instance where her knowledge could have prevented a poor Commission investment had she been able to see project-specific information prior to approval of the work plan since the grant involved an entity she knew to be delinquent in its taxes. Amendments to the Denali Commission Act could enhance the ability of the commissioners to provide their expertise with respect to the Commission's project funding decisions. OGE officials told us that OGE has not been requested to issue a formal advisory opinion on the application of the conflict-of-interest law to the commissioners. According to OGE officials, the commissioners’ participation will be restricted unless Congress amends the Denali Commission Act to exempt commissioners from the principal conflict-of- interest law. OGE officials also told us that they found people to be more receptive to the opinions of ethics officials when the advice is provided in writing. regulations. Moreover, in 2005 guidance, OGE encourages but does not require written advice under specific circumstances, such as when the advice applies the criminal principal conflict-of-interest law to specific facts—a circumstance common to advice given to Commissioners about their participation in specific Commission matters. As of February 4, 2015, the Commission had not developed a course of action. Based on our legal analysis and information provided by Commission management and the attorney assisting the Commission, we identified four options to restructure the Commission so that it could better leverage the commissioners’ expertise in light of the 2006 Justice determination (see table 1). Each of these options would require amending the Denali Commission Act. Additional information about the four options for restructuring the Commission follows: Make commissioners representatives on a FACA Advisory Committee. Under this option, the commissioners would be representatives on an advisory committee subject to FACA rather Representatives on FACA than special government employees.committees provide stakeholder advice—advice reflecting the views of the entity or interest group they are representing, such as Alaska Natives, municipalities, or the state—whereas special government employees on FACA committees, like all federal employees, are expected to provide their own best judgment in a manner free from conflicts of interest and without acting as a stakeholder representing any particular point of view. As representatives on a FACA committee, commissioners would be expected to represent a particular and known bias of the particular group that they are designated and appointed to represent. Under this option, the commissioners’ open and avowed interests, biases, and commitments are intended to check and balance each other, resulting in a balanced and objective recommendation. However, commissioners would not be subject to the principal federal conflict-of-interest law. Make commissioners members on Non-FACA Advisory Committee. Under this option, the commissioners would be members of an advisory committee that is exempt from FACA and subject to an alternative conflict-of-interest standard rather than the principal federal conflict-of-interest law, as in the case of the fishery management councils established by the Magnuson-Stevens Fishery Conservation and Management Act (Magnuson-Stevens Act) to advise the Secretary of Commerce in developing fishery management plans, among other things. To allow certain members of fishery management councils with financial interests in fisheries or fishery- related activities—including the financial interests of their employers— to participate in the councils, these members are exempt from the principal federal conflict-of-interest law when they comply with the financial disclosure and recusal requirements in the Magnuson- Stevens Act and its implementing regulations. Subject commissioners to alternative conflict-of-interest standard but retain decision-making role. Under this option, the commissioners would retain the ability to make decisions on which projects to fund and would be subject to an alternative conflict-of- interest standard rather than the principal federal conflict-of-interest law, which is how the Appalachian Regional Commission and Delta Regional Authority operate. Specifically, the statutes authorizing these other regional entities prohibit their nonfederal members from participating personally and substantially in matters in which they or their immediate family members—but not the state, which is their employer—have a financial interest. Being subject to this alternative conflict-of-interest standard has allowed their nonfederal members to vote on specific project funding with only a few conflicts of interest arising, according to officials from the Appalachian Regional Commission and Delta Regional Authority. For example, Appalachian Regional Commission officials told us that commissioners do not have to recuse themselves from discussing or voting on grants their state agency applied for unless they are personally involved in the project, and Delta Regional Authority officials told us that there is generally not a conflict of interest that would prevent a member from discussing or voting on projects involving their state agency. However, under this option, the principal conflict-of-interest law and its implementing regulations would not apply because the nonfederal members are not subject to the principal federal conflict-of-interest law. Make commissioners a Board of Directors with fiduciary duty and retain decision-making role. Under this option, the nonfederal commissioners would become members of a Board of Directors with a fiduciary duty—a duty imposed by law on a person in a position of trust to act for someone else’s benefit and not to further one’s personal interests—and not be subject to the principal federal conflict- of-interest law. For example, the Board of Directors of the Legal Services Corporation—a federally funded, private nonprofit corporation that makes grants to legal service providers who provide free legal assistance to those who otherwise cannot afford it—has a fiduciary duty to use a high level of care to manage the corporation to best promote the corporation’s interest. Boards of Directors are generally associated with corporations, but some governmental entities also have Boards of Directors. The Farm Credit Administration, an independent agency in the executive branch that, among other things, regulates entities involved in the Farm Credit System, and the National Credit Union Administration, also an independent agency in the executive branch that regulates, charters, and supervises credit unions, both have Boards of Directors. In addition, the Smithsonian’s National Museum of the American Indian is governed by a Board of Directors with a fiduciary duty. Under this option, OGE would not have a role since the commissioners would not be subject to the principal federal conflict-of-interest law. However, the scope and nature of the commissioners’ fiduciary duty, such as whether the commissioners owed a fiduciary duty to American taxpayers generally or to Alaskans in particular and, in either case, what actions would best promote each group’s interests—would need to be determined. The Commission has faced several challenges that have adversely impacted its daily operations. These include periodic vacancies in the Federal Cochair position; issues related to the implementation of Dodd- Frank; and not having a Commission attorney. In addition, the Commission has received limited support from Commerce in trying to resolve its operational challenges. The Federal Cochair position has been vacant on two separate occasions, which has stymied the Commission from fulfilling its statutory responsibilities even though the Denali Commission Act states that any vacancy in the Commission shall not affect its powers. The most recent vacancy of a Federal Cochair occurred during the second quarter of the fiscal year when the Commission typically awards new grants. Because only the Federal Cochair is authorized to take critical actions, such as approving new grants, no one was authorized to sign $7 million in new grant awards or obligate these funds in time for grantees to reserve space on barges bringing building materials to rural Alaska for the brief 2014 construction season, according to Commission management and staff. Commission management told us that this vacancy was a key factor in preventing the Federal Cochair from forwarding for approval a timely fiscal year 2014 work plan, leading to its delayed publication for public comment and subsequent approval. In contrast to appointed officials of many other federal agencies and commissions, the Federal Cochair is not authorized to delegate his or her statutory responsibilities, such as publishing the draft work plan for public comment or to remain in office beyond the expiration of his or her term for several reasons. First, the Federal Cochair is not subject to the Federal Vacancies Reform Act of 1998 (Federal Vacancies Act)—an act that identifies who may temporarily perform the functions and duties in the absence of an officer who is appointed by the President of the United States and confirmed by the Senate—because the Federal Cochair is appointed by the Secretary of Commerce rather than the President. Second, the Denali Commission Act—unlike the statutes that established the Appalachian Regional Commission and the Delta Regional Authority—does not provide for an alternate or acting Federal Cochair. Third, the Denali Commission Act does not contain a “holdover” provision, which would allow the Federal Cochair to continue serving in office beyond the expiration of his or her term. Other federal agencies—such as the Federal Election Commission, Federal Energy Regulatory Commission, and the Federal Communications Commission—have holdover provisions that allow appointed members whose terms have expired to continue to serve in office for a specified period of time or until a successor is appointed or takes office. Furthermore, unlike enabling legislation for other federal agencies, the act does not contain a “delegation of authority” provision that would allow the Federal Cochair to authorize another person to perform the Federal Cochair’s statutory responsibilities during a vacancy that occurs at any point in the Federal In contrast to a holdover provision, a Federal Cochair Cochair’s term.could use a delegation of authority provision while he was in office or if he left before the end of his term. Without amending the act to include either a holdover or delegation of authority provision when the Federal Cochair position is vacant, Commission operations would be stymied the next time a vacancy occurs. Since the enactment of Dodd-Frank in 2010, the Federal Cochair and the attorney assisting the Commission said they spent substantial time discussing and seeking guidance from other agencies on whether and how to implement Dodd-Frank, which diverted attention from day-to-day Commission management and ethics issues. Once the Commission implemented Dodd-Frank in May 2013—thereby making the seven commissioners responsible for the general supervision of the Commission’s Inspector General—concerns arose about its application. For example, commissioners who previously advocated for the removal of the former Inspector General were now vested with the authority under Dodd-Frank to remove an Inspector General by a two-thirds majority vote even if the Federal Cochair is against removal. At the same time, the Federal Cochair could no longer take actions to appoint, supervise, or remove an Inspector General without explicit and prior approval of the other commissioners. The Federal Cochair and attorney assisting the Commission raised concerns about the potential for, or appearance of, commissioners abusing this new power to fire a Commission’s Inspector General, while the former Inspector General, prior to his resignation, raised concerns about his ability to carry out his duties with this supervisory change. As a result, Commission management and the attorney assisting the Commission said they repeatedly met with commissioners to discuss their new role and acknowledged that the commissioners need additional guidance and training on this topic. This change in the commissioners’ role also exacerbated the already contentious relationship between the Commission and the Inspector General, according to Commission management. As a result, they told us, the Inspector General ceased to communicate with both the Federal Cochair and the commissioners for several months leading up to his resignation in December 2013. In addition, the former Inspector General, prior to his resignation, did not comply with requests from the Federal Cochair to attend meetings of the commissioners, including those discussing the implementation of the Dodd-Frank changes. According to Commission management, the decision by the former Inspector General, prior to his resignation, to cease communications stemmed from his concern that the Commission’s interpretation of Dodd-Frank and the subsequent supervisory change impaired the independence of his office. In light of the former Inspector General’s resignation in December 2013, it is unclear what challenges, if any, will continue to exist for the Commission related to this issue. GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). provide mechanisms to identify and deal with any special risks resulting from, for example, continual changes in governmental, operating, and regulatory conditions. However, the Commission has never had a full-time attorney providing it with legal advice and support on a routine and consistent basis, leaving the Commission vulnerable. As primarily a grant-making agency, the Commission has awarded over 800 grants since its inception, many of which Commission officials acknowledged to be complex, that did not receive prior legal review by an attorney on behalf of the Commission. Current and former Commission officials told us that staff drafting grant agreements in the Commission’s early years—grants that generally served as templates for later grants, including recently awarded grants— relied on a combination of their own experience and grant language taken from other agencies. The Commission has relied on other federal agencies for limited legal support. In its early years, the Commission had a memorandum of understanding with Commerce to provide the Commission with limited legal services. This agreement ended in 2006, after the Commission and Commerce were unable to reach an agreement on renewing it. Subsequently, the Federal Cochair entered into an agreement with the Federal Aviation Administration (FAA) for an attorney in the FAA’s Anchorage office to provide occasional and intermittent legal services after commissioners were determined to be special government employees in 2006. To supplement the limited legal assistance provided by FAA, according to Commission management, the Commission sometimes relied on others such as OMB. The FAA attorney did not review the legal agreements the Commission entered into but rather served as the Commission’s designated agency ethics officer and handled the legal questions raised by the Federal Cochair and other Commission officials. As previously discussed, the Commission has recently faced complex legal issues such as the applicability of the principal federal conflict-of- interest law to the commissioners and the implementation of Dodd-Frank. In addition, over its 15-year existence, the Commission has encountered numerous other complex legal matters, such as the following: Legislative proposals. The Federal Cochair, commissioners, and attorney assisting the Commission identified key operational and statutory challenges hindering the Commission—such as the role of the commissioners and the vacancy of the Federal Cochair—and considered proposals to amend the Denali Commission Act to address some of these challenges. As a result, the Federal Cochair and the attorney assisting the Commission had numerous discussions with OMB and others about amending the act and developed draft language for bills reauthorizing the Commission in 2012. The attorney assisting the Commission characterized its demand for legal services during this time as intensive. Validity of, and the Commission’s liability under, certain complicated agreements. Prior to his resignation, the former Inspector General, in a 2012 report to Congress, raised concerns about the validity of the Commission’s “secondary operator agreements”—agreements that allow the Commission, under certain circumstances, to replace the original operator of a Commission- funded project—and whether the agreements impose liability on the Commission after a project’s completion. Similarly, the attorney assisting the Commission raised concerns about whether these agreements and other related agreements are valid contracts and make the Commission an owner or operator of the facility and thus liable if, for example, there is an oil spill. Commission officials and the attorney assisting the Commission told us that no attorney helped draft or review these agreements on behalf of the Commission prior to their approval. Appropriateness of providing services to other federal agencies. In 2013, after the Commission entered into Economy Act agreements with three federal agencies to provide them with an electronic database and other grants administration support, commissioners raised questions about whether the Commission had authority to enter into such agreements and whether providing such services was within the Commission’s statutory purpose to serve rural Alaska. According to Commission management, however, these agreements help to further the Commission’s statutory purpose to deliver services of the federal government in the most cost-effective manner practicable by reducing administrative and overhead costs, since this purpose is not expressly limited to Alaska.helped draft or review these agreements on behalf of the Commission. The Economy Act provides general authority for an agency to obtain goods and services from another agency. As a result of these complex matters, the Federal Cochair said that he increasingly had to focus on legal issues at the expense of other duties, such as strategic planning. Similarly, the attorney assisting the Commission characterized his work on such legal matters as increasingly time-consuming and going beyond what either agency had anticipated. For example, he initially spent about 5 hours per week on Commission work, which increased to at least 10 hours per week as issues arose related to the special government employee determination. Important legal matters demanding his attention increased substantially since 2010, according to this attorney. He spent more than half of his time addressing and advising the Commission on such issues as the Inspector General and Dodd-Frank, leaving no time for additional legal matters beyond the scope of the agreement, such as reviewing the Commission’s grants and other agreements. FAA ceased providing legal services to the Commission at the end of fiscal year 2014 because, according to the attorney assisting the Commission, his legal support for the Commission had become so time-consuming. Without an attorney to help the Commission identify and navigate risks consistent with federal standards for internal control, the Commission is at increased risk for making legal mistakes. For example, the attorney assisting the Commission told us he would not have approved the Commission’s secondary operator agreements as written because such agreements put the federal interest at too much risk. In this context, he recommended that the Commission obtain a full-time, in-house attorney to help the Commission operate in what he termed a “legally murky” environment and to help it avoid legal mistakes in grants management. Similarly, prior to his resignation, the Commission’s former Inspector General recommended in 2010 that the Commission acquire in-house legal counsel. Both the Appalachian Regional Commission and the Delta Regional Authority have full-time legal counsel from either an in- house counsel or through contract with a law firm for the equivalent of a full-time attorney. Commission management has acknowledged that the Commission needs legal support on a more continuous and consistent basis, especially since the ethics officer and primary legal support is departing. Apart from carrying out its own limited responsibilities under the Denali Commission Act, Commerce has consistently treated the Commission as an independent agency. According to the Commerce officials we interviewed, Commerce does not provide legal advice or guidance to the Commission because the Commission is an independent agency, even though its Federal Cochair is a Commerce employee. Similarly, until recently, the Commerce Inspector General did not provide Inspector General services to the Commission. When Commerce provided administrative and legal services for the Commission in the past, it was pursuant to a memorandum of understanding with the Commission. Commerce officials told us that they served as a sounding board for the Federal Cochair on a variety of legal matters after the memorandum of understanding’s expiration in 2006, but they did not provide legal guidance or advice. Commerce officials told us that they communicated this position with Commission management as recently as 2013. However, the Commission and commissioners have not had a clear or consistent understanding of Commerce’s role with respect to the Commission. The Denali Commission Act—in addition to specifying certain responsibilities for Commerce and making the Federal Cochair a Commerce employee—authorizes, but does not require, federal agencies (such as Commerce) to make personnel and services available upon the Commission’s request. Commission management told us that they do not always know what support activities Commerce is responsible for providing, or allowed to provide, to the Commission. Consequently, Commission officials told us that the Commission has repeatedly, and unsuccessfully, sought legal advice and other assistance from Commerce. In addition, at least one commissioner called for increased levels of support from Commerce, specifically calling for Commerce to immediately provide Inspector General staff to the Commission to help address challenges stemming from the recent resignation of the Commission’s former Inspector General. The Commerce Office of Inspector General began providing some oversight services to the Commission pursuant to a new interim agreement reached in May 2014 between the two agencies for the remainder of fiscal year 2014. This agreement was recently extended through the end of fiscal year 2015. The Commission has some key procedures in place for administering its grants, but we found several shortcomings in how the Commission has managed its grants. The rapid increase in funding during the Commission’s early years led staff to spend their time issuing grants rather than developing policies for how to do so. The Commission later developed some administrative procedures for administering its grants and has recognized the importance of developing policies to help manage its grants. In our review of a sample of projects funded by Commission grants, we found several shortcomings in how the Commission has managed its grants, including not having documented policies for awarding and managing grants; inconsistent monitoring of grant and project recipients; and lengthy delays in closing projects, among other things. As it has evolved, the Commission has developed administrative practices to help manage grants in a consistent and transparent manner. For example, the Commission utilizes standard checklists to help ensure that its staff take the necessary administrative steps at key points in the grant-making process. These practices meet established criteria in the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability for good grant management and oversight,including having internal operating procedures in place before awarding grants. Before the Commission awards a grant, its program staff complete a pre-award checklist based on a conference with the grant recipient. The checklist includes items such as discussing the project overview and expectations; the proposed budget and funding availability for cost overruns; and programmatic and business management requirements. Similarly, when Commission staff close out a grant, they follow a closeout checklist, which includes verification that the award recipient submits a project closeout report; program staff and grants management staff review and accept the project closeout report; and a closeout folder is routed to appropriate personnel so that any remaining funds can be deobligated. Figure 5, an interactive graphic, displays examples of checklists used by the Commission. (For full-sized, printable images of these processing checklists, see app. II.) In addition, the Commission has maintained information about its grants and projects in an online database—the Project Database System—that is accessible to the public through the Commission’s website. Starting in October 2003, the Commission required grant and project recipients to submit certain types of reports through the Project Database System, including quarterly reports updating the status of the project and closeout reports at the projects’ conclusion. This database serves as a place for grantees and project recipients to report their progress, and as a source for the public to learn more about specific grants or projects. Such information includes documentation regarding the following: The intended use of grant funds: the database includes links to financial assistance awards, which lay out the specific tasks to be accomplished under each grant and the associated reporting requirements; and Status reports from grant recipients: the database includes sections on grant and project reporting; the project reporting section includes quarterly reports with such information as (1) how much money was allocated to the project, (2) how much money has been spent, (3) the projected timeline of the project, and (4) notes about the status of the project. These practices meet established criteria for good grant management and oversight, including providing evidence of program success.managers and staff also use the Project Database System to help manage grants and reporting timelines. For example, the online database includes built-in reminders to project managers to follow up on missing or late progress reports. Even with these administrative practices, we found several shortcomings in how the agency managed grants awarded in fiscal years 1999 through 2013. Most significantly, the agency does not have documented policies for awarding and managing its grants, leading to inconsistencies in the awarding and monitoring of grants. In addition, the agency does not have a process to address the findings of single audits; project closeouts have sometimes encountered lengthy delays, and the agency does not have a record retention policy in place, as required by federal regulations. The Commission does not have documented policies for how it awards and manages its grants, although it has developed guidelines for the administrative steps involved. In awarding federal grants, effective oversight and internal control—in the form of management directives, administrative policies, or operating manuals—is important in assuring the proper and effective use of federal funds to achieve program goals, according to the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability. The guide states that effective internal control systems provide reasonable assurance that grants are awarded properly, recipients are eligible, and federal funds are used as intended and in accordance with applicable laws and regulations. The Commission’s Grants Management Guidelines, most recently updated in January 2014, provide detailed information on the administrative steps involved in awarding and managing grants, such as creating an announcement for the award and issuing the award to officially obligate the funds for the grant. However, the guidelines do not describe the policies for how the Commission should award and manage its grants. For example, the guidelines do not address issues that could be addressed if the Commission documented its grant-making policies, such as the number of projects acceptable under each grant, when it is appropriate to use a competitive award process, and criteria for identifying the appropriate requirements to include in the Commission’s grant agreements. Not having documented policies in place has hindered the Commission from having a consistent approach to awarding grants. For example, according to the Federal Cochair, the Commission used “monster awards”—a single grant that funded dozens or even hundreds of projects—during its early years, which led to an “accounting nightmare” because of the difficulty of tracking funds associated with such grants and projects. The Federal Cochair explained that such problematic practices arose because, in the absence of documented policies on the number of projects acceptable under each grant, program managers have had discretion in managing their program areas. In addition, the Commission has not consistently used a competitive selection process to award grants. For example, in awarding energy projects during the early years of the Commission, the Federal Cochair told us that Commission officials chose certain program partners based on previous professional contact rather than through an open and competitive selection process. In contrast, the Commission used a competitive process in selecting grantees for building health clinics in rural Alaska, according to Commission management. As the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability states, through competition, agencies can increase assurance that grantees have the systems and resources to efficiently and effectively use funds to meet grant goals. A competitive process also promotes fairness and openness in the selection of grantees. However, because the Commission does not have documented policies regarding when a competitive award process may or may not be appropriate, it cannot be assured that it is making such decisions consistently and based upon the appropriate considerations. The Commission does not have documented policies to specify what reporting requirements should be included in its grants and the frequency of reporting required. Rather than issuing its own policies, the Commission has often incorporated OMB guidance by reference in its grant agreements even though the OMB guidance is intended for agencies and not grant recipients. For example, the OMB guidance indicates that agencies should require recipients to submit financial status reports no more often than quarterly but no less often than annually. Based on our sample, an estimated 33 percentprojects’ grant agreements incorporated this OMB guidance by reference, of Commission-funded and 22 of the 33 such projects in our sample did not specify how often grant recipients’ financial status reports were due. As a result, it was unclear how often the grantee in these 22 cases was required to report to the Commission and difficult to determine whether these grantees met their reporting requirement. While Commission officials told us that program managers would have informally communicated to grant recipients how frequently such reports were expected, not specifying reporting requirements in written grant agreements could lead to confusion regarding what is required of the grantee. According to the Domestic Working Group’s 2005 Guide to Opportunities for Improving Grant Accountability, the terms, conditions, and provisions in the award agreement, if well designed, can render all parties more accountable for the award. Without documented policies to specify such requirements, the Commission may not be setting clear expectations for grantees, making it difficult to hold them accountable for fulfilling the terms of the grant agreement. In addition, as a result of not having clear, documented policies related to monitoring, the Commission has not been consistent in how it monitors the requirements it has included in its grants. We have previously found that once an agency has awarded grants, its monitoring of grantee performance is important to help ensure that grantees are meeting program and accountability requirements. Moreover, monitoring grantee performance helps ensure that grant goals are reached, required deliverables are completed, and potential problems can be addressed early in the grant period.inconsistent in the following ways: The Commission’s monitoring has been The Commission allowed grant recipients to draw down funds without submitting quarterly progress reports as required in the grants. According to Commission officials, the Commission’s policy is to not provide funds to grantees unless they submit required reports. However, in 19 of the 38 projects where this situation could be identified, the Commission allowed grantees to draw down about $5.6 million during periods of inadequate progress reporting.According to Commission program officials, they rarely have withheld payment in cases where required reporting is missing. One program official described withholding payments from grantees as the least viable option, since many project recipients would not have the funds to continue the project without the Commission’s funding. The Commission’s Grants Management Guidelines include a description of a process that eventually cuts off funding for awards when grantees are delinquent on their progress reports, but it does not describe criteria for a program official to apply in deciding whether to allow a grantee who is delinquent to continue to draw down funds. Without clear, documented policies that describe under what circumstances Commission officials should withhold funds, this method of enforcing grantee compliance is less likely to function. Not all required photographs were submitted in 51 of the 66 projects in our sample where the Commission’s grant required photographs. For example, for one project to construct behavioral health space within a primary care clinic, the grant required a minimum of three dated photographs with each quarterly report to fully establish the before, during, and after of the project; Commission records showed that no photographs were submitted with the quarterly progress reports. Photographs of ongoing projects are important because of the inaccessibility of many rural Alaskan communities and the difficulty of having Commission officials conduct visits to observe progress of the project, particularly given decreased funding. While we found that the Commission specified requirements for submission of other documentation and reports, we also found that they did not ensure grant recipients submitted them. For example, the Commission required Labor, Wage, and Residency reports for an estimated 36 percent of its projects, but among the projects reviewed in our sample, these reports were submitted for only 13 of the 36 sample projects for which they were required. Among the documentation for these 13 projects, 4 contained only a letter that referred to past Labor, Wage, and Residency reports being submitted, while the content of such reports for an additional 3 projects did not meet the Commission’s requirements. For example, a grant recipient provided information on the number of employees, place of primary residence, and total payroll earnings for those employed on the project but not on their position, first check date, last check date, and rate of pay per hour—as required by the grant agreement. Similarly, the Commission required periodic meetings, generally semiannually, to discuss lessons learned for an estimated 22 percent of its projects, but we did not find evidence of such meetings occurring in Commission records for any of the 22 such projects in our sample.requirements are appropriate to include in what types of grants would help ensure the Commission was only requiring those reports it actually needs to effectively monitor grantees. Having documented policies regarding what reporting In addition, prior to his resignation, the Commission’s former Inspector General raised several concerns in December 2012 about the Commission’s monitoring of certain accounts meant to fund the operation, as well as maintenance and renewal and replacement of projects, including whether the accounts had been created, funded, and used for their intended purpose; and whether any federal dollars were missing.For more information about these accounts, see appendix III. The Commission does not have a process for obtaining, reviewing, or acting on the results of federal single audits of its grantees. The Single Audit Act, as amended, was enacted to promote sound financial management, including effective internal control, with respect to federal grant awards administered by nonfederal entities. The act requires nonfederal entities that expend more than a certain amount in a year in federal awards to have a single or program-specific audit conducted by an independent auditor. As the awarding agency, the Commission is responsible for ensuring that audits for the federal awards it makes are completed and reports are received in a timely manner and in accordance with OMB guidance. It is also responsible for issuing a management decision on audit findings within 6 months after receipt of the audit report and ensuring that the recipient takes appropriate and timely corrective action. Among the 113 single audit reports for fiscal years 2001 through 2012 for which the Commission was the oversight agency—generally, the agency providing the predominant amount of funding directly to the recipient—we found that 29 had evidence of a potential problem—in 22 cases with the Commission’s funding specifically, and in 7 cases with Commission officials stated that, in some funding from other agencies.cases, when program staff was aware of one of these instances, they followed up with the grantee, but follow-up did not occur in a systematic manner. Unless the Commission takes steps to resolve the findings of these audits, or at least the ones that are relatively recent, the Commission risks continuing to award funds to grantees who may have inadequate controls over their grant funds. Under the federal internal control standard for monitoring, managers are to (1) promptly evaluate findings from audits and other reviews, including those showing deficiencies and recommendations reported by auditors and others who evaluate agencies’ operations; (2) determine proper actions in response to findings and recommendations from audits and reviews; and (3) complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management’s attention. Under this standard, monitoring of internal control should include policies and procedures for ensuring that the findings of audits and other reviews are promptly resolved, including the time frames in which the findings of audits and other reviews are to be resolved. However, officials acknowledged that the Commission does not have a policy or process in place for obtaining, reviewing, or acting upon the results of single audits. Without a documented process for ensuring that the findings of audits and other reviews are promptly resolved, the Commission is not likely to take action on the findings of such audits. Commission officials often did not perform required project and grant closeout steps in a timely manner. As we have previously found, closeout processes can be used for detecting problems that have occurred in areas such as recipient financial management and program operations, accounting for any real and personal property acquired with federal funds, making upward or downward adjustments to the federal share of costs, and receiving refunds that the recipient is not authorized to retain. Further, closeout procedures are intended to ensure that recipients have met all financial requirements, provided final reports, and returned any unused funds. When agencies do not conduct closeout procedures in a timely manner, this increases risk that records will be lost or the grantee’s officials may leave or not remember sufficient details, making it more difficult for the agency to recoup unused funds. GAO-11-773T. with late closeout reports had unused funds of approximately $750,000 that sat idle for periods ranging from about 3 weeks to over 5 years. In addition, until the projects were closed out, the grants that funded them could not be closed out. As we previously found for federal agencies, OMB guidance and agency regulations generally require grantees to submit all financial and performance reports and liquidate all obligations incurred under the grant within 90 days after the completion of the grant. Awarding agencies must then make prompt payments to grantees for allowable reimbursable costs for the grant being closed out. In 2013, Commission officials were actively engaged in closing out grants. From September 2012 to May 2013, Commission records indicate that grants totaling about $8.7 million in unused funds were closed out, and the funds de-obligated. However, the Commission official leading this effort left the agency in August 2013, and Commission officials indicated that no one took over this effort, although program managers, to the extent they are available, have continued this work. Incomplete and late grant closeouts have led to a substantial amount of unused Commission funds—$6.5 million as of June 2014—not being put to other uses. About half of these funds were from grants with award periods that ended in 2012 or earlier. Unless the Commission enhances its efforts to close out projects and grants and de-obligates unused but available funds in a timelier manner, taxpayer dollars provided to the Commission may continue to sit idle for excessively long periods of time. Finally, the Commission has not established a record retention policy as required by federal regulations. This regulation requires agencies to develop record retention policies and obtain approval from the National Archives and Records Administration before implementing the policies, but the Commission did not submit such a draft policy for review until April 2013. As of June 2014, the Commission had not received a decision on the policy; Commission management expected a decision by December 2014. Operating without a record retention policy has led to inconsistencies in how the Commission’s records have been treated. Specifically, some records for grants that have been completed and closed out for many years have been retained. For example, among the projects we reviewed, the Commission maintained records for an award with a performance period that began in December 2000 and ended in September 2004, and At the same time, according which was closed out in December 2004.to Commission staff, the Commission does not generally retain documentation related to unsuccessful applications for grants and projects. Moreover, some Commission officials told us that they were directed to dispose of certain records in the past. For example, Commission officials told us that, at the direction of Commission management, they disposed of bank records from project operators— information that was subsequently needed for an Inspector General inspection. According to Commission management, having a record retention policy in place would not have led to retaining these records because, at the time, neither Commission management nor staff understood what the documents were or that they were associated with Commission-funded grants and projects. Once the Commission’s former Inspector General, prior to his resignation, identified the bank records as relevant documentation, the Commission began retaining such records. Unless the Commission implements its record retention policy, once it is approved, inconsistent record management is likely to continue in the future. Since its inception in 1998, the Denali Commission has funded numerous energy, health, and infrastructure projects that have improved the lives of many rural Alaskans. The principal conflict-of-interest law prevents commissioners from providing their expert advice and opinions on particular matters that would directly affect the financial interest of their employers. Different structures for the Commission, such as the four options identified, could better leverage commissioners’ expertise in the development of the annual work plan. Because the Denali Commission Act does not include holdover or delegation of authority provisions, the Commission has been stymied for significant periods of time after the expiration of a Federal Cochair’s term, affecting the Commission’s day-to-day operations and the Federal Cochair’s statutory responsibilities. Most recently, the Commission was unable to award new grants or submit its annual work plan during a nearly 4-month vacancy in 2014. Without such provisions being enacted into law, the risk remains that the next vacancy in the Federal Cochair position may again bring the Commission to a standstill. Moreover, as the Commission’s funding has decreased, administrative expenses have consumed a more significant part of its overall budget—up to 24 percent in fiscal year 2014. Under the existing 5 percent cap on administrative expenditures, it is unlikely that the Commission will be able to conduct essential administrative activities, such as oversight of its existing and new grants portfolio. While this cap was waived in each of the last 10 fiscal years in appropriation laws, unless Congress amends the act to modify or end it, the Commission will lack flexibility to plan and budget for essential administrative activities. Given the Commission’s 90-percent decrease in funding since 2007, it may not be feasible to continue relying on grant making as its primary approach to achieve its statutory purpose. Unless the Commission reexamines how it operates and realigns its approach to better match its limited budget—and clearly articulates this new approach in a strategic plan, as it is required to do every 4 years—the Commission risks falling into obsolescence. Without issuing a new strategic plan that clearly articulates its approach for fulfilling its statutory purpose amidst decreased funding, the Commission may not be prioritizing its operations in a manner that aligns with its current budget situation. In addition, while the Commission has faced numerous and complex legal questions, it has never had a full-time attorney providing it legal advice and support on a routine and consistent basis, which has led to avoidable legal mistakes. Unless the Commission obtains a full-time attorney to provide legal advice and serve as the Commission’s designated ethics officer, it may find it difficult to address current and future legal matters and will remain at risk of making costly legal mistakes. While the Commission has awarded over $1 billion in grants to help develop the infrastructure and economy of rural communities in Alaska, it has done so without documented policies for how it awards and manages its grants, resulting in inconsistencies in how the Commission awards and monitors grants. Unless the Commission issues such policies, it risks compromising its ability to ensure that grants are awarded properly, clear expectations are set and all parties are accountable, and that federal funds are used as intended and in accordance with applicable laws and regulations. In addition, while the federal internal control standard for monitoring requires, among other things, that the findings of audits and other reviews are promptly resolved, the Commission does not have a process for obtaining, reviewing, or acting on the results of federal single audits of its grantees. Without a documented process for ensuring that the findings of federal single audits and other reviews are promptly resolved, the Commission is not likely to take action on the findings of such audits. Moreover, single audits that raised potential problems could inform the Commission’s future decisions about awarding grants. Unless the Commission takes action to resolve the findings of these audits, at least the recent ones, it risks continuing to award grants to grantees who may have inadequate controls over grant funds. Moreover, the Commission made significant progress in 2013 in closing out expired grants with unused funds, but more work remains to be done in this area, with over $4 million as of September 2014 not being put to other uses. The Commission’s closeout procedures are intended to ensure that recipients have met all financial requirements, provided final reports, and returned any unused funds. Failing to close out grants and de-obligate unspent funds in a timely manner means that taxpayer dollars may sit idle, and the Commission has fewer resources to meet its statutory purpose. Finally, although the Commission has submitted a draft record retention policy to the National Archives and Records Administration as required by federal regulation, it must follow through to implement the policy once it is approved. Unless it does so, the Commission may continue to experience problems with inconsistent record management and retention. To better leverage the commissioners’ expertise in the development of the annual work plan, Congress should consider amending the Denali Commission Act, potentially with one of the identified options. To address barriers to the operation of the Commission, Congress should consider amending the Denali Commission Act to include either a holdover or delegation of authority provision when the Federal Cochair position is vacant. To allow for greater flexibility in the Commission’s operations, Congress should consider amending the Denali Commission Act to modify or end the 5 percent cap on administrative expenditures. To enhance the Commission’s operations, we recommend that the Commission’s Federal Cochair direct the Commission to consider options for fulfilling the Commission’s statutory purpose and finalize that new approach in a new strategic plan. To address the Commission’s legal challenges, we recommend that the Commission’s Federal Cochair direct the Commission to obtain a full-time attorney who would provide legal advice, including reviewing contracts and agreements, and serve as the Commission’s designated ethics officer. To improve the Commission’s grants management, we recommend that the Commission’s Federal Cochair direct the Commission to take the following four actions: issue Commission-specific policies for awarding and managing grants; establish a documented process for ensuring that the findings of single audits of grantees are promptly resolved and take action to resolve any recent single audits that showed evidence of a potential problem; continue efforts to close out grants and projects, including de- obligating unspent grant funds in a timely manner; and take steps to consistently manage and retain Commission records, including implementing its record retention policy once it is approved. We provided a draft of this report to the Denali Commission and the Department of Commerce for review and comment. Written comments from the Federal Cochair; the State Cochair, representing the views of the other six commissioners; and the Department of Commerce; are reproduced in appendixes IV, V, and VI, respectively. The Federal Cochair concurred with our conclusions and recommendations, and he summarized the Commission’s ongoing efforts to address our recommendations. The Federal Cochair also provided technical comments that we incorporated, as appropriate. The other six commissioners of the Denali Commission also concurred with our conclusions and recommendations. The Department of Commerce did not comment on our conclusions and recommendations. The letter from the Deputy Secretary of Commerce reiterated that the Denali Commission is an independent agency. After the draft report was provided for review and comment, we received new and updated information on the ethics issues discussed in the draft report from Commerce, the Denali Commission, and OGE. We updated the ethics section of the report accordingly to reflect this new information. We also updated the draft Matter for Congressional Consideration on the ethics issue to focus it on the question of what is the best statutory framework to better leverage the commissioners’ expertise and we deleted the draft Matter for Congressional Consideration on the commissioners’ roles and responsibilities. We discussed these subsequent changes with the Federal Cochair on February 4, 2015. The Federal Cochair concurred with our conclusions and revised recommendations, and he summarized the Commission’s ongoing efforts to address our recommendations. The Federal Cochair reiterated the need to obtain clarity on Commerce’s responsibilities vis-à- vis the Commission. In addition, we have learned that, consistent with the recommendations in our draft report, the Commission started a new strategic planning effort in January 2015 and has hired a full-time attorney, who began work on January 12, 2015. We are sending copies of this report to the appropriate congressional committees, the Denali Commission’s Federal Cochair and other commissioners, the Secretary of Commerce, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or fennella@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VII. This report examines (1) the challenges, if any, the Denali Commission (Commission) and commissioners face in fulfilling the Commission’s statutory purpose and options to address them; (2) the challenges, if any, that have hindered the daily operations of the Commission; and (3) the Commission’s policies and procedures for awarding and managing grants and the extent to which grantees and commission officials complied with these policies and procedures. We reported separately on the Denali Commission’s Office of Inspector General in September 2014. To inform our review of all three objectives, we analyzed the Denali Commission Act of 1998, as amended; relevant federal laws; regulations; legislative history; agency guidance; and other documents and information related to the commission’s structure and operations. To obtain their views on our objectives, we interviewed Commission officials and staff, including the current federal cochairperson (Federal Cochair) and other Commission officials, as well as a former Federal Cochair and selected former Commission staff; all current commissioners and selected former commissioners; and the attorney assisting the Commission on ethics and certain other legal matters. We also interviewed several stakeholders—parties affected by the Commission and its decisions— including commissioners and the organizations they work for; program partners (generally, state agencies or other entities that receive grants from the Commission and oversee projects funded by those grants); other grant recipients; and residents of rural Alaskan communities. We also analyzed the structure and function of other similar agencies and bodies that provide advice or direction to federal agencies, including the Appalachian Regional Commission, Delta Regional Authority, and fishery management councils, focusing on their organic legislation and conflict- of-interest provisions. To inform our analysis, we also conducted site visits to Anchorage and five selected remote communities in Alaska: Nome, Savoonga, Unalakleet, Ketchikan, and Metlakatla. We selected these communities based on selection criteria that included the number and variety of Commission-funded projects, geographic location, accessibility, and their relative proximity to each other. We visited Nome, Savoonga, and Unalakleet in one trip and Ketchikan and Metlakatla in a second trip. In these communities, we spoke with local officials representing municipal government, tribal entities, and grant recipients, among others, to discuss their experiences working with the Commission. To identify and assess specific challenges faced by the Commission and its commissioners in fulfilling the Commission’s statutory purpose, we also analyzed appropriation and spending data to determine how the commission’s funding and activities have changed over time. We collected and reviewed documents, guidance, and our prior reports related to strategic planning and organizational change. We also analyzed legal opinions; correspondence; and other documents and information related to the role of the commissioners, including the applicability of the principal conflict-of-interest law. To identify possible options for how the Commission can operate in the future, we synthesized information collected from semistructured interviews and e-mails; assessed options presented by similar agencies or commissions; and analyzed relevant evaluations of the Commission. To identify possible options to better leverage the commissioners’ expertise, we analyzed laws, regulations, legislative history, legal opinions, correspondence, and other documents and information related to the role of the commissioners, including their status as special government employees and other more recent changes. We also analyzed the structure and function of other similar agencies, such as the Appalachian Regional Commission and the Delta Regional Authority, and bodies that provide advice to federal agencies, such as regional fishery management councils,identify possible options for the commissioners. We also interviewed officials from the Office of Government Ethics. focusing on their applicable conflict-of-interest provisions to To identify and assess specific challenges that hindered the Commission’s daily operations, we also analyzed legal opinions; correspondence; and other documents and information related to, among other things, the position of the Federal Cochair, the role played by agency attorneys, and the supervision of the Inspector General. We also analyzed the authorizing laws for other similar commissions and bodies for when there is a vacancy of the top official, including the Appalachian Regional Commission and the Delta Regional Authority. We collected and analyzed documents related to internal controls, such as risk management, and agency operations. We also interviewed officials from the Department of Commerce (Commerce) and collected and analyzed documents and e-mails related to the relationship between the Commission and Commerce. To evaluate the Commission’s policies and procedures for awarding and managing grants and the extent to which grantees and commission officials complied with these policies and procedures, we selected a random sample of 100 of the approximately 2,349 Commission-funded projects from fiscal years 1999 through 2013. This sample allowed us to make estimates about all Commission-funded projects during this time period. With this probability sample, each member of the study population had a nonzero probability of being included, and that probability could be computed for any member. Each sample element was subsequently weighted in the analysis to account statistically for all members of the population, including those who were not selected. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval. This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. All percentage estimates from the file review have margins of error at the 95 percent confidence level of plus or minus 10 percentage points or less. We developed a data collection instrument to collect several pieces of data for each project selected. To ensure the reliability of the data we collected, multiple analysts were involved in gathering, entering, and verifying the data in the data collection instrument. First, we obtained documentation related to these projects from the Commission’s Project Database System and from a review of the Commission’s paper files conducted at the Commission’s office in Anchorage in September 2013. We then analyzed these documents to determine the extent to which grantees complied with requirements in the relevant grant agreements and other similar documents. We evaluated this documentation to determine, among other things: what reporting was required for each project, including progress reports; Labor, Wage, and Residency reports; financial status reports; and closeout reports, among others; the extent to which grantees complied with these reporting requirements, including whether reports were submitted in a timely manner and whether their content adequately satisfied the requirement; and whether any delays or other shortcomings in reporting contributed to other problems, such as late closeout reports leading to unused funds sitting idle for a period of time or payments to grantees during periods of inadequate progress reporting. We followed up with Commission officials to discuss particular aspects of grant requirements and reporting to ensure our understanding was accurate. To assess the reliability of the data in the Project Database System, we interviewed Commission officials and grant managers about the data system and elements, how the system is used, and the method of data input, among other areas. In some cases, a certain amount of judgment was required to ascertain certain aspects of projects, such as the exact start and end date of a project; to mitigate against any uncertainty created by these judgments, all data points that support the analysis presented in this report underwent a confirmation process by a second reviewer. We determined that the data we used were sufficiently reliable for our purposes. We conducted this performance audit from May 2013 to March 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Examples of Commission Grant Management Checklists (Corresponds to Fig. 5) Following are the full-sized, printable versions of the Denali Commission (Commission) grant management checklists included in figure 5 of this report. In September 2001, the Denali Commission (Commission) passed a resolution outlining new sustainability guidelines for its infrastructure projects and requiring the completion of business plans before construction funding was awarded on most infrastructure projects. To this end, the Commission used a number of different methods to promote sustainability, including the following: requiring that grantees develop a business operating plan for the facility’s operator, which outlines how they will successfully operate and manage the facility, prior to receiving construction funding; requiring the primary operator of each facility, and the owner if they were not the same entity, to sign a secondary operator agreement, which provides that if the facility is not operated sustainably and in accordance with the business operating plan, and such behavior significantly threatens the long-term economic sustainability of the facility, the Commission has the right to select a new, or secondary operator; and requiring that the operator commit to funding the facility through the creation of two enterprise bank accounts, an “operations and maintenance” account and a “renewal and replacement” account, which were to be funded from the revenue generated by selling fuel or electricity and not from the Commission’s grant or other federal agency money. However, the Commission’s Inspector General, in his Fiscal Year 2012 Second Half report, raised several concerns related to both operation and maintenance and renewal and replacement accounts, including whether the accounts had been created, funded, and used for their intended purpose. In this report, the Inspector General also raised concerns about funds missing from these accounts, which some interpreted as including federal dollars. However, these accounts were not intended to be funded with federal funds, but rather by the revenue generated by selling the electricity produced by the facility or fuel stored in the facility. According to the federal cochairperson (Federal Cochair), the Commission has not enforced the requirement for some operators to set aside funds to pay for project renewal and replacement costs and report to the Commission annually on the status of these funds. Likewise, the Commission has not followed up with operators who did not submit this information, and, until the Inspector General’s December 2012 report, had After the Inspector General’s report, the not checked on these accounts.Commission hired an intermittent employee to review the status of project recipients’ renewal and replacement accounts. The employee contacted dozens of operators of bulk fuel facilities and rural power systems funded by the Commission and asked about their accounts. Overall, about half of the operators reported creating such renewal and replacement accounts, although these operators were not required to provide documentation of these accounts. The employee also reviewed Commission records but found little documentation. According to at least one former Commission official, the records that staff had been instructed to dispose of (as discussed earlier) showed that such renewal and replacement accounts existed. In addition, the Inspector General questioned whether the Commission inadvertently put itself in a position to potentially be held liable for the facilities in perpetuity through its secondary operator agreements. As discussed earlier, questions exist about the secondary operator agreements and other related agreements being valid contracts and, if valid, whether they impose liability on the Commission. At the Federal Cochair’s request, the attorney assisting the Commission has researched whether the agreements impose liability on the Commission. the results of his research, commissioners may make a decision on whether to terminate, rewrite, or continue the agreements. According to the Federal Cochair, the Commission has not tried to invoke these secondary operator agreements. The attorney was not asked to and did not research whether the secondary operator agreements and the other related agreements are valid contracts. Anne-Marie Fennell, (202) 512-3841 or fennella@gao.gov. In addition to the individual named above, Jeffery D. Malcolm (Assistant Director), Carolyn Blocker, Mark Braza, John Delicath, Justin Fisher, Stuart Kaufman, Armetha Liles, Josh Ormond, Christine San, Nico Sloss, Jeanette Soares, Kiki Theodoropoulos, and Tama Weinberg made key contributions to this report. | Since establishment in 1998 by statute, the Denali Commission has awarded over $1 billion in federal grants to help develop Alaska's remote communities. The Commission has a Federal Cochair and six other commissioners. GAO was asked to review the management of the Commission. This report examines (1) challenges the Commission has faced in fulfilling its statutory purpose and options to address them; (2) challenges that hindered the Commission's daily operations; and (3) the Commission's policies and procedures for managing grants and the extent of compliance with them. GAO reviewed key laws and policies; interviewed former and current commissioners and such stakeholders as state agencies that received grants; and analyzed a random sample of 100 projects funded by Commission grants for fiscal years 1999 through 2013. The Denali Commission has faced two key challenges in fulfilling its statutory purpose of providing, among other things, infrastructure and economic development services to rural communities; but options exist to address them. First, a 90 percent decrease in Commission funding from its peak in fiscal year 2007 has raised concerns about whether the Commission can sustain its current approach as primarily a grant-making agency. Given its funding challenge, stakeholders GAO interviewed identified several options for how the Commission could approach fulfilling its statutory purpose in the future, such as shifting its focus to facilitating economic development projects or maintaining existing infrastructure rather than funding new projects. Even though the Commission has taken some steps to reassess its long-term approach, such as conducting statewide listening sessions on how best to assist rural Alaskans in the future, it has not finalized such an approach in a new multiyear strategic plan. Second, the Department of Justice's 2006 determination on the applicability of the principal federal conflict-of-interest law has resulted in a Commission that is, at times, deprived of the expertise of its six commissioners. Concerns about possible criminal prosecution for conflicts of interest have resulted in commissioners regularly recusing themselves from Commission decision-making activities. Based on various sources, GAO identified four options for restructuring the Commission so that it can better leverage the expertise of its commissioners in light of the 2006 determination. Each of the options would require changes to the Denali Commission Act, which established the Commission. The Commission has faced several challenges that have hindered its daily operations, including having periodic vacancies in the Federal Cochair position and not having an attorney. Having a vacancy in the Federal Cochair position has twice stymied the Commission because only the Federal Cochair is authorized to take certain critical actions, such as approving new grants. The Denali Commission Act does not provide for an acting Federal Cochair and does not allow the Federal Cochair to delegate authority to another person or to remain in office beyond the expiration of his or her 4-year term (holdover). In addition, even in the face of numerous complex legal questions, such as the applicability of the principal federal conflict-of-interest law, the Commission has never had a full-time attorney to provide it with legal advice and support on a routine and consistent basis. Without an attorney to help the Commission identify and navigate risks consistent with federal standards for internal control, the Commission is at increased risk for making legal mistakes. The Commission has some key procedures in place for administering its grants, but GAO found several shortcomings in how the Commission has managed its grants. Both the Commission's internal checklists and its online grants database meet established criteria for good grant management and oversight. However, the Commission does not have documented grant-making policies in place, leading to inconsistencies in how it awards and manages grants. For example, the Commission's awarding of grants has not always been open or competitive, and its monitoring of grant and project recipients has been inconsistent. Unless it issues grant management policies, the Commission may not be setting clear expectations for grantees, making it difficult to hold them accountable for fulfilling the terms of grant agreements. Congress should consider amending the Denali Commission Act to, among other things, restructure the Commission to better leverage the commissioners' expertise, and create a delegation of authority or holdover provision for the Federal Cochair position. GAO recommends, among other things, that the Commission consider options for fulfilling its statutory purpose and finalize its approach in a new strategic plan; obtain a full-time attorney; and issue grants management policies. The Denali Commission, including its commissioners, agreed with GAO's conclusions and recommendations. |
Historically, the U.S. government has granted federal recognition through treaties, congressional acts, or administrative decisions within the executive branch—principally by the Department of the Interior. In a 1977 report to the Congress, the American Indian Policy Review Commission criticized the department’s tribal recognition policy. Specifically, the report stated that the department’s criteria for assessing whether a group should be recognized as a tribe were not clear and concluded that a large part of the department’s policy depended on which official responded to the group’s inquiries. Nevertheless, until the 1960s, the limited number of requests for federal recognition gave the department the flexibility to assess a group’s status on a case-by-case basis without formal guidelines. However, in response to an increase in the number of requests for federal recognition, the department determined that it needed a uniform and objective approach to evaluate these requests. In 1978, it established a regulatory process for recognizing tribes whose relationship with the United States had either lapsed or never been established—although tribes may also seek recognition through other avenues, such as legislation or Department of the Interior administrative decisions, which are unconnected to the regulatory process. In addition, not all tribes are eligible for the regulatory process. For example, tribes whose political relationship with the United States has been terminated by the Congress, or tribes whose members are officially part of an already recognized tribe, are ineligible to be recognized through the regulatory process and must seek recognition through other avenues. The 1978 regulations lay out seven criteria that a group must meet before it can become a federally recognized tribe. Essentially, these criteria require the petitioner to show that it is descended from a historic tribe and is a distinct community that has continuously existed as a political entity since a time when the federal government broadly acknowledged a political relationship with all Indian tribes. The burden of proof is on petitioners to provide documentation to satisfy the seven criteria. The technical staff within Interior’s Office of Federal Acknowledgment, consisting of historians, anthropologists, and genealogists, reviews the submitted documentation and makes recommendations on a proposed finding either for or against recognition. Staff recommendations are subject to review by Interior’s Office of the Solicitor and senior officials within the Office of the Assistant Secretary for Indian Affairs. The Assistant Secretary for Indian Affairs makes the final decision regarding the proposed finding, which is then published in the Federal Register, and a period of public comment, document submission, and response is allowed. The technical staff reviews the comments, documentation, and responses and makes recommendations on a final determination that are subject to the same levels of review as a proposed finding. The process culminates in a final determination by the Assistant Secretary who, depending on the nature of further evidence submitted, may or may not rule the same way as the proposed finding. Petitioners and others may file requests for reconsideration with the Interior Board of Indian Appeals. Congressional policymakers have struggled with the tribal recognition issue for decades. Since 1977, 28 bills have been introduced to add a statutory framework for the tribal recognition process (see table 1). Of the House bills, only H.R. 4462 from the 103rd Congress was passed by the full House (on October 3, 1994). None of the Senate bills have been passed by the full Senate. Additional bills have also been introduced to recognize specific tribes; provide grants to local communities or Indian groups involved in the tribal recognition process; or, more recently, address the timeliness of the recognition process. For example, H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. BIA’s regulations outline a process for active consideration of a completed petition that should take about 2 years. However, because of limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, we reported in 2001 that the length of time needed to rule on tribal petitions for federal recognition was substantial. At that time, the workload of the BIA staff assigned to evaluate recognition decisions had increased while resources had declined. There was a large influx of completed petitions ready to be reviewed in the mid- 1990s. The chief of the branch responsible for evaluating petitions told us that based solely on the historic rate at which BIA had issued final determinations, it could take 15 years to resolve all the completed petitions then awaiting active consideration. Compounding the backlog of petitions awaiting evaluation in 2001 was the increased burden of related administrative responsibilities that reduced the proportion of time available to BIA’s technical staff to evaluate petitions. Although they could not provide precise data, members of the staff told us that this burden had increased substantially over the years and estimated that they spent up to 40 percent of their time fulfilling administrative responsibilities. In particular, there were substantial numbers of Freedom of Information Act (FOIA) requests related to petitions. Also, petitioners and third parties frequently filed requests for reconsideration of recognition decisions that needed to be reviewed by the Interior Board of Indian Appeals, requiring the staff to prepare the record and respond to issues referred to the Board. Finally, the regulatory process had been subject to an increasing number of lawsuits from dissatisfied parties—those petitioners who had completed the process and had been denied recognition, as well as by petitioners who were dissatisfied with the amount of time it was taking to process their petitions. Technical staff represented the vast majority of resources used by BIA to evaluate petitions and perform related administrative duties. Despite the increased workload faced by BIA’s technical staff, the available staff resources to complete the workload had decreased. The number of BIA staff assigned to evaluate petitions peaked in 1993 at 17. However, from 1996 through 2000, the number of staff averaged less than 11, a decrease of more than 35 percent. While resources were not keeping pace with workload, the recognition process also lacked effective procedures for addressing the workload in a timely manner. Although the regulations established timelines for processing petitions that, if met, would result in a final decision in approximately 2 years, these timelines were routinely extended, either because of BIA resource constraints or at the request of petitioners and third parties (upon showing good cause). As a result, only 12 of the 32 petitions that BIA had finished reviewing by 2001 were completed within 2 years or less, and all but 2 of the 13 petitions under review in 2001 had already been under review for more than 2 years. While BIA could extend the timelines, it had no mechanism to balance the need for a thorough review of a petition with the need to complete the decision process. As a result, the decision process lacked effective timelines that would have created a sense of urgency to offset the desire to consider all information from all interested parties in the process. In fiscal year 2000, BIA dropped its long-term goal of reducing the number of petitions actively being considered from its annual performance plan because the addition of new petitions would have made this goal impossible to achieve. We also found that as third parties, such as local municipalities and other Indian tribes, became more active in the recognition process—for example, initiating inquiries and providing information—the procedures for responding to their increased interest had not kept pace. Third parties told us they wanted more detailed information earlier in the process so that they could fully understand a petition and effectively comment on its merits. However, in 2001 there were no procedures for regularly providing third parties more detailed information. For example, while third parties were allowed to comment on the merits of a petition before a proposed finding, there was no mechanism to provide any information to third parties before the proposed finding. As a result, third parties were making FOIA requests for information on petitions much earlier in the process and often more than once in an attempt to obtain the latest documentation submitted. Since BIA had no procedures for efficiently responding to FOIA requests, staff members hired as historians, genealogists, and anthropologists were pressed into service to copy the voluminous records of petitions to respond to FOIA requests. In light of these problems, we recommended in our November 2001 report that the Secretary of the Interior direct BIA to develop a strategy to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. The department generally agreed with this recommendation. In response to our report, Interior’s Office of Federal Acknowledgment has hired additional staff and taken a number of other important steps to improve the responsiveness of the tribal recognition process. However, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those ready and waiting for consideration. In response to our report, two vacancies within Interior’s Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In September 2002, the Assistant Secretary for Indian Affairs estimated that three research teams could issue three proposed findings and three final determinations per year and eliminate the backlog of petitions in approximately 6 years, or by September 2008. Through additional appropriations in fiscal years 2003 and 2004, the Office of Federal Acknowledgment was also able to utilize two sets of contractors to assist with the tribal recognition process. The first set of contractors included two FOIA specialists/record managers. The second set of contractors included three research assistants who worked with a computer database system scanning and indexing documents to help expedite the professional research staff evaluation of a petition. Both sets of contractors helped make the process more accessible to petitioners and interested parties, while increasing the productivity of the professional staff by freeing them of administrative duties. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to our report, has been almost completely implemented by the Office of Federal Acknowledgment. Among other things, the Office of Federal Acknowledgment has developed a CD-ROM compilation of prior acknowledgment decisions and related documents that is a valuable tool for petitions and practitioners involved in the tribal recognition process. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds. Even though Interior’s Office of Federal Acknowledgment has increased staff resources for processing petitions and taken other actions that we recommended, as of February 4, 2005, there were 7 petitions in active status and 12 petitions in ready and waiting for active consideration status. Eight of the 12 petitions have been waiting for 7 years or more, while the 4 other petitions have been ready and waiting for active consideration since 2003. In conclusion, although Interior’s recognition process is only one way by which groups can receive federal recognition, it is the only avenue to federal recognition that has established criteria and a public process for determining whether groups meet the criteria. However, in the past, limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties resulted in substantial wait times for Indian groups seeking federal recognition. While Interior’s Office of Federal Acknowledgment has taken a number of actions during the past 3 years to improve the timeliness of the process, it will still take years to work through the existing backlog of tribal recognition petitions. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other Members of the Committee may have at this time. For further information, please contact Robin M. Nazzaro on (202) 512- 3841. Individuals making key contributions to this testimony and the report on which it was based are Charles Egan, Mark Gaffigan, and Jeffery Malcolm. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Bureau of Indian Affairs' (BIA) regulatory process for recognizing tribes was established in 1978. The process requires groups that are petitioning for recognition to submit evidence that they meet certain criteria--basically that the petitioner has continuously existed as an Indian tribe since historic times. Critics of the process claim that it produces inconsistent decisions and takes too long. Congressional policymakers have struggled with the tribal recognition issue for over 27 years. H.R. 4933 and H.R. 5134, introduced in the 108th Congress, and H.R. 512, which was introduced last week, have focused on the timeliness of the recognition process. This testimony is based in part on GAO's report, Indian Issues: Improvements Needed in Tribal Recognition Process ( GAO-02-49 , November 2, 2001). Specifically, this testimony addresses (1) the timeliness of the recognition process as GAO reported in November 2001 and (2) the actions the Department of the Interior's Office of Federal Acknowledgment has taken since 2001 to improve the timeliness of the recognition process. In November 2001, GAO reported that BIA's tribal recognition process was ill equipped to provide timely responses to tribal petitions for federal recognition. BIA's regulations outline a process for evaluating a petition that was designed to take about 2 years. However, the process was being hampered by limited resources, a lack of time frames, and ineffective procedures for providing information to interested third parties, such as local municipalities and other Indian tribes. As a result, there were a growing number of completed petitions waiting to be considered. In 2001, BIA officials estimated that it could take up to 15 years for all the completed petitions to be resolved. To correct these problems, we recommended that BIA develop a strategy that identified how to improve the responsiveness of the process for federal recognition. Such a strategy was to include a systematic assessment of the resources available and needed that could lead to the development of a budget commensurate with the workload. While Interior's Office of Federal Acknowledgment has taken a number of important steps to improve the responsiveness of the tribal recognition process, it still could take 4 or more years, at current staff levels, to work through the existing backlog of petitions currently under review, as well as those that are ready and waiting for consideration. In response to GAO's 2001 report, two vacancies within the Office of Federal Acknowledgment were filled, resulting in a professional staff of three research teams, each consisting of a cultural anthropologist, historian, and genealogist. In addition, the September 2002 Strategic Plan, issued by the Assistant Secretary for Indian Affairs in response to GAO's report, has been almost completely implemented by the Office of Federal Acknowledgment. The main impediment to completely implementing the Strategic Plan and to making all of the information that has been compiled more accessible to the public is the fact that BIA continues to be disconnected from the Internet because of ongoing computer security concerns involving Indian trust funds. |
The EIC is a refundable tax credit available to low-income working taxpayers. Congress established the EIC in 1975 to offset the impact of Social Security taxes on low-income families and to encourage low-income individuals with families to seek employment rather than welfare. EIC coverage and benefit amounts have expanded significantly since 1975. For example, provisions in the Omnibus Budget Reconciliation Act of 1993 (1) raised the maximum credit for families with two or more EIC-qualifying children to $2,528 for tax year 1994 and (2) made certain taxpayers without qualifying children eligible for the credit starting in tax year 1994. For tax year 1994, about 18.9 million taxpayers received about $20.8 billion in EIC benefits. Almost all of those benefits ($20.1 billion) went to families with EIC-qualifying children. Other families who qualify for the EIC may not be claiming it. In that regard, researchers have estimated that between 75 and 86 percent of all eligible families actually claimed the EIC in 1990. IRS data show high noncompliance rates associated with EIC claims. Some noncompliance involves mathematical errors and other obvious mistakes made by taxpayers or their representatives in preparing the returns. Staff in IRS’ 10 service centers are to review each paper return when it is received to make sure it is accurate and complete (e.g., includes required supporting schedules) and, for returns claiming the EIC, contains basic eligibility information, such as the age of qualifying children. Information is then entered into computers. The computers check for math and qualifying errors, some of which could affect EIC eligibility or the size of the EIC claim. EIC claims have for years been the source of many errors identified during processing. In 1995, for example, IRS identified 1.6 million EIC-related errors involving about 8 percent of all returns with EIC claims. Of the 1.6 million errors, about 600,000 involved situations where the taxpayer claimed the EIC but was found not to qualify and about 1 million involved cases where the taxpayer erred in computing the EIC. Other noncompliance involves mistakes that can be detected only through an audit of the return. In the past, IRS measured this kind of noncompliance through its Taxpayer Compliance Measurement Program (TCMP). The last TCMP, involving audits of tax year 1988 returns, found that about 42 percent of EIC recipients were not entitled to some or all of the credit that they claimed—representing about 34 percent of the EIC dollars paid that year. However, these TCMP results may not represent current compliance levels because the EIC has changed substantially since 1988. For example, changes enacted in 1990 included a major redesign and simplification of the EIC eligibility rules that had accounted for many of the errors found in the 1988 TCMP. More recently, IRS sampled EIC returns filed electronically during a 2-week period in January 1994. Although the results can be generalized only to returns filed in that 2-week period, IRS’ analysis of this limited EIC data showed that 39 percent of the returns involved overstated EIC claims that represented 26 percent of the dollars claimed. IRS conducted a broader, more statistically reliable study of EIC returns filed electronically and on paper in 1995. As of August 26, 1996, IRS had not released the results of that study. The most serious form of noncompliance involves deliberate attempts to defraud the government through, for example, phony refund claims. The Questionable Refund Program, established in the 1970s, is IRS’ primary effort to identify fraudulent refund claims, including those involving the EIC. An IRS computer program analyzes all returns to identify those that are potentially fraudulent. Then, fraud detection teams in the 10 service centers perform more in-depth reviews and, if a return is considered fraudulent, attempt to stop any refund before it is issued. The number of returns identified by IRS as containing fraudulent refund claims and the total dollar amount of stopped refunds have increased significantly since 1990. From January 1 through December 31, 1995, the fraud detection teams had identified about 62,000 fraudulent returns and stopped about $83 million in refunds. About 72 percent of the returns had EIC claims. We do not know whether that large percentage reflects (1) the level of EIC-related fraud compared with other types of fraud, (2) IRS’ emphasis on EIC-related fraud, or (3) the comparative ease of identifying EIC-related fraud versus other types of fraud. Over the past few years, more attention has been placed on determining whether the EIC is being paid to ineligible taxpayers. In 1995, IRS expanded its efforts to identify and stop incorrect refunds. Much of what IRS did involved verifying SSNs, with an emphasis on returns claiming the EIC. IRS was looking for SSNs that did not match the Social Security Administration’s records or that had been used on another return filed that year, and returns that were missing one or more required SSNs. IRS warned taxpayers that their refunds could be delayed if they submitted a return with a missing or incorrect SSN. On the cover of the instructions accompanying Form 1040, for example, IRS warned taxpayers to check their SSNs and explained that “incorrect or missing SSNs for you, your spouse, or dependents may delay your refund.” IRS also issued several public service announcements to alert taxpayers to the need for correct SSNs. Another important step IRS took in preparing for the 1995 filing season was to eliminate the direct deposit indicator. In conjunction with the electronic filing program, the private sector offers what is commonly referred to as a refund anticipation loan (RAL). These loans enable taxpayers, for a fee, to get their money more quickly than if they were to wait for IRS to issue their refunds. A taxpayer repays the loan by arranging to have the refund deposited directly to an account specified for repayment of the loan. Although RALs are contracts between the financial institution and the borrower, IRS facilitated the process in the past by providing the direct deposit indicator to the electronic return transmitter after the return was received, acknowledging that the taxpayer’s direct deposit request would be honored. IRS would not honor a request if the taxpayer had a debt, such as unpaid child support or unpaid federal taxes, that would be offset against the taxpayer’s refund. Because the opportunity to get money quickly through RALs was seen as encouraging electronic filing fraud and because a large number of EIC fraud schemes identified by IRS in the past involved RALs, IRS did not provide the direct deposit indicator in 1995. Our objective was to provide information on and our analysis of IRS’ efforts to reduce EIC noncompliance in 1995. To achieve our objective, we reviewed studies on EIC noncompliance, reviewed IRS’ initiatives and procedures for preventing and detecting EIC analyzed IRS data on the results of its efforts to reduce EIC noncompliance, interviewed IRS National Office officials responsible for various EIC compliance initiatives, and interviewed Cincinnati and Fresno Service Center officials responsible for EIC-related studies or investigations. IRS took several steps in 1995 to address a growing problem with refund fraud in general. In March 1996, we reported on those efforts. Unlike that report, this report focuses, to the extent possible, on IRS’ efforts and results as they relate specifically to EIC noncompliance. As discussed later, our attempt to focus specifically on EIC-related results was limited by the nature of IRS’ data. We relied on data provided in IRS’ reports and did not verify the data. We did our work from January 1995 through June 1996 in accordance with generally accepted government auditing standards. You also asked us to determine the extent of EIC noncompliance. Although this letter contains some data on noncompliance, a critical piece of information needed to respond to that portion of your request—the results of IRS’ study of EIC returns filed in 1995—was unavailable at the time we prepared this report. That study was designed to provide current and projectable data on the extent of EIC noncompliance. IRS said that it would provide a report on the results of this study after completing its analysis of the data. After we receive the report, we will analyze the results and issue a separate product. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 30, 1996, we met with the Assistant Commissioner for Criminal Investigations and other IRS officials, who provided us with oral comments. Those comments were generally reiterated and expanded upon in an August 12, 1996, letter from the Acting Chief Compliance Officer. IRS’ comments are summarized and evaluated beginning on page 12 and the Acting Chief’s letter is reprinted in the appendix. IRS took several steps in 1995 to combat a growing problem with refund fraud in general and, more specifically, EIC noncompliance. Most significantly, IRS (1) expanded the up-front controls in its Electronic Filing System, (2) placed increased emphasis on its efforts to verify SSNs on paper returns, and (3) held up the refunds on millions of EIC returns with valid SSNs to allow IRS time to check for duplicate SSN usage. IRS’ efforts had some positive results (e.g., over $800 million in reduced refunds and additional tax assessments) but also had some problems (e.g., an inability to follow through on plans to check for duplicate SSNs) that limited their effectiveness. IRS’ efforts and the publicity surrounding them also may have had a sizable deterrent effect. For example, they may have contributed to the receipt of many fewer EIC claims in 1995 than IRS had expected. For the past several years, IRS has included up-front controls (filters) in its Electronic Filing System to identify submissions that had data problems, such as missing or invalid SSNs or an SSN that had already been used on another return filed for the same tax year. If a problem was identified, IRS refused to accept the electronic submission until the problem was corrected. In 1994, IRS’ electronic filters identified about 1 million SSN problems, about 600,000 of which involved the EIC. In 1995, IRS added more electronic filters to prevent multiple use of an SSN on a return or EIC schedule and identified 4.1 million SSN problems, of which about 1.3 million involved the EIC. Those EIC-related problems included instances where the SSN, name, and date of birth for an EIC-qualifying child did not match Social Security Administration records and instances where the SSN had been previously used on another return claiming an EIC-qualifying child. There is no way of knowing how many of those problems involved intentional noncompliance, as opposed to honest mistakes or IRS database problems. Also, IRS does not routinely track electronic filing rejections and thus does not know whether the problems were eventually resolved or whether the rejected returns were ever resubmitted (either electronically or on paper). However, evidence suggests that some taxpayers whose electronic submissions were rejected because of an SSN problem were able to avoid the problem by filing on paper. IRS reviewed 395 electronic submissions that were rejected because of duplicate SSNs and found that in 113 cases (29 percent) the taxpayers subsequently filed on paper, using the same problem SSNs, and received their refunds. The results of this test, which involved cases from two of the five IRS service centers that receive electronic returns, are not projectable to all electronic filers. IRS also set up controls to better identify noncompliance on paper returns. Starting in 1994, IRS identified certain returns that had missing or invalid SSNs for EIC-qualifying children and delayed refunds to give Examination staff in IRS’ 10 service centers enough time to validate EIC eligibility. Those validation efforts in 1994 showed that about 300,000 of the EIC claimants were ineligible for some portion of the credit. IRS expanded its SSN validation efforts in 1995 to include dependents with a problem SSN and identified 3.3 million paper returns with 1 or more missing or invalid SSNs for EIC-qualifying children and/or dependents.About 3 million of those returns involved requests for refunds. Examination had enough resources to review only about 1 million of the questionable returns. In those 1 million cases, IRS sent notices to taxpayers telling them (1) that a problem had been identified with their returns; (2) what they had to do to resolve the problem; and (3) that their refund, if they had claimed one, was being delayed while IRS checked for noncompliance. For the other 2.3 million returns, all of which involved refunds, IRS delayed the refunds but did not refer the returns to Examination for follow-up. The taxpayers were told that their refunds were being delayed but were not told that IRS had identified a problem on their returns. IRS subsequently released the refunds after holding them for several weeks. Information on the results of Examination’s review of the 1 million cases was not readily available from IRS. Although IRS routinely reports on the disposition of such reviews, the data are not reported in a way that aligns results with specific tax years. Instead, results are reported on the basis of the fiscal year a case is closed. Thus, data reported for fiscal year 1995 represented the results of all cases closed in 1995, no matter what the tax year. While that kind of reporting has value, it was not useful for assessing the results of IRS’ expanded SSN-verification procedures in 1995 because the results of that year’s cases were commingled with the results of prior years’ cases. To determine the results of IRS’ fiscal year 1995 efforts, we requested a special breakdown of Examination’s case closure data that aligned results by tax year. We analyzed the data and provided a copy to IRS’ Office of Refund Fraud. We concluded, and officials of the Office of Refund Fraud agreed, that tax year results are helpful in assessing program initiatives. According to IRS officials, these data could be provided on a regular basis at minimal cost. Our analysis of the special breakdown of Examination’s case closure data showed that 986,000 of the 1 million tax year 1994 cases had been closed as of June 30, 1996. Of the closed cases, 500,000 (51 percent) were closed with no change to the reported tax liability or refund because the taxpayers were able to prove that they were entitled to claim the dependent or the EIC. The other 486,000 cases were closed with changes (either in reduced refunds or additional taxes assessed) amounting to about $808 million. Even with our special breakdown, we do not know how much of this money related to EIC claims because IRS’ data did not distinguish between cases involving dependents and those involving EIC-qualifying children. According to data reported in IRS’ Data Book for fiscal years 1993 and 1994 (the most recent reported data), the 51-percent no-change rate for cases with missing or invalid SSNs for EIC-qualifying children or dependents was more than double the 24 percent no-change rate for all service center audits done in fiscal year 1994. The high no-change rate can be attributed to IRS procedures that, according to IRS’ Internal Audit Division, did not adequately ensure selection of the most productive cases and thus resulted in an inefficient use of Examination resources and an undue burden on thousands of taxpayers. IRS changed its procedures for 1996 in an attempt to target its resources on the most egregious cases and minimize the burden on taxpayers. Because IRS studies have shown a high risk of noncompliance with returns claiming the EIC, IRS decided to delay about 4 million EIC refunds in 1995 even though IRS had identified no missing or invalid SSNs on those returns.The 4 million returns included returns filed electronically and on paper with EIC claims above a certain dollar amount. IRS stated that one of its goals in doing so was to allow additional time to identify any returns that might be filed later using one or more of the same SSNs as the delayed returns, with the expectation that Examination staff would research the duplicate SSN usage and stop inappropriate refunds. IRS was not able to realize this potential because it did not have enough resources to research many questionable cases. After holding the refunds for several weeks, IRS released almost all of them without checking for duplicate SSNs. For the 1996 filing season, IRS revised its procedures so as not to delay refunds on returns with valid SSNs. An April 1996 report by IRS’ Internal Audit Division provided some indication of the level of noncompliance associated with the duplicate use of SSNs on EIC claims. In that report, Internal Audit estimated that the number of duplicate SSN occurrences on returns filed in 1995 ranged from 233,000 to 449,000 and that the revenue impact ranged from $283 million to $545 million. IRS’ efforts to better control EIC noncompliance in 1995 and the publicity surrounding them may have had a significant deterrent effect. The number of EIC claims filed by persons with qualifying children had increased steadily over the past 10 years. For 1995, IRS’ Research Division had estimated that the number of such claims would increase by about 2.2 million. IRS data showed, instead, that persons with qualifying children made about 100,000 fewer EIC claims in 1995 than in 1994. In that regard, the Congressional Budget Office, in its August 1995 Economic and Budget Outlook update, decreased anticipated EIC outlays by $2 billion to $3 billion a year. In doing so, it stated that EIC spending “has been lower than expected this year, possibly as a result of a recent crackdown by the Internal Revenue Service on fraudulent claims.” According to the Director of IRS’ Office of Refund Fraud, another indication of the deterrent effect of IRS’ efforts in 1995 was the drop in identified fraud by IRS’ fraud detection teams. In calendar year 1995, the detection teams identified $132 million in fraudulent refunds on 62,309 returns compared with $161 million on 77,781 returns in 1994. Likewise, about 73 percent of the fraudulent returns identified in 1995 involved EIC claims, down from 91 percent in 1994. Although the numbers went down, there is no way of knowing, from available data, whether the decrease reflects a decline in the incidence of fraud or just a decrease in the amount of fraud identified by IRS. For example, elimination of the direct deposit indicator, which the Director said was one of the most effective actions taken by IRS for 1995, may have contributed to a decrease in fraud. But such a direct cause and effect relationship is difficult, if not impossible, to prove. EIC noncompliance has been an ongoing concern of Congress and IRS. To meet the challenge, IRS expanded its controls in 1995 to better prevent taxpayers from receiving EIC benefits to which they were not entitled. A successful compliance program requires that IRS effectively balance taxpayer burden against the program’s revenue protection benefits. In implementing its fiscal year 1995 controls, however, IRS delayed significantly more EIC refunds than it was able to review and did not select the most productive cases to review. While we agree that IRS needs to delay EIC refunds in order to follow up with taxpayers on questionable claims, we believe that IRS would have achieved better results if it had better targeted its efforts to those cases most in need of review. For the 1996 filing season, IRS decided to delay only those cases that it had the time and resources to review and revised its procedures in an attempt to select the most egregious cases to review. Although IRS data indicated that its controls for 1995 identified and prevented some noncompliance, including that associated with the EIC, IRS did not compile data in such a manner as to allow for a meaningful analysis of those controls. The results of IRS’ SSN validation efforts on paper returns were reported in a way that (1) did not distinguish between dependent claims and EIC claims and (2) commingled the results of IRS’ efforts in 1995 with the results of efforts in prior years. The ultimate impact of the up-front filters in the Electronic Filing System is unknown because IRS does not track the resolution of problems identified by the filters. If IRS does not have adequate data to assess its efforts, it is less likely to make informed decisions about continuing, expanding, or revising those efforts. Some of the data discussed in this report, such as the disaggregation of Examination results by tax year, would seem inexpensive to compile. Other data, such as the tracking of electronic rejections, might be more costly. Only IRS knows what such efforts would cost and whether compilation of the data is feasible given the cost and the level of effort IRS expects to devote to EIC noncompliance in the future. We recommend that IRS consider cost-effective ways to compile the kind of data needed to better assess the effectiveness and direction of its efforts to combat EIC noncompliance. In doing so, IRS should consider (1) routinely reporting data, by tax year, on the results of Examination efforts to validate eligibility for benefits; (2) tracking what happens to returns rejected by the Electronic Filing System; and (3) distinguishing the results relating to EIC-qualifying children from the results relating to dependents. We requested comments on a draft of this report from the Commissioner of Internal Revenue or her designee. On July 30, 1996, we met with the Assistant Commissioner for Criminal Investigations and other IRS officials, who provided us with oral comments. Those comments were generally reiterated and expanded upon in an August 12, 1996, letter from the Acting Chief Compliance Officer (see app.). In response to our suggestion that IRS consider reporting Examination’s results by tax year, IRS agreed that such information is important in assessing program effectiveness and said that it is available when needed by querying an automated management information system. Our report acknowledges that such information exists. However, it is important not only to have the information available but also to use it. As we pointed out earlier, IRS was not using tax-year specific data to assess program results until we specifically asked for it. To clarify our intent, as discussed with IRS officials at our July 30 meeting, we reworded our recommendation to say that IRS should consider routinely “reporting” data by tax year. IRS also said that while it seems reasonable to track what happens to returns rejected by the Electronic Filing System, certain legal ramifications have to be explored first. Those ramifications center on the question of whether any files of rejected electronically filed returns that IRS might have to compile for tracking purposes would constitute a system of records under the Freedom of Information Act. The officials said that the legal issues had been referred to IRS’ Office of Chief Counsel. We agree that any possible legal issues should be resolved before designing and implementing a system to track rejected returns. With respect to our suggestion that IRS consider distinguishing the results relating to EIC-qualifying children from the results relating to dependents, IRS said that it wanted to defer any decision while two pieces of legislation, that would have a bearing on how IRS handles missing/invalid SSN conditions in the future, were pending. According to IRS, the new procedures called for in the legislation would not automatically provide the sort of data we envisioned and that complicated systems programming would be required to capture the data systemically. IRS said that until its fiscal year 1997 appropriation is approved, it is unable to determine if resources will be available to make the programming changes. We agree with IRS’ position. We are sending copies of this report to the Ranking Minority Member of the Senate Finance Committee, the Chairman and Ranking Minority Member of the House Committee on Ways and Means, various other congressional committees, the Secretary of the Treasury, the Commissioner of Internal Revenue, the Director of the Office of Management and Budget, and other interested parties. Copies will be made available to others upon request. If you have any questions, please contact me on (202) 512-5594. Major contributors to this report were David J. Attianese, Assistant Director, and William H. Bricking, Evaluator-in-Charge. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) efforts to reduce Earned Income Credit (EIC) noncompliance in calendar year 1995. GAO found that: (1) the up-front controls used by IRS in its Electronic Filing System helped IRS reduce some EIC noncompliance and identify about 1.3 million social security number (SSN) problems on electronically filed tax returns in 1995; (2) IRS placed increased emphasis on validating SSN on paper returns, since it identified about 3.3 million returns with missing or invalid SSN for EIC-qualifying children; (3) although IRS identified 3.3 million returns with problems, IRS only had the resources to follow up on 1 million cases; (4) IRS delayed refunds on about 4 million EIC returns that did not have any SSN problems to check for the use of duplicate SSN, but released almost all of those refunds without checking for duplicate SSN; (5) IRS has taken steps to better utilize its resources in 1996, such as attempting to identify more productive cases and limiting the number of delayed refunds; and (6) the overall impact on IRS efforts to reduce EIC noncompliance cannot be assessed because IRS commingled 1995 data with data from previous years. |
Before service or joint sponsors can initiate major defense acquisition programs and begin system development at Milestone (MS) B, they are required by DOD’s acquisition policy to conduct an AOA. The AOA is an analytical study that is intended to compare the operational effectiveness, cost, and risks of a number of alternative potential solutions to address valid needs and shortfalls in operational capability. The basis for conducting an AOA begins when a capability need is validated or approved through the department’s requirements determination process—the Joint Capabilities Integration and Development System (JCIDS) (See fig. 1). A sponsor, usually a military service, submits a capability proposal—called an Initial Capabilities Document (ICD)—through JCIDS, which identifies the existence of a capability gap, the operational risks associated with the gap, and a recommended solution or preferred set of solutions for filling the gap. When a capability proposal is validated, before a major defense acquisition program begins, an AOA is undertaken to compare potential solutions and determine the most promising and cost-effective weapon system to acquire. The AOA is a key input to defining the system capabilities of the major defense acquisition program, which are established in a capability development document (CDD). Most AOAs are sponsored by a single military service, but some may be conducted jointly by more than one service, in which case, the Milestone Decision Authority (MDA) designates a lead service as the sponsor. AOAs are conducted by study teams, the composition of which depends on the service—most of the Army’s AOAs are conducted by the Army’s Training and Doctrine Command Analysis Center, most of the Air Force’s AOAs are conducted by the Air Force’s major commands, such as the Air Combat Command, and most of the Navy’s AOAs are contracted out to federally funded research and development centers and the Navy’s various study centers. Both the Office of the Secretary of Defense (OSD) and the services are responsible for issuing study guidance to scope the AOA, which provide a minimum set of alternatives to analyze and shape the analysis through a series of study questions. Conducting an AOA may take anywhere from a few months to several years and cost from a few hundred thousand to several million dollars depending on its scope and complexity. The final results and recommendations of the AOA are then presented to decision makers, who decide on which alternative to select for program initiation. According to the Air Force’s manual on conducting AOAs, some of the key questions that decision makers need the AOA to answer include: What alternatives provide validated capabilities? Are the alternatives operationally suitable and effective? Can the alternatives be supported? What are the risks (technical, operational, programmatic) for each alternative? What are the life-cycle costs for each alternative? How do the alternatives compare to one another? The Office of the Secretary of Defense, Program Analysis and Evaluation (OSD PA&E), plays a central role in the AOA process because it is responsible for providing initial guidance to the AOA study team, reviewing the proposed AOA study plan, and assessing the completed AOA. In carrying out these functions, OSD PA&E provides a DOD enterprise-level perspective to AOAs and encourages service sponsors to consider all viable concepts to fill a capability need, even if they were not initially considered by the service sponsors, and to assess technical risks and costs of each alternative. The AOA is one of several inputs required for a program’s initiation at MS B, and it is a key element in planning and establishing a sound business case for a weapon system program. We have frequently reported on the importance of using a solid, executable business case before committing resources to a new product development effort. The business case in its simplest form is demonstrated evidence that (1) the warfighter’s needs are valid and that they can best be met with the chosen concept, and (2) the chosen concept can be developed and produced within existing resources—that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the product when it is needed. The AOA addresses the first point of a business case by providing a foundation for developing and refining the operational requirements for a weapon system program. An AOA also addresses the second point of a business case by providing insight into the technical feasibility and costs of alternatives. By contributing to business cases, AOAs should provide programs with a sound basis for program initiation. Most of the programs we reviewed either did not conduct an AOA or conducted an AOA that focused on a narrow scope of alternatives and did not adequately assess and compare technical and other risks of each alternative. While many factors can affect program cost and schedule outcomes, we found that programs that conducted a limited assessment of alternatives before the start of system development tended to experience poorer outcomes than the programs that conducted more robust AOAs. According to several DOD and program officials, AOAs have often simply validated a concept selected by the sponsor and are not used as intended to make trade offs among performance, cost, and risks to achieve an optimal weapon system concept that satisfies the warfighter’s needs within available resource constraints. Most of the programs we reviewed considered a narrow scope of alternatives to support program start. Ten of the 32 programs did not conduct AOAs and focused on an already selected weapon system solution. Of the 22 programs that had AOAs, 13 of them examined a limited number of alternatives within a single weapon system concept such as helicopters or specific classes of ships, while 9 considered a relatively broad range of alternatives, by assessing many alternatives within a single weapon concept or alternatives across multiple concepts, such as comparing ships to aircraft. We found that the programs that considered a broad range of alternatives tended to have better cost and schedule outcomes than the programs that looked at a narrow scope of alternatives (see table 1). For example, 1 of the 9 programs that examined a broad set of alternatives experienced high cost or schedule growth whereas 8 of the 13 programs that considered only a limited number of alternatives experienced high cost or schedule growth. For various reasons, 10 of the 32 weapon programs we reviewed did not have formal AOAs to support program start (see table 2). For 7 of these programs, it may have been appropriate not to conduct the AOA because the programs involved a planned modernization to an existing weapon system or there was support from other analyses to warrant the chosen concept. This was the case, for example, with the Navy’s Standard Missile 6 (SM-6) program. Because the missile was the next planned increment in a long history of missile development efforts and an AOA had been conducted for the previous standard missile increment, a separate AOA for SM-6 was considered repetitive and waived. The program started development in 2004 and has remained on track with its planned cost and schedule objectives. Similarly, an AOA was not conducted for the Air Force’s Global Positioning System IIIA program because there was a body of analysis available that served the purpose of an AOA and the proposed program was considered a follow-on increment to a multiprogram effort to modernize global positioning system capabilities. Since it started development in 2008, the program has remained on cost and schedule. However, in the other 3 programs that did not have AOAs, the requirements and development effort proved to be more demanding and cost and schedule growth occurred. In the case of the Army’s Sky Warrior Unmanned Aerial System (UAS) program, an Army executive waived the AOA requirement because the Army believed, among other things, that the source selection process would provide an adequate way to compare alternatives. However, when the Air Force and Joint Staff were reviewing the Sky Warrior’s draft requirements and acquisition documentation, they raised concerns that the requirements potentially duplicated capability provided by the Air Force’s Predator UAS. The Army cited the urgent need of battlefield commanders for the capability and gained approval to proceed to source selection. Three years after the Sky Warrior AOA was waived, the Deputy Secretary of Defense directed that the two UAS programs be combined into a single acquisition program to achieve efficiencies in areas such as common development, procurement, and training activities. However, the Army and Air Force have continued to pursue unique systems. In the meantime, the Sky Warrior UAS has experienced a 138 percent increase in total cost and 47-month schedule delay from original plans. By relying on industry-provided information in source selection and not conducting an independent AOA, the Army missed an opportunity to gain a better understanding of the other services’ UAS capabilities, and pursue an acquisition strategy that would have taken advantage of commonalities and used resources more efficiently. Of the 22 programs that conducted AOAs, 13 focused on a limited number of alternatives within a single weapon system concept while 9 focused on many alternatives (see table 3). According to DOD and service officials, the scope of an AOA can be different for each program and dependent upon many factors, including the nature of the capability need, the proposed time frame for fielding the capability, and the type of program being pursued–whether it is a new development start, a modification of a commercially available system, or an upgrade to an existing system. As a result, AOAs that focus on a limited number of alternatives within a single weapon system concept may be appropriate in some cases. For instance, when the capability need was defined in terms of upgrading an existing weapon system, AOAs focused on refining a single platform concept and its system-level specifications and attributes. The AOA for the Army’s Apache Block III program is an example of an appropriately, but narrowly scoped AOA. It examined various block upgrade options for the existing Longbow Apache helicopter to improve interoperability and other shortcomings in the helicopter. The program started development in 2006 and has remained on track with its planned cost and schedule objectives. In a few of the other AOAs that had a narrow scope, the capability need involved the replacement of an aging weapon system and the AOAs presumed that the concept of the aging weapon system was the appropriate starting point for analysis rather than examining whether other concepts could also meet the need. For example, the AOA for the Army’s Armed Reconnaissance Helicopter (ARH) program, which was intended to replace the aging Kiowa helicopter fleet and improve attack and reconnaissance capabilities, examined two options: improving the legacy Kiowa helicopter or procuring nondevelopmental helicopters. The AOA did not explore other potential solutions, such as developing unmanned aerial systems, increasing the purchase of existing attack helicopters, increasing the purchase of other reconnaissance assets, or relying on a mix of solutions. After 3 years of development, the ARH program’s research and development costs increased from about $360 million to $940 million. A Center for Naval Analyses report commissioned by the Army after the ARH program began having execution problems identified several factors that contributed to the significant cost growth, including questionable requirements, an aggressive schedule, limited oversight, and a perceived preference for one helicopter model. As a result of the cost growth and other problems, DOD cancelled the program in 2008 after determining that at least one alternative could provide equal or greater capability at less cost. Most of the programs (7 of 9) that examined a broad scope of alternatives have tracked well with their planned cost and schedule targets. The AOA for the Navy’s P-8A Multi-mission Maritime Aircraft, which is a program designed to replace the P-3C aircraft and provide maritime patrol and reconnaissance for the Navy, explored multiple concepts and many alternatives in response to study guidance issued by OSD PA&E, including several nonmanned aircraft alternatives such as submarines, helicopters, and UAS. The AOA concluded that a manned aircraft would still be the best option to replace the P-3C. However, the AOA also helped the Navy to recognize that a UAS could perform some of the maritime patrol missions as an adjunct platform, eventually leading to the Broad Area Maritime Surveillance (BAMS) UAS AOA and program. The P-8A program has not experienced cost growth over its 4 years of development and remains on schedule. Similarly, the Joint Land Attack Cruise Missile Defense Elevated Netted Sensor System (JLENS), which is designed to provide over the horizon detecting and tracking of land attack cruise missile and other targets, had an AOA that explored alternatives across multiple concepts, including aerostat sensors, sea-based sensors, and nonaerostat elevated sensors. The Army chose the aerostat concept and has developed an incremental program that has experienced low cost and schedule growth since starting development in 2005. DOD acquisition policy requires that AOAs assess the technical risk of alternatives, but it does not provide criteria and guidance for how and to what extent technical risks should be addressed and it does not specify that other types of risks should be assessed. Risks are important to assess because there may be technical, programmatic, or operational uncertainties associated with different alternatives that should be considered in determining the best weapon system approach. For example, it may be the case that one alternative is more effective than another in meeting a capability need but has more technical or other risks that may make the alternative infeasible to develop. Many of the AOAs we reviewed (12 of the 22) conducted limited assessments of the risks of each alternative presented (see table 4). Some AOAs we reviewed did not examine risks at all, focusing only on the operational effectiveness and costs of alternatives. Other AOAs had relatively limited risk assessments. For example, several AOAs did not discuss integration risks even though they were examining modified commercial systems that required the integration of subsystems or equipment packages, while other AOAs did not examine the schedule risks of the various alternatives, despite accelerated schedules and fielding dates for the programs. We found that programs with AOAs that conducted a more comprehensive assessment of risks tended to have better cost and schedule outcomes than those that did not (see table 5). AOAs that do not examine risks could provide overly optimistic assessments of alternatives, which do not provide for sound business case decisions. Comparing risks across alternatives is especially critical for new development programs, which rely on breakthrough technologies and assume that technology will be achieved as planned. Of the 22 programs that had AOAs, 8 were new development starts involving technology development. Of the 8 new development starts, only 4 had AOAs that performed adequate risk analyses. The other 4 AOAs did not assess technical, integration, or other risks as criteria for comparing the alternatives or neglected to analyze these risks altogether. For example, the AOA for the Future Combat Systems (FCS), one of most complex and technically challenging programs ever undertaken according to the Army, assessed the technical risks of each of the new development concepts for FCS, but did not assess and compare the risks with those of the other alternatives. The AOA concluded that the new FCS development option was more costly but more operationally effective than the baseline and improved baseline alternatives. By not comparing the risks of the alternatives, the FCS AOA missed an opportunity to provide the Army with a meaningful trade off among operational effectiveness, costs, and risks. Now, after 6 years of development, some of the critical technologies for the FCS program are still immature. The latest estimates for the program show that development costs have grown 38 percent or about $8 billion, and the fielding date has been delayed 57 months. As a result, DOD recently proposed canceling the FCS acquisition program. Also, the AOA for the Army’s Warfighter Information Network-Tactical (WIN-T) program, which involves development of new on-the-move networking capabilities, did not address technical or programmatic risks. Army officials stated that WIN-T was largely based on a concept that did not have well-defined requirements of the proposed network and operations, and the WIN-T development alternative in the AOA was based on preliminary design concepts, from two competing contractors, which were blended together by the Army. The AOA did not take these risks into account and concluded that the new WIN-T alternative was the most operational and cost-effective solution available. In March of 2007, the WIN-T program had a Nunn McCurdy cost breach (25 percent or more unit cost growth) and was subsequently restructured by DOD. Insufficient technical readiness was cited as one of the key factors leading to the cost breach. Assessing risks is also important for programs based on commercial products that require significant modifications. Based upon a recent Defense Science Board report on buying commercially-based defense systems, programs that do not assess the systems engineering and programmatic risks of alternatives do not understand the true costs associated with militarizing commercial platforms or integrating various commercial components. As a result of this incomplete understanding of inherent technical and integration risks of programs, DOD fails to fully take advantage of efficiencies and cost savings from commercially available technologies. Several of the programs we reviewed that involved modified commercial products had AOAs with weak risk assessments. For example, the AOA for the Marine Corps’ replacement for the Presidential Helicopter, VH-71, failed to assess the technical, integration, and schedule risks associated with its three alternatives. It instead compared alternatives based on costs and performance attributes, such as cabin size, deployability, and performance. One program official stated that the focus of the VH-71 AOA was to merely identify platforms that had the best probability of meeting the requirements. According to a statement by the Secretary of Defense, the program’s costs have nearly doubled, increasing from $6.5 billion to $13 billion, and the schedule has fallen behind by several years. DOD recently cancelled the program. The Defense Science Board, which assessed the VH-71 program, concluded that some of the program’s requirements plainly exceeded the limits of the available technology and schedule. We identified several factors that may have limited the effectiveness of AOAs and their ability to identify the most promising option and contribute to a sound business case for starting a weapon system program: (1) service sponsors lock into a solution early on when a capability need is first validated through DOD’s requirements process and before an AOA is conducted; (2) AOAs are conducted under compressed time frames in order to meet a planned milestone review or fielding date and their results come too late to inform key trade off decisions; and (3) DOD does not always provide guidance for conducting individual AOAs. The AOAs with one or more of these factors tended to be AOAs that had a limited scope and assessment of risks (see table 6). In developing a capability proposal, sponsors not only justify the need to fill an existing capability gap, but also conduct an assessment—called a functional solutions analysis (FSA)—to identify a potential concept or set of solutions to fill the gap. The identification of a potential concept is intended to provide a general approach for addressing the gap and set the stage for a more in-depth assessment of alternatives to be conducted in the AOA. In four cases, AOAs were limited because program sponsors had decided on a preferred solution prior to the AOA, when a capability need was first proposed through the department’s requirements determination process. Approval of the capability proposal then led to a narrowly scoped AOA that supported or refined the preferred solution. According to DOD officials, the analysis supporting a capability proposal is generally conducted by the operational requirements community within a military service and contains only rudimentary assessments of the costs and technical feasibility of the solutions identified. With the Armed Reconnaissance Helicopter program, for example, the Army proposed acquiring an armed reconnaissance helicopter after the termination of the Comanche helicopter program, which had experienced significant cost and schedule problems. While the initial capability proposal submitted to JCIDS for the ARH considered nonhelicopter concepts, such as unmanned aerial systems, the Army concluded that a modified version of an existing armed reconnaissance helicopter was the preferred solution. According to Army officials, the modified helicopter solution was pushed in part because there was a desire to field a system within a relatively short time frame, a similar helicopter variant was in use by the special operations forces, and funding available from the terminated Comanche helicopter program needed to be used quickly. Because the Army effectively locked into a solution in this early stage, the AOA primarily focused on comparing the performance and costs of existing helicopter alternatives (see fig. 2). Armed Reconnaissance Helicopter (ARH) Similarly, we have previously reported that the Navy began the Littoral Combat Ship (LCS) program before fully examining alternatives. Beginning in 1998, the Navy conducted a series of wargames and studies to test new concepts for surface combatant ships that could address known threats in littoral areas. Following these efforts, the Navy began an analysis of multiple concepts study in 2002 to further refine the Navy’s preferred solution—a new warship along the lines of LCS. Concurrently, the Navy established an LCS program office and issued a request for proposal to industry to submit LCS concepts. The Office of the Secretary of Defense and the Joint Staff were concerned that the Navy’s focus on a single solution did not adequately consider other ways to address littoral capability gaps. Based on these concerns in late 2003, the Navy was directed to consider alternatives to surface ships such as submarines and manned aircrafts in the ongoing analysis of multiple concepts. The analysis, which was led by the Naval Surface Warfare Center, compared nonship alternatives to LCS-concept ships and concluded that the LCS concept remained the best solution to provide capabilities in the littorals. However, the estimated costs for the various LCS ship alternatives developed in the analysis far exceeded the $220 million (fiscal year 2005 dollars) target that the Navy had set for the program. The Navy stated that because the cost estimates were rough-order-of-magnitude estimates and were based on preliminary concept designs, those costs were not used to make cost decisions for LCS. However, since starting development in 2004, the LCS program has experienced a 151 percent growth in development costs and its costs are closer to the cost estimates from the analysis of multiple concepts than the target cost set by the Navy. DOD and service officials responsible for conducting AOAs indicated that often capability requirements are proposed that are so specific that they effectively eliminate all but the service sponsor’s preferred concepts instead of considering other alternatives. For example, in recent proposals to address a global strike capability need, two components of the Air Force—the Air Combat Command and Space Command—defined initial performance requirements that required two different approaches. The Air Force Air Combat Command defined the requirement as the ability to strike a target within 1 day, which meant that bombers, which fall under the Air Force Air Combat Command’s portfolio, could address the gap. However, the Air Force Space Command defined the requirement in the capability proposal as the ability to strike a target within a certain number of hours, which meant only missiles, which fall under the Air Force Space Command, could fulfill the need. Although OSD PA&E attempted to get the Air Force to consider both bombers and missiles in the same analysis, the major commands argued that their requirements were different enough to require two separate analyses. As a result, the Air Force Air Combat Command initiated the Next Generation Long-Range Strike AOA for a new bomber, while the Air Force Space Command initiated the Prompt Global Strike AOA separately. Similarly, for the ARH AOA, the Army called for very specific deployability requirements. These requirements included the ability to fit two helicopters into a C-130 aircraft and for the helicopter to be “fightable” within 15 minutes of arrival. The Center for Naval Analyses, in its report on the factors that led to significant cost and schedule growth in the ARH program, noted that it was not clear whether these requirements were needed to fulfill the operational gap. Furthermore, the Center for Naval Analyses noted that due to the stringent deployability requirements, the program had effectively eliminated other potentially feasible and cost- effective alternatives, such as twin-engine helicopters, and limited the analysis to single engine alternatives. Many AOAs are also conducted under compressed time frames—6 months or less—or concurrently with other key activities that are required for program initiation, in order to meet a planned milestone decision or weapon system fielding date. Consequently, AOAs may not have enough time to assess a broad range of alternatives and their risks, or be completed too late in the process to inform effective trade discussions prior to beginning development. In 9 of the 22 programs we reviewed that had AOAs, the timing of the AOAs was compressed or concurrent with other planning activities. In 7 of these 9 programs, the AOAs were limited. For instance, the AOA for the Future Combat Systems program was a complex undertaking; however, according to the authors of the AOA, it was conducted in half the time that a less complex AOA would typically be conducted. In addition, due to schedule constraints imposed to meet a preset milestone review date, the AOA was performed concurrently with concept development, requirements determination, and system definition documents. Ultimately, the Future Combat Systems AOA was completed 1 month after the operational requirements were validated and the same month that the program was approved to begin system development, which precluded trade off discussions among cost, performance, and risks from taking place. In addition, although AOAs are required to be done for a Milestone B decision, the Army’s Warfighter Information Network-Tactical (WIN-T) program was approved to begin without one. The milestone decision authority for the program waived the AOA requirement until a later date. The WIN-T AOA was completed approximately 16 months after the program started (see fig. 3). While DOD acquisition policy requires that major defense acquisition programs conduct an AOA prior to program initiation at Milestone B, the policy does not specify criteria or guidance for how AOAs should be conducted. According to the policy, OSD PA&E is to provide guidance to programs prior to, during, and after their AOA has been completed. The guidance is intended to ensure that the services are examining a sufficient number of alternatives that take into consideration joint plans and interoperability, but to also ensure that AOAs are analyzing key risks such as technology, cost, and schedule. In 9 of the 22 programs we reviewed that had AOAs, OSD PA&E either provided late guidance or did not provide formal guidance when AOAs were started. In 6 of these 9 programs, the AOAs were limited. For instance, OSD PA&E did not provide guidance for the AOA that supported initiation of the VH-71 Presidential Helicopter program. In this AOA, the service had very specific performance requirements that narrowed the scope of the alternatives examined. In addition, the service conducted the AOA under a compressed schedule to meet a previously planned milestone, which may not have allowed for robust analyses of technology and integration risks. These factors most likely played a part in the AOA examining only 3 alternatives and eliminating 19 other alternatives early on. DOD officials have also stated that when OSD PA&E guidance is provided, it is sometimes late. For example, the LCS program AOA had been underway for about a year before OSD PA&E provided guidance to the Navy. Officials also explained that guidance is often informal, sometimes provided over the telephone, or if written, remains in draft form for long periods, preventing the services from formulating and having analysis plans approved. However, according to PA&E officials, sometimes guidance is never formalized or written because the services do not have a validated capability proposal or do not agree with the scope and direction provided. By not providing timely formal guidance before AOAs are started, DOD is missing an opportunity to ensure AOAs examine an appropriate scope of alternatives and conduct robust risk assessments. In December 2008, DOD revised its acquisition policy and introduced several initiatives based in part on direction from Congress that could provide a better foundation for establishing knowledge-based business cases for initiating weapon system programs. The revised policy strengthens the front end of the acquisition process by requiring key systems engineering activities and early prototyping, and establishing required milestone reviews to assess whether programs are acquiring the requisite knowledge as they move towards the start of system development. In addition, in March 2009, DOD revised its policy governing the JCIDS process, to help streamline the determination of capability needs and improve the integration between JCIDS and the acquisition process. In revising these policies, DOD elevated the role of AOAs in determining weapon system concepts and strengthened how they are to be implemented. Improving the effectiveness of AOAs will depend on DOD’s ability to ensure that its policy changes are consistently implemented and reflected in decisions on individual weapon system programs. We have reported in the past that inconsistent implementation of existing policies has hindered DOD’s efforts to plan and execute programs effectively. The key revisions to the policies that impact AOAs are summarized in table 7. DOD’s revised policies, for example, may help mitigate service sponsors from locking into a solution too early in the process by eliminating the functional solutions analysis in a capability proposal, which identified a preferred solution and influenced the scope of alternatives in an AOA. In the revision, the capability proposal will only identify a broad category of the type of materiel solution that should be considered; for example, whether it should be an incremental or transformational development approach. The AOA will then assess potential solutions as determined by the milestone decision authority and within the broad category recommended. This change integrates essentially what had been two separate trade space analyses into one analysis. In doing so, it sets up a better opportunity for a more robust analysis of alternatives. DOD’s revised acquisition policy also now imposes early milestone reviews which should help resolve the timing issues we found with several AOAs in the past. Under the previous policy, AOAs were required for program initiation at Milestone B, which may have led to some AOAs being completed just prior or even after program initiation. Under the revised policy, AOAs are generally required earlier in the process. Furthermore, DOD PA&E is required to be involved much earlier in the process by providing requisite guidance at the Materiel Development Decision as well as approving AOA study plans before an AOA is started. These additional reviews with required guidance earlier in the acquisition process should help mitigate conducting AOAs under compressed time frames. However, while the revised policy strengthens the front end of the acquisition process, the AOA is still constrained to a given set of requirements that may be unfeasible and could lead to unsuccessful program outcomes, such as with the Armed Reconnaissance Helicopter and Future Combat Systems. With increased demand and competition for funding, it is critical that DOD weapon system programs provide the best value to the warfighter and to the taxpayer. Yet in too many cases, DOD programs do not accomplish this and experience significant cost, schedule, and performance problems. Many of these problems could be avoided if programs started with sound, knowledge-based business cases. A key to developing such business cases is having effective AOAs that analyze and compare the performance, costs, and risks of competing solutions, and identify the most promising weapon system solution to acquire. The majority of AOAs we reviewed were limited and thus did not sufficiently inform the business case for starting new programs. DOD’s recent policy revisions are positive steps that could, if implemented properly, provide a better foundation for conducting AOAs and establishing sound business cases for starting acquisition programs. The revisions, for example, should help ensure that DOD direction is provided before AOAs are started and that AOAs are conducted at an early point in the acquisition process where their results can inform key decisions affecting program initiation. However, these policy changes alone will not be sufficient to ensure AOAs achieve their intended objectives. Unless mechanisms are established to ensure policy is followed, specific guidance and criteria are developed for how AOAs should be conducted, and AOAs are completed before program requirements are set, AOAs will not provide effective in-depth analyses and DOD will continue to struggle to make informed trade offs and start executable programs. To further strengthen the effectiveness of AOAs in helping DOD establish sound business cases for major weapon programs, we recommend that the Secretary of Defense take the two following actions: Establish specific criteria and guidance for how AOAs should be conducted, including how technical and other programmatic risks should be assessed and compared. Ensure that AOAs are completed and approved before program requirements—key performance parameters and attributes—are finalized and approved. In written comments on a draft of this report, DOD concurred with our recommendations. DOD’s response is reprinted in appendix II. DOD stated in response to our first recommendation that it had made significant progress in establishing criteria and guidance for conducting AOAs, and in defining the relationship/role of the AOA in both the acquisition and capabilities determination processes. DOD indicated that the role of the AOA has been defined in recently revised acquisition policy (Department of Defense Instruction 5000.02, dated Dec. 2, 2008) and capabilities policy (Chairman, Joint Chiefs of Staff Instruction 3170.01G, dated Mar. 1, 2009). While we agree that promising improvements have been made in revising the policies, they do not go far enough in providing specific criteria and guidance for how AOAs should be conducted. Without such direction, there is a risk that AOAs will continue to provide limited assessments of weapon system options, and DOD will initiate programs without sound, executable business cases. In concurring with our second recommendation—that AOAs be completed before requirements are finalized—DOD pointed out that under its revised acquisition policy, AOAs are now required to be completed before the formal initiation of an acquisition program. We agree that the policy should help improve the timing of AOAs so that they are conducted at an early point in the acquisition process and provide an opportunity for trade offs to take place. However, establishing and approving requirements is another key step required for initiating an acquisition program and this is done under a separate process—the Joint Capabilities Integration and Development System. We believe that DOD needs to take steps to ensure that program requirements are not finalized before the AOA is completed and that the results of the AOA are used to inform the setting of requirements. DOD also provided technical comments, which we incorporated where appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Secretary of Defense; the Secretaries of the Air Force, Army, and Navy; and interested congressional committees. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report or need additional information, please contact me at (202) 512-4841 or sullivanm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To assess whether analyses of alternatives (AOA) have been effective in identifying the most promising options and providing a sound rationale for program initiation, we analyzed data and documents for Acquisition Category (ACAT) I programs that have been initiated between fiscal years (FY) 2003 and 2008 and were in the Department of Defense’s (DOD) FY 2008 Major Defense Acquisition Program (MDAP) list. The relevant policy that governs the AOA process for these programs, DOD Instruction 5000.2 (Operation of the Defense Acquisition System), was revised by DOD in May of 2003 and revised again in December of 2008 to become DOD Instruction 5000.02. As a result, we used the May 2003 DOD Instruction to assess the AOAs. Using DOD’s FY 2008 MDAP list and Milestone B dates provided by DOD, we identified 34 ACAT I programs that had been initiated, or started system development and production, between 2003 and 2008. Programs that had been initiated between 2003 and 2008 but were not in the FY 2008 MDAP list, such as programs terminated before 2008, were not included in the analysis. We collected AOA full reports, executive summaries, guidance documents, and study plans when available, from program officials. Program officials also responded to data collection surveys we distributed through service action officers to gather information about their programs’ AOA, guidance, capability documents, and how the AOA led to changes to the program concept. An official for the Cobra Judy Replacement program responded to the survey, but officials did not respond to several phone calls and e-mails requesting additional documentation, so this program was not included in the analysis. In addition, because the Combat Search and Rescue Replacement Vehicle (CSAR-X) program did not start development. Of the remaining 32 programs, 10 programs did not have AOAs. Whether a program had an AOA or not was determined through analysis of program documents and survey responses. For the 22 programs that had AOAs, program documents and survey data were reviewed to determine the scope of the AOAs and whether the AOA assessed technology and integration risks. An AOA’s scope was assessed to be narrow if the AOA examined 2 to 5 alternatives within a single concept and assessed to be broad if the AOA examined 8 to 26 alternatives within a single concept or multiple concepts. An AOA was assessed to have not completed any risk analyses for its alternatives when it made no mention of risks in the entire AOA report; assessed to be limited if the risk analyses were not completed for all of the alternatives, if integration risks were not examined, or if the risk analyses were not emphasized in the conclusions and recommendations; and assessed to be adequate if technical and integration risks were analyzed and compared for all of the alternatives. We followed up with some program officials through phone calls and e-mails for additional information. To assess how the quality of AOAs correlates with programs’ outcomes, we also collected program and cost data from DOD’s Selected Acquisition Reports and GAO’s Annual Assessments of Selected Weapon Programs. Programs with less than 10 percent cost growth were considered to have low cost growth, programs with 10 to 24 percent cost growth were considered to have moderate cost growth, and programs with 25 percent or more cost growth were considered to have high cost growth. Programs with less than 7 months of delay in initial operational capability or acquisition cycles were considered to have low schedule growth, programs with 7 to12 months of delay in initial operational capability or acquisition cycles were considered to have moderate schedule growth, and programs with greater than 12 months of delay in initial operational capability or acquisition cycles were considered to have high schedule growth. The 32 programs we reviewed accounted for one third of the 96 programs in DOD’s 2008 Major Defense Acquisition Program portfolio and approximately 22 percent of the total planned funding commitments. To identify the factors that have affected the scope and quality of AOAs, we reviewed program documents, analyzed data from the survey, and reviewed DOD policy. We reviewed Initial Capabilities Documents (ICD) gathered from the Joint Staff’s Knowledge Management/Decision Support tool and AOAs to determine how preferred solutions were carried from the requirements-generation process to the acquisition process. To determine how program schedules affected AOA scope and methodology, we analyzed AOA documents, program milestone dates, and AOA completion dates. To assess how DOD study guidance affected the quality of AOAs, we analyzed whether DOD provided guidance through survey responses and followed up with DOD to confirm those responses. We also reviewed regulations and policies issued by the Joint Staff, the military services, and DOD, as well as other DOD-produced documentation related to AOAs. To determine what additional actions may be needed to address the limitations in the AOA process, we analyzed relevant DOD policies and federal statutes, including DOD Instruction 5000.2 (May 2003), DOD Instruction 5000.02 (December 2008), the Chairman of the Joint Chiefs of Staff Manual (CJCSM) 3170.01C (May 2007), CJCSM 3170.01 (March 2009), and Section 2366a of Title 10, United States Code. In researching all three objectives, we interviewed officials from the U.S. Army G3; U.S. Army Training and Doctrine Command Analysis Center (TRAC); U.S. Army Capabilities Integration Center (ARCIC); U.S. Air Force Office of Aerospace Studies; Office of the Assistant Secretary for Acquisition, Deputy Assistant Secretary of the Air Force for Science, Technology, and Engineering; Air Force Acquisitions - Global Reach; Deputy Assistant Secretary of the Navy, Acquisition and Logistics Management (A&LM); Deputy Directorate for Antiterrorism and Homeland Defense, J-34, Joint Staff; Office of the Secretary of Defense, Acquisition, Technology & Logistics; Office of the Secretary of Defense, Program Analysis and Evaluation; Office of the Deputy Under Secretary of Defense for Science and Technology (Acquisition and Technology)/Systems and Software Engineering; Armed Reconnaissance Helicopter Product Manager’s Office; U.S. Army Aviation Center; Deputy Assistant Secretary of the Navy, Ship Programs; Littoral Combat Ship Program Office; Marine Corps Combat Development Command; Office of the Chief of Naval Operations, Deputy Chief of Naval Operations, Integration of Capabilities and Resources (N8), Director of Warfare Integration (N8F), Director of Surface Warfare (N86); Air Combat Command/A8I (Requirements), Secretary of the Air Force Technical and Analytical Support; and the Naval Surface Warfare Center, Dahlgren. We conducted this performance audit from June 2008 to September 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We surveyed 32 major defense acquisition programs on their analyses of alternatives process and outputs. Ten of the programs did not conduct AOAs. The following table provides characteristics of the 22 programs that conducted AOAs. In addition to the contact named above, the following individuals made key contributions to this report: John Oppenheim (Assistant Director), Martin G. Campbell, James Kim, John Krump, Claire Li, Guisseli Reyes- Turnell, and Tatiana Winger. | Department of Defense (DOD) weapon programs often experience significant cost and schedule problems because they are allowed to start with too many technical unknowns and not enough knowledge about the development and production risks they entail. GAO was asked to review the department's Analysis of Alternatives (AOA) process--a key first step in the acquisition process intended to assess the operational effectiveness, costs, and risks of alternative weapon system solutions for addressing a validated warfighting need. This report (1) examines whether AOAs have been effective in identifying the most promising options and providing a sound rationale for weapon program initiation, (2) determines what factors have affected the scope and quality of AOAs, and (3) assesses whether recent DOD policy changes will enhance the effectiveness of AOAs. To meet these objectives, GAO efforts included collecting information on AOAs from 32 major defense acquisition programs, reviewing guidance and other documents, and interviewing subject matter experts. Although an AOA is just one of several inputs required to initiate a weapon system program, a robust AOA can be a key element to ensure that new programs have a sound, executable business case. Many of the AOAs that GAO reviewed did not effectively consider a broad range of alternatives for addressing a warfighting need or assess technical and other risks associated with each alternative. For example, the AOA for the Future Combat System program, one of DOD's large and most complex development efforts, analyzed the operational performance and cost of its alternatives but failed to compare the technical feasibility and risks, assuming that the technologies would perform as forecasted. Without a sufficient comparison of alternatives and focus on technical and other risks, AOAs may identify solutions that are not feasible and decision makers may approve programs based on limited knowledge. While many factors can affect cost and schedule outcomes, we found that programs that had a limited assessment of alternatives tended to have poorer outcomes than those that had more robust AOAs. The narrow scope and limited risk analyses in AOAs can be attributed in part to program sponsors choosing a solution too early in the process, the compressed timeframes that AOAs are conducted under, and the lack of guidance for conducting AOAs. While AOAs are supposed to provide a reliable and objective assessment of viable weapon solutions, we found that service sponsors sometimes identify a preferred solution or a narrow range of solutions early on, before an AOA is conducted. The timing of AOAs has also been problematic. Some AOAs are conducted under compressed timeframes in order to meet a planned milestone or weapon system fielding date and are conducted concurrently with other key activities required to become a program of record. This can short-change a comprehensive assessment of risks and preclude effective cost, schedule, and performance trade offs from taking place prior to beginning development. Furthermore, while DOD has an opportunity to influence the scope and quality of AOAs, it has not always provided guidance for conducting individual AOAs. Recognizing the need for more discipline in weapon systems acquisition, DOD recently revised its overall acquisition and requirements policies. If implemented properly, the revised policies could provide a better foundation for planning and starting new programs with sound, knowledge-based business cases. Included in the revised acquisition policy are several mechanisms to improve the AOA process. For example, the policy revisions should help ensure that DOD direction is provided before AOAs are started and that they are conducted at an early point in the acquisition process where their results can inform decisions affecting program initiation. While these policy changes are promising, DOD must ensure that they are consistently implemented and reflected in decisions on individual programs. Furthermore, more specific criteria and guidance for how AOAs should be conducted may need to be developed to ensure they meet their intended objectives and provide an in-depth assessment of alternatives. |
A federal loan guarantee is a binding agreement between an agency and a lender. If a borrower defaults on a guaranteed loan, the lender is to be reimbursed by the agency for the balance of the guaranteed portion of the loan. The guaranteed portion of a loan may vary across federal loan guarantee programs. A loan guarantee gives lenders an incentive to make loans that, due to the perceived risk of default, they otherwise might not make without requiring, for example, higher interest rates or additional collateral. For each of their loan guarantee portfolios, agencies are required to estimate the long-term cost to the government, which is referred to as the credit subsidy cost. The credit subsidy cost for each loan guarantee is equal to the amount of the estimated losses or gains to the federal government over the life of the loan. As part of the agreement, lenders may be required to pay fees to the agency to offset administrative expenses and credit subsidy costs. Part of EDA’s mission is to support economic development by promoting innovation, global competitiveness, and regional collaboration. In addition to developing the ITM program, EDA’s activities include providing funding through a number of investment programs, as well as offering a variety of services that include technical assistance, postdisaster recovery assistance, trade adjustment support, strategic planning, and research and evaluation. EDA does not currently administer any loan guarantee programs besides the pending ITM program. In directing the establishment of the ITM program, COMPETES 2010 provided for three types of eligible projects—ones that reequip, expand, or establish a manufacturing facility in the United States to use an innovative technology or an innovative process in manufacture an innovative technology product or an integral component of such a product; or commercialize an innovative product, process, or idea that was developed by research funded in whole or in part by a grant from the federal government. As it has designed the ITM program, EDA has drafted the following definitions to help determine project eligibility: innovative—defined as representing a significant improvement in function, performance, reliability, or quality of a product or service in comparison to commercial technologies currently in use, and technological—defined as relying on the principles of one of the following sciences: engineering, physical sciences, computer sciences, or biological sciences. The ITM program will provide a guarantee for up to 80 percent of a loan, with a maximum loan size of $10 million, or up to $15 million in certain circumstances, according to EDA officials. Through fiscal year 2015, Congress has appropriated $19 million for the ITM program. Credit subsidy costs are based on the assumption that the government will only need to reimburse lenders for a percentage of the loan guarantees made. In this case, according to EDA estimates, the agency will need to reserve about 7 percent of the value of loans guaranteed to cover the cost of future defaults. The program may support a total of up to $70 million in guaranteed loans for each $5 million in appropriations. This $5 million can be used to support $70 million in guaranteed loans because costs to the government are only incurred when a borrower defaults on a loan. Although Commerce’s EDA was given the task of implementing the ITM program, COMPETES 2010 stated that Commerce may use its NIST MEP centers to provide information about the ITM program and conduct outreach to potential borrowers. NIST MEP’s goals are to enhance U.S. productivity and technological performance, as well as to strengthen the global competitiveness of manufacturing firms. Under the program, NIST partners with 60 nonfederal organizations called MEP centers, which are located in each of the 50 states and Puerto Rico. MEP centers provide services aimed at helping small and medium-sized U.S.-based firms grow and enhance their competitiveness. Since our 2013 report on the ITM program, EDA has made progress on implementing the program, but several key tasks remain to be completed before EDA can issue loan guarantees. EDA has made progress on a number of tasks. For example, to help develop the program, EDA hired a contractor—FI Consulting. With FI Consulting’s assistance, EDA developed a credit subsidy model and drafted program regulations and forms, among other efforts. As of November 2015, key tasks remain in developing the program, and EDA officials expect they could begin issuing loan guarantees for the ITM program as early as July 2016. This was delayed from December 2015, EDA officials said, because of the complexity of building a loan guarantee program and promulgating regulations. EDA officials stated that the most significant of the remaining key tasks are finalizing the ITM program regulations, manuals, and forms. According to EDA’s project plan, they expect to have program manuals and draft program regulations completed in March 2016; the regulations are to be sent to OMB for review and revised by EDA in June 2016. Other remaining key tasks include finalizing the requirements for the ITM program information technology support systems, which will be used for functions such as accounting and credit subsidy cost estimation, as well as developing marketing materials and conducting outreach. Table 1 shows the status of key tasks for the ITM program. EDA has coordinated with other federal agencies to learn from their experiences with loan guarantee programs, but as currently designed, EDA has not clearly differentiated the ITM program from other comparable programs that we identified. EDA officials said they reached out to officials from SBA, USDA, and DOE—agencies that have loan guarantee programs comparable to the ITM program—to learn from their experiences and identify practices that could be incorporated into the ITM program. In particular, EDA officials highlighted the information they learned about SBA’s loan guarantee programs. Based on what they learned, EDA officials said they decided to largely model the ITM program after the 7(a) program. Specifically, EDA has adapted or plans to adapt SBA’s application forms, loan performance data, staff position descriptions, regulations, and manuals to fit ITM program parameters and statutory requirements. EDA also hired contractor FI Consulting, which told us its consultants previously worked on the 7(a) program. In addition, EDA officials said they coordinated with USDA and DOE officials to gather information to help design the ITM program. Table 2 provides examples of practices suggested by other agencies with loan guarantee programs and how EDA plans to use those practices. EDA’s coordination with other agencies has helped avoid duplication of the effort those agencies have already expended in designing loan guarantee programs. However, as currently designed, the ITM program does not clearly differentiate its potential applicants from those of the comparable federal loan guarantee programs we identified. SBA’s 7(a) program, USDA’s Business and Industry Loans program, USDA’s Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program, and DOE’s Federal Loan Guarantees for Innovative Energy Technologies program already provide loan guarantees to a similar pool of borrowers as those eligible for the ITM program, with roughly equivalent limitations. Areas of overlap between these four programs and the ITM program include the following: Business size. As required by COMPETES 2010, small and medium- sized manufacturers are to be eligible for the ITM program. Those businesses are also eligible for three of the four comparable programs. One program, SBA 7(a), is available only to small businesses. Business type. EDA officials expect that the ITM program will be open to only manufacturers producing, using, or commercializing innovative technologies. All four comparable programs allow such manufacturers to participate, and two of the programs—the USDA Biorefinery, Renewable Chemical, and Biobased Product Manufacturing Assistance program and the DOE Loan Guarantees for Innovative Energy Technologies program—are intended to support specific types of innovative technologies. According to an EDA analysis of SBA 7(a) loan data, roughly 11 percent of the loans made under SBA’s 7(a) program from October 1991 through March 2014 were to manufacturers in subsectors identified as innovative. USDA officials estimated that about 25 percent of the agency’s Business and Industry program loan guarantees are issued to manufacturers. Maximum allowable loan amount. According to EDA officials, the ITM program will guarantee loans of up to $15 million. Three of the four comparable programs are able to guarantee loans of at least $15 million. Maximum guaranteed portion of loan. The maximum loan guarantee percentage allowed under the ITM program is 80 percent. Each of the four comparable programs also allows for a loan guarantee percentage of 80 percent, but the percentages can vary depending on loan amounts or total project costs. Permitted uses of funds. The ITM program, according to EDA officials and program documents, will allow funds to be used to purchase land, buildings, and equipment, just like the four comparable programs we examined, but permissible uses of funds vary somewhat across programs. All four of the other programs also allow funds to be used for working capital or startup costs, though the ITM program will not, according to EDA officials and program documents. Table 3 provides a more detailed comparison of the ITM program, as currently designed, and the SBA 7(a) program on which the ITM program is largely modelled. Appendix I provides a comparison of the ITM program to all four comparable programs we examined. EDA officials acknowledged that the ITM program is potentially duplicative with other federal loan guarantee programs in a number of respects. In addition, EDA officials said that it is possible that loan guarantees ultimately issued under the ITM program could be similar to those issued by another agency, such as SBA or USDA. However, as discussed, COMPETES 2010 directs the Secretary of Commerce to ensure, to the maximum extent practicable, that the activities carried out under the ITM program are coordinated with, and do not duplicate, the efforts of other federal loan guarantee programs. GAO’s fragmentation, overlap, and duplication analysis guide states that one way to help minimize duplication among government programs is to identify and target service gaps that the programs could fill. Targeting can be accomplished by using program eligibility parameters and marketing and outreach to aim the program at more specific segments of a potentially eligible population in need of access to capital that might not be served or are underserved by other federal programs. While EDA officials coordinated with other agencies to design the ITM program, they did not work with agencies specifically to target service gaps—in this case, capital access gaps—because they have not yet developed a marketing and outreach strategy for the program. A 2011 study commissioned by MEP about the capital access needs of small and medium-sized manufacturers identified several capital access gaps resulting in potentially underserved populations for federal loan guarantees. Specifically, the report, which NIST provided to EDA, identified gaps in capital access based on several characteristics, for example, as follows: Size: The report specifically identifies gaps in the availability of capital for manufacturers with less than 200 employees, restricting their ability to grow and compete. In addition, MEP reported that there are 38 federal government programs that specifically target manufacturing, but many are not fully accessible to small manufacturers or do not target funds directly for small and medium- sized companies. The MEP report further identified a gap in small manufacturers’ awareness of sources of capital. Growth stage: According to the MEP report, early-stage companies may experience larger gaps in capital access than businesses in advanced stages of growth, hindering their ability to fund activities such as product design and improvement. One reason early-stage companies may have a harder time obtaining funding is that lenders and investors see them as more risky. For example, early-stage companies may not be able to demonstrate financial strength by providing a consistent history of profitability. SBA officials stated that EDA did not specifically seek information from them on how to target the ITM program so as not to duplicate the efforts of SBA’s loan guarantee programs. As a result, EDA has not taken full advantage of SBA officials’ expertise regarding the types of small manufacturers that receive support through the 7(a) program and those that do not, to help identify potential capital access gaps. SBA officials said that they spend a significant amount of time trying to determine potential applicants not being served by their loan guarantee programs. Officials said they use internal SBA data and information gathered from industry representatives to inform discussions on the topic. SBA officials said that new and early-stage businesses are the most challenged in terms of capital access. EDA also coordinated with NIST on some aspects of the ITM program, but its coordination was not focused on targeting capital access gaps. According to a NIST official, EDA officials coordinated with NIST about relevant topics such as the optimal loan sizes and loan guarantee percentages to support small and medium-sized manufacturers. In addition, a NIST official said that he discussed how to define innovative technologies with EDA officials. EDA officials said they reviewed the MEP report in order to determine demand for the ITM program and inform its design. However, EDA did not specifically coordinate with NIST about how to help address the capital access gaps identified in the report, according to a NIST MEP official. EDA officials stated that they intend to work with NIST by using its MEP centers to conduct ITM program marketing and outreach to borrowers and manufacturers. However, according to a NIST MEP program official, as of November 2015, EDA had not worked with NIST to develop marketing materials or an outreach strategy, or discussed other ways to ensure that the ITM program addresses capital access gaps. As a result, EDA has not taken full advantage of NIST’s and its MEP centers’ expertise regarding the capital needs of small and medium-sized manufacturers. Coordinating more extensively on targeting marketing materials and outreach efforts to potential applicants in need of access to capital could give EDA greater assurance that ITM program loan guarantees will not duplicate the efforts of other federal loan guarantee programs. Technological innovation drives the development of new products and improved processes, allows the U.S. manufacturing sector to remain competitive in the global marketplace, and stimulates economic growth. COMPETES 2010 directed the establishment of the ITM program to help small and medium-sized manufacturers gain access to the capital they need for the use or production of innovative technologies. While EDA has taken a number of steps to implement the program, key tasks remain before loan guarantees can be issued, such as finalizing program regulations and developing marketing materials and outreach plans. EDA has coordinated with several agencies on program design, but coordination on targeting the program through, for example, developing marketing materials and a strategy to conduct outreach to potential applicants in need of access to capital has been limited. The result is that, as currently designed, the ITM program does not clearly differentiate its potential applicants from those already served by other federal loan guarantee programs. Working with SBA and NIST to examine how the ITM program could fill capital access gaps not filled by other federal programs, and then marketing the program to target those gaps could help EDA ensure, as COMPETES 2010 directs, that ITM program activities do not duplicate the efforts of other federal loan guarantee programs. To better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, such as SBA’s 7(a) program, the Secretary of Commerce should direct EDA to work with SBA and NIST to further identify any gaps in capital access that may be present that the program could fill, and then develop marketing materials and conduct outreach to help target those gaps. We provided a draft of this report for review and comment to the Secretaries of Agriculture, Commerce, and Energy; Director of the Office of Management and Budget; and Administrator of the Small Business Administration. In its written comments, reproduced in appendix II, Commerce concurred with our recommendation and said that EDA will work with SBA and NIST to further identify capital access gaps that can be filled by the ITM program. Commerce also noted that there can be no assurance that loan guarantees provided by the ITM program will never duplicate the efforts of other agencies’ programs. However, our recommendation to work with SBA and NIST to identify capital access gaps and then target those gaps in marketing the program would better ensure that the activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs, not eliminate the possibility of duplication completely. In addition to Commerce’s written comments, EDA provided technical comments, which we incorporated as appropriate. EDA also included a more general comment suggesting that GAO emphasize that EDA has taken significant steps to implement the program. In our report, we note that EDA has taken a number of steps to implement the program. However, as outlined in table 1, several key steps remain before EDA can provide loan guarantees. DOE and SBA also provided technical comments that we incorporated, as appropriate. USDA and OMB indicated they had no comments on the report. We are sending copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, and Energy; the Director of the Office of Management and Budget; and the Administrator of the Small Business Administration. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to the report are listed in appendix III. Table 4 below shows how the Economic Development Administration’s Innovative Technologies in Manufacturing loan guarantee program compares to the four comparable programs we examined. In addition to the individual named above, Chris Murray (Assistant Director), Natalie Block, Kevin Bray, Mark Braza, Marcia Carlsen, Emily Eischen, Ellen Fried, Cole Haase, Steve Komadina, Gerald Leverich, Cody Raysinger, and Jack Wang made key contributions to this report. | To help small and medium-sized manufacturers obtain the capital they need to develop innovative technologies and remain competitive, COMPETES 2010 directed the Secretary of Commerce to establish the ITM program. When implemented, the program is to provide loan guarantees to small and medium-sized manufacturers for the use or production of innovative technologies. Under COMPETES 2010, Commerce must ensure that activities carried out under the ITM program do not duplicate the efforts of other federal loan guarantee programs. Commerce's EDA is responsible for implementing the program. COMPETES 2010 also included a provision for GAO to biennially review the program. This report assesses (1) the status of EDA's implementation of the ITM program and (2) the extent to which EDA has coordinated with other agencies to ensure that ITM program activities do not duplicate the efforts of other federal loan guarantee programs. GAO analyzed applicable laws and program documents, interviewed EDA officials and contractor staff, and interviewed officials from agencies with comparable loan guarantee programs or with other expertise about the needs of small and medium-sized manufacturers. The Department of Commerce's Economic Development Administration (EDA) has taken a number of steps to implement the Federal Loan Guarantees for Innovative Technologies in Manufacturing (ITM) program, but several key tasks remain before EDA can issue loan guarantees. EDA hired a contractor to assist with developing the program, drafted program documents and published them in the Federal Register for comment, and submitted documents to the Office of Management and Budget for review, as required when creating new federal credit programs. EDA officials said the most significant of the remaining key tasks are finalizing the ITM program regulations, manuals, and forms. Other key tasks remaining include hiring additional staff, finalizing the requirements for the program's information technology systems, developing marketing materials, and conducting outreach. As of November 2015, EDA officials expected they could begin issuing ITM program loan guarantees as early as July 2016. EDA has coordinated with other federal agencies to learn from their experiences with loan guarantee programs, but EDA has not clearly differentiated ITM from other programs, which may result in duplication. Coordination. EDA officials said they reached out to officials from the Departments of Energy and Agriculture, and the Small Business Administration (SBA)—agencies that have loan guarantee programs comparable to the ITM program—to learn from their experiences. EDA officials decided to largely model the ITM program after an SBA program that provides loan guarantees to small businesses, and they adapted or plan to adapt the SBA program's application forms, and regulations, among other things. EDA's coordination has helped avoid duplication of the effort those agencies have already expended in designing loan guarantee programs. Potential duplication. As currently designed, the ITM program is not clearly differentiated from SBA's program or from other programs that already provide loan guarantees to a similar pool of borrowers. EDA officials acknowledged that the ITM program is potentially duplicative with other programs in a number of respects. However, the America COMPETES Reauthorization Act of 2010 (COMPETES 2010) directs the Secretary of Commerce to ensure that the activities carried out under the ITM program are coordinated with, and do not duplicate the efforts of other federal loan guarantee programs. GAO's fragmentation, overlap, and duplication analysis guide states that one way to help minimize duplication among government programs is to identify and target service gaps that the programs could fill. In 2011, the National Institute of Standards and Technology (NIST) identified several gaps in capital access for small and medium-sized manufacturers, including gaps companies face in early stages of growth. However, in coordinating with SBA and NIST, EDA did not seek information on how the ITM program could target these capital access gaps to minimize duplication with other programs. Coordinating more extensively with SBA and NIST on targeting the ITM program could provide EDA with greater assurance that ITM loan guarantees will not duplicate the efforts of other federal loan guarantee programs. GAO recommends that EDA work with SBA and NIST to further identify any gaps in capital access that the program could fill, and conduct outreach to help target those gaps. Commerce agreed with GAO's recommendation. |
FEMA has a substantial challenge in balancing the need to get money out quickly to those who are actually in need and sustaining public confidence in disaster programs by taking all possible steps to minimize fraud and abuse. Nevertheless, FEMA could reasonably be expected to have mature, fully tested processes, along with business partners in the federal, state, and private sector, that can provide it with real time access to the data required to validate identities and addresses for those seeking disaster assistance. Once fraudulent registrations are made and money is disbursed, detecting and pursuing those who committed fraud in a comprehensive manner is costly and may not result in recoveries. Further, many of those fraudulently registered in the FEMA system already received expedited assistance and will likely receive more money, as each registrant can receive as much as $26,200 per registration. Another key element to preventing fraud in the future is to ensure there are consequences for those that commit fraud. We are referring the fraud cases that we are investigating to the Katrina Fraud Task Force for further investigation and, where appropriate, prosecution. We believe that prosecution of individuals who have obtained disaster relief payments through fraudulent means will send a message for future disasters that there are consequences for defrauding the government. We recommend that the Secretary of the Department of Homeland Security (DHS) direct the Director of the Federal Emergency Management Agency to take six actions to address the weaknesses we identified in the administration of IHP. These six recommendations relate only to the limited scope of work that we have completed to date and will not prevent all types of improper and fraudulent IHP payments. Consequently, we will continue to audit and investigate the assistance provided by FEMA in the aftermath of hurricanes Katrina and Rita and we will issue further recommendations designed to create a more comprehensive fraud prevention program for IHP. To address the concerns raised in our February 13, 2006, testimony, we recommend that DHS and FEMA do the following: Establish an identity verification process for Individuals and Households Program (IHP) registrants applying via both the Internet and telephone, to provide reasonable assurance that disaster assistance payments are made only to qualified individuals. Within this process establish detailed criteria for registration and provide clear instructions to registrants on the identification information required, create a field within the registration that asks registrants to provide their name exactly as it appears on their Social Security Card in order to prevent name and Social Security Number (SSN) mismatches, fully field test the identity verification process prior to ensure that call center employees give real-time feedback to registrants on whether their identities have been validated, and establish a process that uses alternative means of identity verification to expeditiously handle legitimate applicants that are rejected by identity verification controls. Develop procedures to improve the existing review process of duplicate registrations containing the exact same SSN and to identify the reasons why registrations flagged as invalid or as potential duplicates have been overridden and approved for payment. Establish an address verification process for IHP registrants applying via both the Internet and telephone, to provide reasonable assurance that disaster assistance payments are made only to qualified individuals. Within this process create a uniform method to input street names and numbers and apartment numbers into the registration, institute procedures to check IHP registration damaged addresses against publicly available address databases so that payments are not made based on bogus property addresses, fully field test the address verification process prior to ensure that call center employees can give real time feedback to registrants on whether addresses have been validated, and establish a process that uses alternative means of address verification to expeditiously handle legitimate applicants that are rejected by address verification controls. Explore entering into an agreement with other agencies, such as the Social Security Administration, to periodically authenticate information contained in IHP registrations. Establish procedures to collect duplicate expedited assistance payments or to offset these amounts against future payments. Such duplicate payments include the payments made to IHP recipients who improperly received the $2,000 debit cards and an additional $2,000 EA check or Electronic Funds Transfer (EFT) and the thousands of duplicate EA payments made to the same IHP registration number. Ensure that any future distribution of IHP debit cards includes instructions on the proper use of IHP funds, similar to those instructions provided to IHP check and EFT recipients, to prevent improper usage. In written comments on a draft of this report, which are reprinted in appendix II, DHS and FEMA made a number of observations that were not related to any specific recommendation, concurred fully with four of our six recommendations, and partially concurred with the remaining two recommendations. In general comments, FEMA and DHS stated that they could benefit more from the report if information sharing between GAO and FEMA had been reciprocal. We believe that we employed such an arrangement throughout this engagement. We regularly briefed DHS and FEMA concerning the progress of the audit. For example, we notified FEMA management immediately after we detected that duplicate EA payments were made to individuals who had received debit cards, and worked closely with FEMA’s Disaster Finance Center to resolve other issues related to payments that appeared to exceed the $26,200 limit for specific recipients. DHS and FEMA also expressed concern over the objectivity and fairness of our report. Specifically, DHS and FEMA noted that our selection of 248 registrations was not a representative sample and was geared specifically toward identifying and reporting on registrations that had problems. Our testimony clearly states that the case studies we used were intended to demonstrate the type of fraud and abuse that occurred because of weak or nonexistent controls over the registration process and did not represent a statistical sample of registrations. The primary findings of our work relate to weak or nonexistent controls that leave the government vulnerable to substantial fraud and abuse in the IHP. Furthermore, as represented at the February 13, 2006, hearing, we are continuing our work in this area. Specifically, we have taken a statistical sample of IHP payments so that we can statistically estimate the magnitude of improper and potentially fraudulent claims. We have nearly completed this work and plan to report our findings later this month. FEMA and DHS also found problems with our assertion that EA payments were the gateway to future IHP payments. Specifically, FEMA and DHS noted that future IHP payments are subjected to additional scrutiny. We did not test this additional scrutiny as part of our February 13, 2006, testimony. However, we continue to believe that accepting registrations for individuals using invalid identity and damaged property information subjects the federal government to a high risk of fraud and abuse beyond EA payments. We believe that our ongoing audit and investigative work sheds further light on whether the additional scrutiny that FEMA asserts does in fact prevent fraudulent and improper payments related to rental assistance and other covered losses. FEMA and DHS further noted that we made several references to isolated incidents where debit cards were used for purchases that did not appear to be for disaster needs, and FEMA questioned whether highlighting those examples was appropriate. We specifically noted in each reference to these purchases that they were isolated and were not representative of the general breakdown of known debit card usage. We also clearly stated that over 60 percent of debit card transactions were used to obtain cash and could not be tracked further to identify the final use of the IHP funds. We identified the non-disaster-related purchases to highlight the fact that FEMA did not provide any instruction to debit card recipients on the appropriate use of IHP funds. With regard to specific recommendations, FEMA and DHS concurred fully that FEMA (1) improve procedures to review registrations containing the same SSNs and other duplicate information; (2) subject all registration addresses to verification during the registration process; (3) explore entering into agreements with other agencies, such as the Social Security Administration, to periodically authenticate IHP information; and (4) issue proper instructions to any future debit card recipients. FEMA and DHS stated that they have already taken actions to address these recommendations. These actions include instituting an Internet application process that will prevent all duplicate registrations from the Internet, implementing procedures so that call centers will no longer accept duplicate registrations with the same SSN in the same disaster, and conducting conference calls and conducting data sharing tests with SSA. In addition, DHS and FEMA stated that, starting in June 2006, all registration addresses (even phone-in) will be subjected to an online verification during the registration process. While these are steps in the right direction, we will follow up on whether the actions taken fully address our recommendations. FEMA and DHS partially concurred with our recommendation concerning duplicate payments. FEMA and DHS took exception with our categorization of some payments as being potential duplicates, and with our assessment that they should initiate actions to collect duplicate EA payments or offset these amounts in the future, stating that it was unclear whether some of the of the payments were in fact valid due to the “separated households” policy instituted for hurricanes Katrina and Rita. With respect to duplicate registrations, we maintain that these registrations are very likely duplicates because the payments were made to several individuals with the same last names, same damaged addresses, and the same current addresses; FEMA’s own database clearly indicates that these were not separated households. For all our case study examples, we conducted further investigative work to confirm that the payments were made to actual duplicates, not covered by the separated household policy, and were therefore improper payments. As for initiating actions to collect duplicate payments, DHS and FEMA stated that they had processed for recoupment nearly all the payments they believed were duplicates as of April 1, 2006. While we have not assessed the effectiveness of FEMA’s recoupment process, we continue to believe that FEMA should attempt to recoup as many dollars of improper payments as possible, including those duplicate payments that we identified that FEMA questioned. FEMA also stated that many of what we identified as duplicate payments effectively will be offset because the registrant will ultimately be eligible for more than the amount of the duplicate payments, up to a maximum of $26,200 that a single household can receive. We believe that FEMA’s position is shortsighted because it does not reflect the likelihood that some individuals are not entitled to, and will not receive, additional funds regardless of the cap limitations. Thus, FEMA should not use $26,200 as the aggregate dollar test. Rather, FEMA should follow its own policy of limiting EA to $2,000; adhere to the statutory caps that are allowed for specific categories of aid; and promptly recover the amounts that exceed the category limits. Therefore, we continue to believe that FEMA should review all the registrations we identified as potential duplicates to access whether collection is necessary. We also disagree with FEMA’s statement that its “management was keenly aware” that a recipient could receive more than one EA payment, and that it knowingly issued these duplicate payments partly because individuals in shelters did not have access to their banking institution (and thus their EA payments) and therefore were in need of immediate assistance in the form of debit cards. While we recognize that providing individuals access to immediate funds was a priority following the hurricanes, FEMA’s data and its representations made to us months ago do not support its claim that it knowingly made those payments. For example, when we questioned the official responsible for managing FEMA’s national disaster assistance processing center about the more than duplicate 5,000 EA payments to individuals who had already received debit cards, he told us that he was unaware of the magnitude of the duplicate payments. After researching the issue, he informed us that the duplicate payments in question were made as a result of a “system glitch” and not as a result of a deliberate action on the part of FEMA management. In addition, the more than 5,000 duplicate payments in question were all made within the span of several hours roughly a week after FEMA completed issuing all the debit cards. An analysis of the more than 5,000 duplicate payments indicates that there was no apparent reason why only about half of the roughly 10,000 debit card recipients received the duplicate payments. Using FEMA’s rationale, all 10,000 registrants who received a debit card should have received a duplicate EA payment. FEMA and DHS partially concurred with our recommendation to establish identity verification processes for IHP registrants applying via the phone and Internet. FEMA and DHS stated that they had implemented identity proofing on call center applications. As noted in our report, FEMA instituted identity proofing for Internet registrants at the time of the two hurricanes, and FEMA and DHS response to our report indicates that FEMA instituted identity proofing for call center registrants. In future work, we will follow up on whether these actions fully address our recommendations. FEMA and DHS additionally commented that they did not see the necessity of requiring registrants to also provide their name exactly as it appears on their Social Security Card, noting that their data contractor is able to use logic to find aliases and nicknames. While we do not object to FEMA collecting the nicknames or aliases of registrants applying for disaster assistance, we continue to believe that registrants should be instructed to provide their name as it appears on their Social Security Card to prevent name and social security mismatches. Instructing registrants to provide the name that appears on their Social Security Card can only help—not hinder—the registrant verification process. FEMA and DHS’s responses indicate that they are attempting to address some of the systemic problems we identified in the IHP program. Going forward it will be important for FEMA to establish effective controls to prevent fraudulent and improper payments before they occur, because fraud prevention is a far more effective control than detecting improper and potentially fraudulent payments after they are made. Our experience with organizations that rely on a process that attempts to detect improper and potentially fraudulent payments after they are made is that the organization recovers only a fraction of the payments that should not have been made. We are sending copies of this report to the Secretary of the Department of Homeland Security, and the Director of Federal Emergency Management Agency. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-7455 or kutzg@gao.gov if you or your staffs have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. A result of wdespred congressinaanpubinterein the federl respnse to hrranKtrina anRi, GAO cocted an aut of the Iua and Household Prom (IHP) under Comtroller Geerl of the United Ste tory authory. We deed signiant fl in the rocess for registeringisaster vcttht leve the federovermet verable to frauanabuse of EA paymes. For Iteret appns, lted automted cotrol were in pce to ver registran’s dey. However, we founindedet ver of the de of registran who registered for disaster assisance over the teleho. To demonstrte the verabi inherein the cll-in appns, we used fsied de, gus ddress, and fabted disaster tor to register for IHP. Below is copy of oe of the $2,000 check tht we receved to dte for ogus telehoappns. Hrran Ktrina anRidetroed homes and dispced mllns of inuas. I the wke of thenal disaster, FEMA fced the chllenge of roving assisance quickl and wth mini“red tape,” whle hing sufft cotrol to rovde assuance thef were paid oto eligible inuas and households. I respnse to this chllenge, FEMA rovded $2,000 in IHP paymeto ffected householdia Expedted Assisance (EA) ro. Vctwho receved EA mayua for up to $26,200 in IHP assisance. A of md-Decemer 200, IHP paymetotled abt $5.bill, wth $2.bill rovded in the form of EA. Thepayme were mde via check, electronic fund transfer, an ll nuer of debit crds. We o found tht FEMA’s automted system freqtl deed oteiall fraulet registrns, such asltiple registrnsth deociaec nuer (SSN) but dffereddresss. However, the manuarocess used to revew thee registrnsot revet EA and other payme from ing issued. Other cotrol wess inclde the lck of any of daged roert ddress for oth Iteret and telehoe registrns. GAO’s temonyll rovde the result to dte relted to whether (1) cotrol re in ce and oering effectvel to lt EA to quaed appan, (2) inns xist of frauanabusin the appfor and receipt of EA and other payme, and (3) cotrol re in ce and oering effectvel over debit crd to revet dupte EA payme anroer usag. Gve the wek or xistet cotrol, is ot suising tht or dining aninveigans to dte how the oteial for subsanial frauanabuse of EA. Thousan of registranisused SSN, i.., used SSN tht were ever issued or elonged to deceased or other inuas. Or cas inveigans of everl hundred registrns inte signiant misuse of SSN and the use of gusaged roert ddresss. For exale, or visi to over 200 of the casaged roert in Texas and Louisiana howed tht least 80 of theroert were gus—inclingant lot anxisteapartmes. www..gov/cg-bin/getrpt?GAO-06-403T. To vew the fll prodct, nclng the cope nd methodology, clck on the lnk above. For more nformon, contct Gregory Ktz t (202) 512-7455 or ktzg@g.gov. We found tht FEMA o mde dupte EA payme to ab,000 of the rl 11,000 debit crd recipi—oce through the distribu of debit crd anagain by check or electronic fun transfer. We found tht whle debit crd were used redominantl to oainash, food, clothing, anernaecessi, ll nuer were used for lt etertainmet, baiervce and weapns purchase, whch do ot appr to tem or ervcethre essial to saisisaster relted essiaeeds. Cairman and Memer of the Commttee: Than for the opportuni to disussr onging forensiauand relted inveigans of assisance rovded to inua and householdrelted to hrran Ktrina anRia. The Iua and HouseholdProm (IHP), ajor comt of the federl disaster respnse effortabished under the Rert T. Sfford Disaster Relef and EmerAssisance Act (Sfford Act), is designed to rovde finaniaassisance to inua and household who, as rect result of ajor disaster, hve ecessaxpns anerus eed tht cannot e met through other means. A of md-Decemer 200, the Federl Emer Managemet A (FEMA) hd distributed rl $5.bill in IHP assisance o more thanll registrns. Hrran Ktrina anRi detroed home and dispced inua cross the gulf coast regin. I the wke of thee massive nal disaster, FEMA fced the formable chllenge of roving t leasome iniiaassisance to over ll registranuicklth mini“red tape,” whle hing sufft cotrol in ce to rovde assuance thef were paid o to eligible inua and households. Disaster relef covered by IHP inclde temor housing assisance, reanernaroert repaiand recemet, and other ecessaxpns relted to isaster. IHP assisance is erll delvered fter an inspectas ee cocted to ver the etet of loss and determine eligibiy. Because of the tremedous devasaused byrran Ktrina anRi, FEMA ctted expedted assisance to rovde fast trck mo—in the form of $2,000 inxpedted assisance payme—to eligible disaster vct to helth mmediate, emer eed of food, helter, clothing, anernaecessis. This ft respnse wasin helpingct of hrran Ktrina anRia. FEMA speced tht expedted assisance payme were to rovded o to inua and household who, as result of hrran Ktrina anRi, were dispced from theredisaster residece anPub. L. 93-288, 88 S. 143 (1974) (meded 2000). ted assisance rocess is ot specll authorzed in the Sfford Act. However, FEMA revusas asserted, and we hve agreed, tht has legaauthor under the ct to lemet expedted, or fast trck, rocedres. Disster Assistance: Gidance Needed for FEMA’s “Fst Tr” Hosig Assistance Process, GAO-RCED-98-1 (Wasingto, D.C.: Oct. 1997). were in eed of helter. Typill householdan receve oxpedted assisance payme. Ecens re mde in siuans where household memer re dispced to pate locns, in whch case more thane memer of the household may e eligible for paymes. FEMA rovded expedted assisance payme relted to hrranKtrina anRi redominantl through electronic fun transfer (EFT) and check t to the registrans’rreddresss. I dd, FEMA rovded ted mount of expedted assisance via debit crdistributed t three locns in Texas. A of md-Decemer 200 howed tht the agd delvered 44 ercet ($2.) of the $5. in IHP aid through expedted assisance to hrran Ktrina anRi registran cross t least 17 coun in 4 dfferetes. Almot $1.bill wet to inuath daged ddress in Louisiana, more than $400 mll to inua in Texas, and over $300 mll to inua in Alabaa and Mississippi. Rgistran determined to e eligible for expedted assisance may e eligible to receve ddnal IHP payme up to the overll IHP cap of $26,200. Or crreauaninveiga is ing erformed under the tor author give to the Comtroller Geerl of the United Stes. Oauaninveiga is cocted under the remise tht whle the federovermeeed to rovde ft and compassinate assisance to the vct of nal disaster, pubc codece in an effectve disaster relef rom tht tke ll ssible teps to minize fraud, waste, anabuseed to reerved. Today, we wll summze the result from or onging forensiauand relted inveigans of the IHP ro. The Act’s lemeing reguns defin household as ll erns (incling lt and chldre) who lved in the redisaster residece, as well as any other erns ot ret the tme but who re expected to reting the assisance erod.C.F.R. §.. Curreddress refer to the ddress t whch the disaster vctisrretl resiing. Daged ddress re the ddress whch were ffected by the hrrans. The debit crd rois pilot rolemeted to rovde expedted assisance to inua and householdhoused t three Texas helters. The debit crd, whch reemle credt crd anr the MasterCard loo, can used t ATM anany commercial otlet thcce MasterCard. re o releasing today the result of or lted inveiga into llegans tht M Me, R-To-Et rns inteded for usin the hrrane relef effort were insteold to the pubc o the Iteret auct site eBay. See GAO, Ivestigtion: Militry Mels, Redy-To-Et Sold o eB, GAO-06-410R (Wasingto, D.C.: Feb. 13, 2006). This temonyll rovde the resultof or work relted to whether (1) cotrol re in ce and oering effectvel to lt expedted assisance to quaed registran, (2) innsxist of frauanabusin the registr for and receipt of expedted assisance and other payme, and (3) cotrol re in ce and oering effectvel over debit crd to revet dupte payme anroer usag. We an to issu detailed reort wth recommens the result of oau. Thusr, or work has focused the IHP registr rocess ecausinua whoe registrns re approved hve ccess to expedted assisance payme ansubseqtl the fll range of IHP efs. To assss the design of cotrol, we erformed wlkthroug of FEMA’s rocess for cceing registrns anrdingxpedted assisance funs. To determine whether innsxisted of frauanabusinxpedted assisance and other disbueme, we rovded FEMA d to the SociaSec Administr (SSA) to ver against ther record of vociaecy nuer (SSN), and revewed the FEMA dabase of IHP registrns for other anom usingining technis. To determine whether registrns resulted in oteiall fraulet or roer payme, we elected rereve elect of 248 registrns from or dining result for frther inveigans. The 248 registrns rereted 20 cas—ome involvingltiple registran—tht we linked toether througdename, SSN, daged ddress and/or crreddresss. Oanaysis of oteiall frauleuse of SSN and other dining effort re onging, and we an to reort o ddnal result in the fre. For pu of this temony, we dot coct sufft work to roect the magnide of oteiall frauleanroer IHP paymes. We roctvel teted the dequa of cotrol over the registrn process for disaster assisance by subtting clai for relef usingsied de, gus ddress, and fabted disaster tors. Thee te were erformed efore FEMA rovded us any inform relted to the rocess used to cree IHP registrns anreclde ome fraulet registrns. Addnal detaicoand methodologi re inclded in appix I. we reqted has ot ee rovded. O Janua 18, 2006, the Departmeof HomelanSec (DHS) Offce of GeerCunsel drovde usth well less thanlf of the docme tht were reqted. Whle the dabasand other d rovded by FEMA enabled us to design procedre to tet the effectvess of FEMA’s system of internal cotrol, t dot enable us to fll determine the root caus of wek or - existet cotrol and formte detailed recommens. For exale, asll e disussed lter, FEMA and the DHSot rovded us docme to enable us to coclusivel determine the reas tht FEMA subtted ome registrns, and dot subt other registrns, to den por to issuingxpedted assisance paymes. We cocted oauaninveigans from Octoer 200 through Janua. Ecet for retrctnsisussed revus relted to the lns tht DHS ced o the coe oaut work, we cocted oaut work in ccordance wth erll cceted overmeauing anrd and cocted inveigave work in ccordance wth the anrd recribed by the Preside’s Cunl o Ite and Effy. Or finings today focus the result to dte from of or dining aninveigave technis. We found wek or xistet cotrols in the rocess tht FEMA used to revew disaster registrns anapprove assisance payme tht leve the federovermet verable to frauanabus. I the crftermth of hrran Ktrina anRi, FEMA moved ftl to distribute expedted assisance payme to llow disaster vct to migate and overcome the effect of the disasters. I this cotet, the eabishmet of an effectve cotrol eromet was signiant chlleng. Specll, we found tht FEMA hlemeted ome cotrol or to the disaster to rovde automted v of the de of registran who apped for assisance via the Iteret. Or work thusinte tht this resulted in FEMA reecting ome registran who rovded name anSSN tht dot pass the vte. However, FEMA dot lemet the same reveve cotrol for thoe who apped via the teleho. Ouse of fctus name, gus ddress, and fabted disaster tor to oainxpedted assisance der the Act’s lemeing reguns, FEMA may recover fun tht determin were rovded erroeous, tht were spinapproiatel, or were oained through fraulet means.C.F.R. § .116 () payme from FEMA demonstrted the ease wth whch expedted assisance cold e oained by rovinginform over the teleho. Because expedted assisance is gateway to frther IHP payme (up to $26,200 er registr), approvl for expedted assisance payme oteiallxp FEMA, and the federovermet, to more frauanabuse relted to temor housing, home repaiand recemet, and other eed assisance. Ding the coe of oauaninveiga, FEMA offia ted tht theot ver whether registraninsuance and whether registran were unable to lve in ther home or to approvingxpedted assisance paymes. According to FEMA offia, the unprecedeted le of the two disaster and the eed to move quickl to migate thepact led FEMA to lemet expedted assisance. Expedted assisance dffer from the trnal way of delveringisaster assisance in tht cll for FEMA to rovde assisance wthot requiing roof of loss and verying the etet of such losss. Cnseqtl, FEMA lemeted lted cotrol to ver eligibi for the iniial expedted assisance paymes. According to FEMA offia, thee cotrol were retrcted to determining whether the daged residece was in the disaster re and lted vof the deof registran who used the Iteret. Rgistran who FEMA thought met thee quans based o ther lted assssme were deemed eligible for expedted assisance. FEMA lemeted dffererocedre whe rocessingisaster registrns subtted via the Iteret and telehoe clls. Of the more than.5ll registrns recorded in FEMA’sabase, i.., registrns tht were successll recorded—60 ercet (more than.5 ll) were eemt from any de ver ecause the were subtted via the teleho. Pror to ingt expedted assisance payme, FEMA dot hve rocedre in ce for Iteret or telehoe registrns thcreeed ot registrns where the lleed daged ddressas gus ddress. The lck of de ver for telehoe registrns anany ddressxped the overmet to frauanabuse of the IHP ro. aiing the Iteret, the FEMA cotrctor took teps to ver registrans’ des. The ver teps involved corming tht the SSN mtched wth SSN in pubc record, tht the name anSSN combinatched wth an de registered in pubc record, and tht the SSN was ot associated wth deceased inua. The FEMA cotrctor was respnsible for locking any registrns for whch any of thee three consas ot met. Addnall, registran who passed the fgate hd to rovde answer to nuer of qns aimed t frther corrooring the registrans’ des. Rgistran who were reected via the Iteret were dvised to coct FEMA via teleho. Oauaninveigave work inted tht this vern process heled deter ous fraulet Iteret registrns usingname anSSNs. However, FEMA keo record of the name, SSN, and other inform relted to the reected registrns, ano record of the reasns tht the FEMA cotrctor locked the registr from ing forwrd. FEMA ckowleded tht was coceable thinuawho were reected ecause of finform subtted via the Iteret cold et expedted assisance payme by roving the same finform over the teleho. Although the de ver rocess appred to hve worked for mot Iteret registrns, t dot de ll nuer of registrnsth inSSNs. According to inform we receved from the SSA, rl 60 Iteret registran who receved FEMA payme rovded SSN tht were ever issued or elonged to inua who were deceased or to the hrrans. Rsult inte tht theinuaayve passed the ver rocess ecauspubc record used to ver registrans’ de were flwed. For exale, oe credt histor we oained inted th registrant hd eabished credt histor using an inSSN. verfor telehoe registrns sir to thoused for the Iteret. FEMA o rereted to us tht de to buet constrain another considerns, the change was ot lemeted inme to respd to hrran Ktrina anRia. However, to dte we hve ot receved docme to vte thee rerens. The lck of de ver of hoe registran or to disbusingunke FEMA verable to authoringxpedted assisance payme based o frauleinform subtted by registrans. Pror to oaining inform the cotrol rocedre FEMA used to authorze expedted assisance payme, we teted the cotrol by tteming to register for disaster relef through two orts: (1) the Iteret via FEMA’s We site and (2) telehoe cll to FEMA. For oth ort, we teted FEMA’s cotrol by rovingsied de angus ddresss. I ll insance, FEMA’s We site dot llow us to successllinaze or registrns. Insted, the We site inted tht there were rolemth or registrns andvised us to coct the FEMA toll-free nuer f we thought tht we were eligible for assisance. This is consistet wth FEMA’s rere tht Iteret registrns were compared against thrd-part inform to ver des. Oinveigave work o cormed tht the lck of sir cotrol over telehoe registrnsxped FEMA to frauanabus. Specll, in insance where we subtted via the telehoe the same exact inform tht hee reected o the Iteret, i.., fsied de angus ddress, the informas cceted as. Subseqtl, the clai were rocessed and $2,000 expedted assisance check were issued. Figure 1 rovde anxale of anxpedted assisance check rovded to GAO. rovde assuance tht the disaster ddressas ot gus ddress, ther for Iteret or telehoe registrns. FEMA’s cotrolailed to revet thousan of registrnsth dupte inform from ing rocessed anpai. Or work inte tht FEMA insted lted automted checkthin NEMIS to de registrns coaining upte inform, e.g., mltiple registrns th the same SSN, dupte daged ddress telehonuer, and dupte bank roing nuers. D FEMA rovded enabled us to corm tht NEMIS deed rl900,000 registrns—ot of 2.5ll totl registrns—as oteial duptes. FEMA offiarther rereted to us tht the registrns deed asupte by the system were “frozen” from frther payme unddnal revew cold e cocted. The pue of the ddnal revewas to determine whether the registrns were tre dupte, and therefore paymes shold coinue to e denied, or whether innsxisted tht the registrns were ot tre dupte, and therefore FEMA hold mke thopaymes. It appred from FEMA d tht the automted check and the subseqt revew rocess reveted hundred of thousan of payme from ingde oupte registrns. However, FEMA d and or cas inveigans inte tht the ddnal revew rocessas ot erel effectve ecausllowed paymes based oupte informn. We o found tht FEMA dot lemet effectve cotrol for telehoand Iteret registrns to ver tht the ddress claimed by registran as ther daged ddressxisted. All e disussed frther elow, many of or cas of oteial frauhow thpayme were receved based o claide lising gusaged ddresss. Oundercover work o corroorted tht FEMA rovded expedted assisance to registranth gus ddresss. thousan of doll of IHP payme based o frauleand dupte informn. Thee cas re ot isolted insance of frauanabus. Rather, or dining result to dte inte tht the re llustrve of the wder internal cotrol wess t FEMA—cotrol wess tht led to thousan of paymede to inua who rovded FEMA wth incorrect inform, e.g., incorrect SSN angus address, and thousan more mde to inua who subtted mltiple registrns for paymes. Oau aninveigans of 20 cas demonstrte tht the wek or xistet cotrol over the registr anpaymerocessve oed the door to roer payme aninua eeking to oain IHP payme through fraulet means. Specll, ajor of or cas registrns—16 of 248—coained SSN tht were ever issued or elonged to deceased or other inuas. At 20 of the 248 registrns we revewed were subtted via the Iteret. Frther, of the over 200 lleed daged ddress tht we tred to visit, abt 80 dot exis. Some were vant lot, othered ot to gus apartmebuildings anunis. Because the hrrand detroed many home, we were unable to corm whether abt 1 ddnaddressd ever existed. We deed other fraucheme unrelted to the weanxistet v anrepaymet cotrol revusisussed, such as registran who subtted registrns usingddress tht were ot ther resideces. I totl, the cas registran of whom we cocted inveigans ve collected hundred of thousan of doll in payme based o oteiall fraulects. Thepayme inclde mo for expedted assisance, reassisance, and other IHP paymes. Frther, asr work roress, we re uncovering evdece of ler cheme involvingltiple registran thre inteded to defraud FEMA. We found thecheme ecause the registran red the same lasname, crreddress, and/or daged ddress—ome of whch we were able to corm dot exis. Whle the fct surrouning the cas rovded usth intor thoteial fraud mayve een peretrted, frther teing aninveigans eed to e cocted to determine whether theinua were intenall trying to defrauus intor such as dename, SSN, daged ddress, and crreddress to link mltiple registrns toether into the 20 cass. the overmet or whether the discrepan aninacc were the result of other errors. Cnseqtl, we re coctingrther inveigans into thee cass. Table 1 highlight 10 of the 20 cas we deed through dining tht we inveigated. I dd, ome inua in the casted elow subtted ddnal registrns but hot receved payme as of md Decemer 2005. Bogus Properties Used to Receive At least 10 Seventeen ndua receved pyment on 36 registronusing 34 SSN tht were not thes. Of the 17 ddress we visited, 13 were from the same rtment buildng, of whch 6 dd not exis. ddonddress were nv. Pyment nclded 31 expedted assisnce pyment totng $62,000, nd 18 n other pyment, nclng rentl pyments. At least 8 One ndual receved pyment on 15 dfferent SSN—only one of whch elonged to tht peron. Inveve work howed tht 3 ddress were vbut were not ddress of the registrnt. Pyment nclded 13 expedted assisnce pyment totng $26,000 nd $15,000 n other assisnce, nclng housing. The ndual my hve commtted bank frauusing nvSSN to open ccont. The ndual hd eabished credusing 2 SSN tht dd not elong to the ndua. None One ndual receved 8 expedted assisnce pyment using the same nme, SSN, nd crrent ddress. Of the 8 ddress declred asged, two ppered to elong to the ndua. FEMA’ automted ed dented t least 7 registron as plte, neverthelessyment were issued. At least 14 Two ndua receved expedted assisnce pyment on 23 SSN – 21 of whch were not thes. Pubc records indte tht the nduad not lve ny of the 9 vddresss. Pyment nclded 22 expedted assisnce pyment nd 1 housing assisnce pyment. Bogus Properties Used to Receive At least 10 Sinduareceved 38 pyment on dfferent SSN—only 1 of whch was trced back to them. Pyment nclded 37 expedted assisnce pyment totng $74,000 nd over $2,000 n other assisnce. Indual receved 18 expedted assisnce pyment using the same nme nd 18 dfferent SSN—only 1 of whch elonged to the peron. Inveve work nd pubc record ndte tht the ndual hd never lved ny of the 6 remaing vddresss. At least 22 A grop of 8 ndua receved pyment on 31 registronusing 26 SSN tht dd not elong to them. 22 of the registron were for ddress tht dd not exis. The remaing ddress were not vted. Pyment nclde 32 pyment for expedted assisnce nd over $28,000 for other assisnce nclng housing assisnce. None Sipprent memer of the same household registered 6 me using the same dged ddresss. Fve of the 6 nduas ared the same crrent ddress. Pyment nclded 5 expedted assisnce pyment nd $13,000 n other pyment nclng housing assisnce. None Seven pprent memer of the same household receved yment using the same dged ddress. One fly memer used SSN tht dd not elong to the ly memer. Six of the 7 ndua red the same crrent ddress. Pyment nclded 7 pyment for expedted assisnce. None Seven pprent memer of the same household registered using the same dged ddress. Pyment nclded 6 expedted assisnce pyment nd $68,000 n other assisnce. Amont reflecttotl pyment for IHP, whch nclde expedted assisnce, temporry housing assisnce, pyment for repaind replcement of rend peronl property, nd pyment for other needs such as medl, trporton, nd other necessis. One ddress cold associated wth mltple registrons. The following rovde llustrve detailed inform everl of the ass. Casnuer 1 involveinua, everl of whom hd the same lasname, who subtted t least 36 registrns claiing to e disaster vct of oth Ktrina anRia. All 36 registrns were subtted through the telehoe, using 36 dffereSSN and 4 dfferet crreddresss. Theinua used ther ow SSN 2 of the registrns, but the remainingSSN were ever issued or elonged to deceased or other inuas. The inua receved over $103,000 in IHP payme, incling $62,000 inxpedted payme and $41,000 in payme for other assisance, incling temor housing assisance. Oanaysis how tht the inua claimed 13 dfferet daged ddressthin single apartmebuilding, and 4 other ddressthin the same lock in Louisiana. However, oysiinspect of theddress reveled tht 10 of the ddress were gus ddresss. Frther auaninveigave work how tht theinuaay ot hve lved any of the vd disaster ddress t the tme of hrran Ktrina anRia. We re cocting addnainveigans thisas. Casnuer 2 involve an inual who used 1ffereSSN—oe of whch was the inua’s ow—to subt least 1 registrns over the teleho. The inual claimed fferet daged ddress ll 1 registrns, anused 3 dfferet crreddress—incling t offce , where the inual receved paymes. The inual receved 16 payme toting over $41,000 o of the registrns. I ll, the inual receved 13 expedted assisance payme, 2 temor housing assisance payme, ananother paymet of $10,. Frther inveigave work discloed tht the inual mayve commtted bank frauby using SSN to o banccoun. Other pubcl aiable record inte tht the inual hused 2 SSN tht were issued to other eole to eabish credt histors. thee registrns as oteial duptes. I spite of the edt flags, FEMA clered the registrns for roer expedted assisance paymes. Casnuer 4 involveinua who appr to e ling toether the same crreddress in Texas. Thee 2 inua receved paymefor 23 registrns subtted over the telehousing 23 dffereSSN— two of whch elonged to them—to oain more than $46,000 inisaster assisance. The inform the registran rovded relted to many of the disaster ddress appred f. The ddressther dot exist, or there was roof the inuad ever lved t theddresss. Casnuer 8 relte to 6 registranth the same lasname who registered for disaster assisance using the same daged ddress, wth of the 6 using the same crreddress. FEMA crteria spec thinuawho reside toether t the same ddress and who re dispced to the same ddress re etled to oe expedted assisance payme. However, ll 6 ssible f memer receved 12 payme toting over $23,000—$10,000 inxpedted assisance and more than $13,000 in other assisance, incling reassisance. The cas we deed and reorted re ot isolted insance of oteial frauanabus. Rather, or dining result how tht the re inve of frauanabusd thee cas, anint drectl to the wess in cotrol tht we hve deed. The wess deed through dining inclde ineffectve cotrol to detect (1) SSN tht were ever issued or elonged to deceased or other inua, (2) SSN used more thance, and (3) other dupte informn. tch wth the name rovded o the registrns. A revus isussed, frther teing aninveigans eed to e cocted to determine whether this inual was intenall trying to defraud the overmet or whether the discrepan aninaccwere the result of other errors. Or dining and cas clerl how tht FEMA’s cotrol do ot reveinua from mingltiple IHP registrns using the same SSN. We found thousan of SSN tht were used o more thane registr associated wth the same disaster. Becausan inual can receve disaster relef ois or her residece an SSN is uninuer assigned to an inual, the same SSN hold ot used to receve assisance for the same disaster. This rolem is llustrted inase 3 above, where an inual registered for IHP 8 tme using the same name, same SSN, ansame crreddress—and thus cold hve quaed for o 1 expedted assisance payme—buinsted receved expedted assisance payme of $2,000 for 8 dfferet registrns. Or dining and cas how tht the IHP cotrol to revet dupte paymeot revet FEMA from ming paymeto tens of thousan of dfferet registran who used the same ke registr informn. FEMA’s eligibi crteria spec thinuawho reside toether t the same ddress and who re dispced to the same ddress re typilltled to oe expedted assisance payme. FEMA ol rovde for expedted assisance payme to more thane memer of the household in unusual crcance, such as whe household wasispced to dfferet locns. However, oth oinveigans and dining found thousan of insance where FEMA mde more thanpaymet to the same household thred the same lasname and daged and crreddresss. A llustrted inase 8, of 6 inuath the same lasname, the same daged ddress, and the same crreddress receved mltiple expedted assisance payme, insted of just oe for whch theuaed. Whle ot ll of the registrns thused the same ke inform were subtted frauletl, ddnainveigans need to e cocted to determine whether or ot the ere fastled to expedted and other IHP assisance. U.S.C. § 1001, er who kowing and wllfllke anyterialle, fctus, or frauletemet or rere ll e fined or ised up to , or oth. Or dining o found tht FEMA mde dupte expedted assisance payme to tens of thousan of inua for the same FEMA registr nuer. FEMA ol te tht registran hold o receve oe expedted assisance payme. However, in ome cas, FEMA paiasany as for $2,000 expedted assisance payme to the same FEMA registr nuer. Aisussed lter, we o found tht FEMA issued expedted assisance payme to more than ,000 registran who hlre receved debit crds. FEMA offia rereted to us tht the trced ome of thee ousupte payme to computer error thinadvertetlaused the dupte paymes. However, the rovded supporting docmen. I the days followingrrane Ktrina, FEMA expermeted wth the use of debit crd to expedte payme of $2,000 to abt 11,000 disaster vct t three Texas helter who, ccording to FEMA, hd dfflt ccessing thebanccouns. Figure 2 is anxale of FEMA debit crd. helter were locted in Dllas, Housto, anSan Atoni. The debit crd rom was an effectve means of distribuing relef quickl to thoe moin eed. However, we found thecause FEMA dot vte the deof debit crd recipi who registered over the telehoe, ome inua who supped FEMA wth SSN tht dot elong to them o receved debit crds. We o found tht cotrol over the debit crd rom were ot effectvel designed anlemeted to revet debit crd recipi from receingupte expedted assisance payme, oce through the debit crd anagain through check or EFT. Finall, unke the guiance rovded to other IHP registran, t the tme FEMA distributed the debit crd, FEMA dot rovde instrctns informing them tht the fun ther crdusused for approiate pus. Aisussed revus, FEMA dot ver the de of inuas and/or household who subtted disaster registrns over the teleho. This wess occrred in the debit crd roas well. FEMA required the comlet of isaster registr or to household or inuaing able to receve debit crd. According to FEMA offia, registran t the three ceter apped for assisance via the telehoand Iteret. Therefore, to the etet tht registrns for the debit crd were tke over the telehoe, FEMA dot subject the de of the registran to ver rocess. Cnseqtl, we deed 0 debit crd issued to registranising SSN tht the SSA ho record of issuing, and 12 crd issued to registran using SSN elonging to deceased inuas. For exale, oe registranused an inSSN to receve $2,000 debit crd anused abt $00 of tht mo to pay or trffc volns to reinste drver’scens. I another case, registranused the SSN of an inual who ded into receve $2,000 debit crd. FEMA subseqtl desited an ddna$7,in IHP payme to tht debit crd ccount for ddnal clai subtted by thinua. This registrant wthdrew mot of the $9,4 desited into the debit crd ccounbyaining ATM cash wthdrs. to ther home ddress or banccoun and therefore eeded mmediate assisance in the form of debit crds. Or revew of FEMA d isproved FEMA’s elef tht o few inua who receved debit crd o receved other disaster assisance paymes. Insted, thousan, or rllf, of the inua who receved debit crd o receved check or EFT tht were mde everl days fter the debit crdee issued. The result was tht FEMA paid more than $10 mll doll inupte expedted assisance payme to inua who hlre receved ther $2,000 of expedted assisance. I erl, oce FEMA receve isaster registr, FEMA package coaining IHP inform and detailed instrctns, incling instrctns how to follow up ef, how to appf denied ef, and the roer use of IHP paymes. However, FMS and FEMA offia informed us tht FEMA dot specll rovde instrctns how the debit crd hold o used for ecessaxpns anerus eed relted to the disaster t the same tme the debit crd were distributed. We found thin isolted insance, debit crd were used for lt etertainmet, to purchase weapns, and for purchas assagparlor tht hee revusaided by locolce for ron. Oanaysis of debit crd transact rovded by JP Morgan Case found tht the debit crd were used redominantl to oainash whch dot llow us to determine how the moas ctuall used. The major of the remaining transactnsas associated wth purchas of food, clothing, anernaecessis. Figure 3 how rekdow of the typ of purchasde byrdholders. FEMA has subsanial chllengin baaning the eed to et mot quickl to thoe who re ctuall in eed ansusaining pubc codece inisaster ro bying ll ssible teps to minize frauanabus. Based or work to dte, we eleve tht more can e doe to revet fraud through v of de and dagddress and eanced use of automted system ver inteded to revet fraulet disbuemes. Oce fraulet registrns re mde anmo isisbued, detecting anpusuing thoe who commtted frauin a comrehensive manner is more cotl and may ot result in recovers. Frther, many of thoe frauletlregistered in the FEMA system lre receved expedted assisance and wll lkel receve more mo, asch registrant can receve asch as $26,200 er registrn. Aother ke elemet to reveing frauin the fre is to ensure there re conseqce for thoe tht commt frau. For the fraud cas tht we re inveigaing, we an to refer them to the Ktrina Fraud Task Force for frther inveiga and, where approiate, roecn. We eleve throec of inua who hve oained disaster relef paymethrough fraulet meansll message for fre disaster tht there re conseqce for defrauing the overme. MCairman and Memer of the Commttee, this coclde teme. I wold leased to answer anyns th or other memer of the commttee mayve t thisme. For frther inform abt this temony, lease coct Greor D. Ktz t (202) 12-74 or ktz@ga.gov. Cct in for or Offce of CngressinaRelns and Pubc Affaiay e found o the laspage of this temony. To assss cotrol in ce over the Federl Emer ManagemeA (FEMA)’s Iua and Household Prom (IHP), we intervewed FEMA offia anerformed wlkthroug t the Nnal Processing Servce Cter in Wincheter, Va. We revewed the Sfford Act, Pub. L. 93-288, the lemeing reguns, and FEMA’s instrctns to disaster registran aiable via the Iteret. I dd, to roctveltet cotrol in ce, we apped for assisance usingsied de, gus ddress, and fctusisaster tor to determinf IHP payme cold e oained based o frauleinformn. Because of everl key unanswered req for docme from the Departmet of HomelanSec (DHS), inform eeded to fll assss the expedted assisance rom wasted. For exale, FEMA and DHSot rovded us docme to enable us to coclusivel determine the reas tht FEMA subtted ome registrns, and dot subt other registrns, to de or to issuingxpedted assisance paymes. Cnseqtl, or work wasted to oanaysis of the FEMA dabas, inveigans we cocted, ddel aiable to the pubc via the Iteret, aninform FEMA offia orll rovded to us. To determine the magnide and chcteris of IHP payme, we oained the FEMA IHP dabasas of Decemer 2005. We vted tht the dabase was comlete and reliable by compaing the totl disbueme against reort FEMA rovded to the Snate Approians Commttee o Ktrina/Riisbuemes. We summzed the moun of IHP rovded byype of assisance anby loc of disaster ddress. paymes. We deed insance where roups of registranay ve ee involved in cheme to defraud FEMA. We found thecheme ecause the registran rovded the same SSN, lasname, crreddress, and/or daged ddress ther registrns. Or mcro anaysis of oteiall frauleuse of SSN and other dining re onging, and we an to reort ddnal result re dte. For pu of this temony, we dot coct sufft work to roect the magnide of oteiall frauleanroer payme of IHP. We o visited over 200 of the claimed daged ddress relted to or cas to determine whether or ot the ddress were v. To assss the typ of purchasde wth FEMA debit crdistributed t relef ceter, we revewed abase of transactns rovded by JP Morgan Case, the dministring bank for the debit crds. SSA assisted us to compare crdholder dth SSA record to determine whether registran receing debit crdrovded vdes. We erformed dining debit crd transactns to de purchas tht dot appr to inve of ecessaxpns as defined by the Sfford Act’s lemeing reguns. Finall, we vted specc transactns deed in the dabasbyaining inform ctuatem purchased from the vedors. I the coe of or work, we mde numerous wrtte req for ke docme anet of d relted to the IHP, mot ding back to Octoer 2005. Whle FEMA offia romtl comed wth oe ke part of or reqt—this FEMA mde aiable dabas of IHP registran anpayme—the major of tem reqted hve ot ee rovded. O Janua 18, 2006, the Departmet of HomelanSec Offce of GeerCunsel rovded usth well less thanlf of the docmetht were reqted. For exale, FEMA and the DHSot rovded us docme to enable us to coclusivel determine the reas tht FEMA subtted ome registrns, and dot subt other registrns, to den por to issuingxpedted assisance paymes. Whle the dabasand other d rovded by FEMA enabled us to design rocedre to tet the effectvess of the FEMA’s system of internal cotrol, t dot enable us to comrehensivel determine the root caus of wek or -existet cotrols. Octoer 200 through Januain ccordance wth erll cceted overmeauing anrd and qua anrd for inveigans as et forth by the Preside’s Cunl o Ite and Effy. GAO-0-403T This is work of the U.S. government nd is not subject to copyrght protecton n the Unted Stes. It me reprodced nd distributed entrety wthot frther permission from GAO. However, ecause this work my contain copyrghted ge or other mterial, permission from the copyrght holder me necessary f yoish to reprodce thisteriaeptely. The Govermet Accounabi Offce, the aut, evuan aninveigave rm of Cngress, exis to support Cngress in meeting consnal respnsibi and to hel rove the erformance anccounabi of the federovermet for the Ameran eole. GAO exain the use of pubc funs; evuate federro anols; anrovde anays, recommens, and other assisance to help Cngresske informed oversight, ol, and funing decisins. GAO’s commtmet to ood overmeis reflected in core v of ccounabi, inte, and reliabiy. The fasteand easit way to oain copi of GAO docme o cois through GAO’s We site (www.ga.gov). Ech weekday, GAO ewl released reort, temony, and correspdece o We site. To hve GAO e-mai ist of ewl ted rodct ever fteroo, o to www.ga.gov anelect “Subscribe to Utes.” The ft copy of ech inted reort is free. Addnal copi re $2 ech. A check or mo order hold e mde ot to the Superintedet of Docmes. GAO cce VISA and Mastercrd. Order for 100 or more copiailed to single ddress re discounted 2 erce. Order hold t to: U.S. Govermet Accounabi Offce 441 G Street NW, Room LM Wasingto, D.C. Gloria Jrmo, Managing Drector, JrmoG@ga.gov (202) 12-4400 U.S. Govermet Accounabi Offce, 441 G Street NW, Room 712 Wasingto, D.C. Paul Ader, Managing Drector, AderP1@ga.gov (202) 12-4800 U.S. Govermet Accounabi Offce, 441 G Street NW, Room 7149 Wasingto, D.C. | In the wake of Hurricanes Katrina and Rita, the Federal Emergency Management Agency (FEMA) faced the challenge of providing assistance quickly while having sufficient controls to provide assurance that benefits were paid only to those eligible under the Individuals and Households Program (IHP). On February 13, 2006, GAO testified on the initial results of its ongoing work related to whether (1) controls are in place and operating effectively to limit assistance to qualified applicants, (2) indications exist of fraud and abuse in the application for and receipt of assistance payments, and (3) controls are in place and operating effectively over debit cards to prevent duplicate payments and improper usage. GAO identified significant flaws in the process for registering disaster victims that leave the federal government vulnerable to fraud and abuse of expedited assistance (EA) payments. For Internet applications, limited automated controls were in place to verify a registrant's identity. However, there was no independent verification of the identity of those who applied for disaster assistance via the telephone. GAO demonstrated the vulnerability inherent in the call-in applications by using falsified identities, bogus addresses, and fabricated disaster stories to register for IHP. FEMA's automated system frequently identified potentially fraudulent registrations, such as multiple registrations with identical social security numbers (SSN) but different addresses. However, the manual process used to review these flagged applications did not prevent EA and other payments from being issued. Other control weaknesses include the lack of any validation of damaged property addresses for both Internet and telephone registrations. Given these weak or nonexistent controls, it is not surprising that GAO's data mining and investigations showed substantial potential for fraud and abuse of EA. Thousands of registrants misused IHP by applying for assistance using SSNs that were never issued or belonged to deceased or other individuals. GAO's case study investigations of several hundred registrations also indicate the use of bogus damaged property addresses. Visits to over 200 of these damaged properties in Texas and Louisiana showed that at least 80 of these addresses were bogus--including vacant lots and nonexistent apartments. FEMA also made duplicate EA payments to about 5,000 of the nearly 11,000 debit card recipients--once through the distribution of debit cards and again by check or electronic funds transfer. In addition, while debit cards were used predominantly to obtain cash, food, clothing, and personal necessities, a small number were used for adult entertainment, bail bond services, and weapons purchase, which do not appear to be items or services required to satisfy disaster-related needs. |
The federal government may consider a wide selection of contract types when purchasing products and services. One of those types is an IDIQ contract. An IDIQ contract provides flexibility in cases where the government cannot determine the exact quantities and required timing of a product or service. Under an IDIQ contract, the government must order, and the contractor must provide, a minimum agreed-upon quantity of products or services, also known as a minimum guarantee. In addition, the contractor must provide any other quantities ordered by the government up to a stated maximum. A contracting officer determines whether, for a specific solicitation, to award multiple IDIQ contracts or only one. The FAR establishes a preference for “multiple-award contracts.” For purposes of this report, we describe these two approaches as “single-award IDIQ contracts” and “multiple-award IDIQ contracts.” “Single-award IDIQ contracts” refers to situations when only one contract is awarded under a solicitation. These contracts may have been competed or may have been awarded on a non-competitive basis. If a contract is awarded without competition, it must follow certain procedures, for example, a justification and approval document must be prepared and approved. In addition, if a single- award IDIQ contract is expected to exceed a certain threshold—raised from $103 million to $112 million on October 1, 2015—a written determination by the head of an agency is required. Single-award IDIQs are used under certain circumstances, such as when only one contractor is capable of providing the products or services. “Multiple-award IDIQ contracts” refers to situations when contracts are awarded to two or more contractors under a single solicitation. These contracts allow agencies to establish a group of prequalified contractors to compete for future orders under streamlined ordering procedures once agencies determine their specific needs. Contracting officers must avoid situations in which contractors specialize in one or a few areas of the work, creating the likelihood that orders would be awarded noncompetitively. An order, which is placed when a concrete need arises, obligates funds and authorizes work. Orders must be within the scope, period of performance, and maximum value and or quantities agreed to in the contract. The ordering processes for a multiple-award IDIQ contract and single-award IDIQ contract differ somewhat. For orders under single award IDIQ contracts, once a requirement is known, contracting officials can place an order following the procedures outlined in the contract. When multiple-award IDIQ contracts have been awarded, and a need arises, the requirement must be generally competed, through “fair opportunity”, among all of the IDIQ contract holders. The specific procedures required to provide fair opportunity differ based on the dollar value of the orders. Contracting officers must provide each contractor a fair opportunity to be considered for each order unless exceptions apply. Exceptions to fair opportunity requirements for orders are permitted in certain circumstances, such as when only one source is capable of providing the particular products or services sought. Beyond the requirement to meet a minimum guarantee, contractors can choose to submit offers or not. The FAR requires that before purchasing supplies and services, contracting officers must determine that the prices proposed by contractors are fair and reasonable. The FAR states that adequate price competition normally establishes a fair and reasonable price, but in some situations contracting officers may need to, or be required to, obtain other types of data to help establish pricing. Generally, the information that is used by contracting officers to determine the reasonableness of price depends on a series of circumstances, including whether the particular product or service procured is for a commercial or noncommercial item, and whether the requirement is being competed or awarded noncompetitively. The data examined could be cost data, such as the cost of materials, labor, and overhead, or pricing information, such as invoices for the same or similar items sold to commercial customers. When required, contracting officers must ask contractors for certified cost and pricing data. Once contracting officers obtain the data needed, there are several techniques they can use—singly or in combination—to determine price reasonableness, such as comparing proposed prices to historical prices paid, or comparing prices to an independent government cost estimate. About one-third of all federal government contract obligations from fiscal years 2011 through 2015 were through IDIQ contracts. Obligations on IDIQ contracts were more than $130 billion annually during these years, with DOD accounting for more than two-thirds of all IDIQ obligations. IDIQs were used more often for services than products across government agencies and most IDIQ contracts and orders were competed. While the FAR states a preference for multiple-award IDIQs, federal agencies obligated more dollars through single-award IDIQs than through multiple-award IDIQs. Most single-award IDIQ contracts were competed. DOD contracting officials cited various reasons for the wide use of IDIQ contracts, including flexibility and administrative ease. From fiscal years 2011 through 2015, the proportion of IDIQ obligations relative to total government contract obligations remained relatively constant, accounting for about a third of total obligations (see figure 1). Total IDIQ obligations ranged from about $180 billion in fiscal year 2011 to about $130 billion in fiscal year 2015. Overall, total contract obligations declined from fiscal year 2011 through 2015, and the changes in IDIQ obligations during this time frame were consistent with this decline. From fiscal years 2011 through 2015, DOD accounted for more than two- thirds of total IDIQ obligations annually, while all civilian agencies combined accounted for less than one-third (see figure 2). The three civilian agencies with the highest amounts of IDIQ obligations were the Departments of Homeland Security (DHS), Health and Human Services (HHS) and Veterans Affairs—(VA). From fiscal years 2011 through 2015, these agencies combined accounted for about 8 to 13 percent of government-wide IDIQ obligations each year. For example, in 2015, DHS, HHS, and VA each accounted for about 4 percent of IDIQ obligations, as shown in figure 3. From fiscal years 2011 through 2015 about two-thirds of government- wide IDIQ obligations were for services, while about one-third were for products. For example, in fiscal year 2015, government-wide IDIQ obligations for services accounted for about 70 percent of total IDIQ obligations. However, the proportion of IDIQ obligations on services versus products differed between DOD and civilian agencies—with IDIQ obligations on services accounting for 62 percent of total 2015 IDIQ obligations at DOD, but 85 percent at the civilian agencies. Figure 4 shows the annual breakdown of products and services by civilian agencies and DOD from fiscal years 2011 through 2015. While the FAR states a preference for multiple-award IDIQs, the majority of all government-wide IDIQ contract dollars were obligated through single-award IDIQ contracts from fiscal years 2011 through 2015. Specifically, across the government, approximately 60 percent of IDIQ obligations were awarded through single-award IDIQs and 40 percent through multiple-award IDIQs. Approximately eighty percent of all single- award IDIQ obligations were at DOD. See figure 5 for a breakdown of single- and multiple-award IDIQs by DOD and civilian agencies. From fiscal years 2011 through 2015, IDIQ contract and order obligations were generally competed. About 70 percent of all single-award contract obligations were competed from fiscal years 2011 through 2015, and that percentage was fairly consistent across DOD and civilian agencies, as shown in figure 6. For multiple-award IDIQ orders government-wide—more than 85 percent of all order obligations were competed from fiscal years 2011 through 2015. In each year, a higher percentage of order obligations were competed at DOD than at civilian agencies, as shown in figure 7. Based on FPDS-NG data, agencies identified a variety of exceptions to fair opportunity for multiple-award IDIQ orders, for example, that only one contractor was capable of providing the products or services required, a noncompetitive order was needed to satisfy a contract’s minimum guarantee, or that there was an urgent need. Our review of DOD contracts revealed several reasons for the use of IDIQ contracts. Contracting officials noted it was easier and faster to place an order under an IDIQ contract than to solicit and award a separate contract each time a need arose. Price and technical approach can still be evaluated at the time of placing an order, but the overall turnaround time, they said, is significantly less than for a new contract. Contracting officials also stated that IDIQ contracts were easier to administer. First, they noted that it was more efficient to track funds and requirements for different customers through orders, rather than making modifications to stand- alone contracts for the same purpose. Second, officials told us that the close-out of orders from IDIQ contracts was much faster, as each order can be closed-out individually when the last payment is made rather than waiting until the entire contract was complete. According to DOD contracting officials, IDIQ contracts also provide more funding flexibility as funds are obligated as needed through orders and not at contract award—as may be required for some other types of contracts. Once the minimum guarantee is satisfied on an IDIQ contract, there is no further government obligation to procure additional products and services under an IDIQ contract. For example, on an Air Force IDIQ contract for roofing services, contracting officials established a pricing structure that allowed for repairs to different types of roofing. The Air Force placed an order only when a specific need arose. These needs may vary—such as when repairs are needed due to wear and tear. This contract allows work to be performed on an as needed basis, which may help the Air Force begin or continue work in an uncertain funding environment. In addition, DOD officials told us that the contracts they used served a broader customer base, for example, multiple commands, other federal agencies, and foreign military sales. By not needing to specify an exact quantity or timing of delivery at the time of contract award, program offices can accommodate unforeseen needs on an ongoing basis through issuance of orders. For example, an Army contract for Aerial Target Systems training and testing is intended for use by all military departments as well as foreign military partners. Since the need for testing and training varies depending on the customer, these requirements were less defined at contract award, and will be more clearly specified at the time of order. DOD can award IDIQ contracts on a competitive or noncompetitive basis. Ten of the 18 single-award IDIQ contracts we reviewed were not competed, generally because only one contractor could meet the need. The remaining single-award IDIQ contracts reviewed were competed. For these contracts, a single-award contract was used for a variety of reasons; for example, orders under the contract were to be for integrally related tasks and therefore there was a need to build knowledge with each order. Orders under multiple-award contracts also can be awarded on a competitive or noncompetitive basis. The orders we reviewed that were not competed cited a variety of reasons, such as that there was an urgent need, there was only one contractor capable of completing the work, or the order was a follow-on to other work. Some orders we reviewed were competed, but only one contract holder chose to submit an offer. In most cases, the competitive orders for which the government received one offer were either in compliance with DOD’s policy that solicitations for competitive actions be open for at least 30 days, or the order met one of the exceptions to that policy. DOD awarded single-award IDIQ contracts—which are awarded to one contractor on a competitive or noncompetitive basis—for a variety of reasons. Of the 18 single-award IDIQ contracts we reviewed at DOD, we found that 10 contracts were awarded noncompetitively because only one contractor was capable of fulfilling the need. Eight single-award IDIQ contracts in our sample were competed (see figure 8). For the 10 single-award IDIQ contracts that were not competed, contract files contained the required justification and approval memorandums in all cases. In terms of the reasons why DOD chose not to compete the contract, in 8 of the 10 contracts we found that the government determined that it did not possess the data rights to proprietary technologies or processes needed to perform a service, for example: The Navy awarded a noncompeted single-award IDIQ contract with a value of up to $15 million per year for the deactivation of Tomahawk missiles, missile testing, and engineering services. Officials stated that they used an IDIQ because they could not determine the number or types of missiles that would be selected for deactivation and added that the manufacturer of the missiles was the only source capable of providing this service as the government lacked the data rights and certified facilities needed to perform this service. The Army awarded a noncompeted single-award IDIQ contract with a value of up to $1.7 billion to procure engines and associated data for several types of helicopters, including the Army’s UH-60 helicopter. The Army anticipates an ongoing need for these products and services over 5 years, but could not pinpoint the exact schedule for these deliveries. In addition, according to DOD, it does not own the manufacturing drawings, specialized processes, or technical data that would be required for production of the engines. For the 8 single-award IDIQ contracts we reviewed that were competed, contracting officials cited various reasons for using a single-award IDIQ contract, such as that orders were being used for interrelated tasks and therefore there was a need to build knowledge over time. For example: The Air Force competitively awarded several single-award IDIQ contracts under its program to procure research and development efforts to improve aviation engine technology. We reviewed one of the single-award IDIQs with a value of up to $75 million. The single-award IDIQ contract we reviewed was part of a larger research and development effort that included several government agencies, including DOD, the National Aeronautics and Space Administration, and the Department of Energy. In this case, the Air Force awarded single-award IDIQs using a broad agency announcement—a general announcement of an agency’s research interest used to procure and advance broad scientific knowledge or understanding, rather than focusing on unique research required to develop a specific system or hardware solution. Contracting officials told us that single-award IDIQs were used rather than multiple-award contracts because each of the contractors had specialized expertise in a specific propulsion research area such as fuel efficiency. Additionally, each order would be built upon prior research; therefore, orders could not be competed among multiple contractors. The Army competitively awarded a single-award IDIQ contract with a value of up to $38 million to procure a suite of seven different aircraft maintenance and repair toolkits. Officials cited the need for commonality among the tool kits and manuals, and the requirement that replacement tools match previous purchases. Nine of 18 single-award IDIQ contracts that we reviewed required a determination and findings document due to an estimated value of over $103 million. All 9 IDIQ contracts met the requirement. To understand the reasons why competition was not obtained, we reviewed 23 multiple-award IDIQ orders where DOD received only one offer. Specifically, we found for 9 of the 23 orders reviewed, contracting officers did not provide IDIQ contractors a chance to compete and cited exceptions to fair opportunity. We found that the remaining 14 orders were all competed, but only one contractor chose to submit an offer. Figure 9 depicts whether or not one-offer orders we reviewed were competed, and the reasons cited for exceptions to fair opportunity. For the 9 orders that were not competed, contracting officers obtained the required justification and approvals that provided reasons for using an exception to fair opportunity. The reasons included: urgent need, only one contractor was capable of completing the work, the order was a logical follow-on to other work, or there was a need to satisfy a minimum order guarantee. We reviewed two contracts awarded by the Navy to procure land- based and sea-based Unmanned Aircraft System (UAS) Intelligence, Surveillance, and Reconnaissance services. Specifically, we reviewed three noncompeted orders that were awarded under these two contracts to provide support for overseas contingency operations. Urgency was the primary factor in not providing fair opportunity in two of the orders. Contracting officials cited the need for flight clearances, explaining that only two of their three contractors possessed this capability. The remaining contractors did not have enough capability at the time to perform the work, and the contracting officer decided to split the work between the two contractors. For the third order, only one contractor was capable of providing the needed services. The Army awarded multiple-award IDIQ contracts that included two contracts for the procurement of aviation systems modifications. We reviewed one order which was for the installation of threat detection systems for the UH-60 helicopters. The contracting officer cited urgency as the reason for not providing fair opportunity. The Army placed the order, describing the threat detection system as survivability equipment, and explained that failure to install the modifications would likely interfere with troop deployments. The Air Force awarded multiple-award IDIQ contracts that included 34 contracts to provide roofing maintenance services across the United States. We reviewed one order with a value of $1,000 to participate in a post-award orientation, which satisfied the IDIQ contract minimum guarantee. According to contracting officials, all 34 contractors were awarded orders to meet the minimum guarantee. As shown in figure 9 above, 14 orders under multiple-award contracts we reviewed, where DOD received only one offer, were competed. In addition, only one offer was received because only one contractor chose to submit an offer. DOD regulations generally require that, when only one offer is received in response to a competitive solicitation, certain steps need to be taken if the solicitation was not open for at least 30 days, including allowing for an additional solicitation period of at least 30 days. DOD allows exceptions to this requirement in certain instances, such as when a contract or order is part of a broad agency announcement, or is a small business set- aside. Of the 14 orders we reviewed that were competed but DOD received only one offer, 7 of them had solicitations that were open for less than 30 days. Of these, 1 order was exempted because it was a broad agency announcement, 3 orders were exempted because they were small business set-asides, and 3 orders did not comply with DOD regulation. These 3 orders were all awarded under the same multiple- award IDIQ vehicle. The contracting officer acknowledged that although the orders did not meet any of the exceptions listed in the DFARS, he did not revise the solicitations or allow for an additional solicitation period. The contracting officer further stated that the orders were not resolicited due his lack of familiarity with the DFARS requirement. The contracting officer added that, apart from delaying award, he did not believe that a 30-day extension would have had any effect on competition. After we discussed our findings and the DFARS requirements with this contracting officer, he stated that he now understands the requirement and will comply with the provision when placing future orders. For the contracts we reviewed, prices for well-defined products and services were typically established at the IDIQ contract level. For less defined products and services, prices were established at the order level. In situations where an IDIQ contract had both well-defined and less defined items, some price elements were established in the IDIQ contract and some were established in the order. Contracting officials use a variety of data and methods to help establish pricing, such as comparing historical prices for similar items, and obtaining certified cost and pricing data, among others. IDIQ prices can be established at the time of contract award, at the time of order award, or both. We reviewed 31 contracts. For 5 of the IDIQ contracts, all of the pricing was established upfront and agreed to at contract award. For 8 contracts pricing was established only at the time of the order. And for 18 IDIQ contracts, pricing was established in both, with some price elements established at IDIQ contract award and some at order award (see figure 10). For the 5 DOD IDIQ contracts for which pricing was established upfront in the IDIQ contract, all had well-defined requirements at the time of contract award. Once prices are established at contract award, those prices were referred to when placing an order, for instance: The pricing for a noncompeted Navy single-award IDIQ contract with a value of up to $420 million to procure commercial radios used in fixed wing aircraft was established in the IDIQ contract. The radio is a well-defined product and has been a requirement for many years. With known requirements and historical knowledge of the need, Navy contracting officials were able to establish prices before contract award. To establish prices, contracting officials compared commercial pricing of the product to the contractor’s proposal, reviewed published prices obtained from federal supply schedules, and reviewed historical prices paid in previous contracts. The 3 orders we reviewed followed the pricing established in the contract. The Navy awarded a competed single-award IDIQ contract with a value of up to approximately $789 million to procure six different variants of sonobouys, devices used to detect and identify underwater objects. Sonobouys are well-defined products that have been used by the Navy since the 1940s. Contracting officials established prices for each variant. The government’s estimate was based on certified cost or pricing data submitted by contractors. In addition, contracting officials also enlisted support from the Defense Contract Audit Agency, and the Defense Contract Management Agency, both of which helped examine and determine if labor rates were reasonable. In addition to reviewing the contract, we reviewed three orders placed under this IDIQ and found that the prices paid for in the orders were consistent with what was agreed to in the IDIQ contract. The Army competitively awarded a single-award IDIQ contract with a value of up to $38 million to procure a suite of seven different aircraft maintenance and repair toolkits. All pricing for this contract was established before contract award as this requirement was well defined. Contracting officials relied on competition to establish pricing. This contract was awarded to the contractor who had the lowest price and whose proposal was deemed technically acceptable. DOD contracting officials established prices at the order level when they were not established at the contract level, primarily for services and undefined products. Within our selected sample of 31 DOD contracts, there were 8 contracts where prices were determined at the order level only, and the contracts only included a ceiling value. Six of these 8 contracts were primarily for research and development efforts. The following are examples where prices were established at the order level. The Air Force awarded a competed single-award IDIQ contract for up to $24.9 million that, according to a program official, was to procure research and development for cybersecurity and malware detection. No prices were established at the time of IDIQ contract award because specific requirements were not known at the time of contract award. The orders we reviewed were for the development of software and hardware to detect malware and other cybersecurity threats within medical equipment. Once a well-defined requirement arose pricing was established at the order level. To establish the pricing on the orders we reviewed, the program office performed a technical evaluation to determine if the proposed labor mix was appropriate. Subsequently, contracting officials collected and analyzed certified cost and pricing data or other cost data provided by the contractor. We reviewed two multiple-award IDIQ contracts awarded by the Navy to procure UAS imagery services. Though it was known that imagery services would be procured, it was not known where, when or for how long these services would be needed until an actual mission need arose. We reviewed 3 orders awarded under these IDIQ contracts. All three orders were noncompeted and were for deployment of personnel to provide imagery services from specific platforms such as ship or ground in specific locations. Since the platforms, locations, and timeframes for the missions could not be known at time of IDIQ contract award, the prices were established at the order level once the scope and location of each mission need was known. To establish pricing for one of the orders, we found that contracting officials compared the contractor’s proposal with historical pricing, as well as verified labor rate information provided by the contractor. Eighteen DOD IDIQ contracts, which include both multiple- and single- award, in our selected sample had some price elements established at the time of contract award and some price elements established at the time of order award. This arrangement occurred in situations where some elements of the requirement were well defined and pricing could be established upfront at the contract level, while other requirements were less defined and the prices were established when the order was placed. For instance, in DOD’s multiple-award IDIQ contracts, some pricing elements may be negotiated upfront at contract award, such as not-to- exceed labor rates; however, since further competition is expected at the order level contractors may offer labor rates below the not-to-exceed rates. Therefore, actual labor rates were determined when an order was placed, for instance: The Air Force established a multiple-award IDIQ vehicle for roofing repairs with a ceiling of $325 million. According to officials, each IDIQ contract has a not-to-exceed price for 11 different roofing scenarios. When a need arises, the contracting officer solicits offers from the multiple-award IDIQ contract holders. According to contracting officials, these contractors submit proposals and base their pricing on defined requirements such as the type of roof, extent of repair, and location. The proposal with the lowest price that is technically acceptable—which cannot exceed a contractor’s not-to-exceed pricing—is awarded the order. A Navy noncompeted single-award IDIQ contract was awarded for the deactivation and disposal of Tomahawk missiles with a value of up to $15 million per year. Pricing for the deactivation of the missiles was established upfront in the IDIQ contract; however, some elements of the contract, such as unscheduled maintenance and testing, were not defined at contract award and therefore no price was established. We found that in one of the orders we reviewed, the contractor was to provide software for missile testing. In order to establish pricing on this order, contracting officials conducted a cost analysis of the proposed offer. They asked the Defense Contract Management Agency to review the labor pricing that was submitted and pricing for similar labor categories the government paid on a different contract. The Army awarded a noncompeted single-award IDIQ contract with a value of up to $42 million that, according to a contracting official, is for a broad range of efficiency management services, such as determining ways to improve the function and efficiency of logistical processes. Not-to-exceed values for labor rates and the fee were determined for the IDIQ contract, but actual prices are determined at the order level. To establish the not-to-exceed rates in the IDIQ contract, contracting officials used certified cost and pricing data and support from the Defense Contract Management Agency to determine reasonable rates. For the 3 orders we reviewed under this IDIQ, a technical evaluation was conducted to ensure that the labor mix was acceptable, and contracting officials compared proposed labor rates with those not-to-exceed rates agreed to in the IDIQ contract. We provided a draft of this report to DOD for review and comment. DOD had no comments. We are sending copies of this report to the Secretary of Defense and interested congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff has any questions about this report, please contact William T. Woods at (202) 512-4841 or woodsw@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II. This report addresses (1) federal agencies’ use of indefinite delivery / indefinite quantity (IDIQ) contracts from fiscal years 2011 through 2015, the latest year for which complete data were available; (2) the role of competition when awarding and using selected IDIQ contracts and orders at the Department of Defense (DOD); and (3) when and how DOD contracting officials established prices for these contracts and orders. To examine the use of IDIQ contracts by federal agencies, we analyzed government-wide Federal Procurement Data System-Next Generation (FPDS-NG) data on IDIQ obligations from fiscal year 2011 through 2015 to identify information such as overall agency obligations on IDIQ contracts, obligations for products and services, obligations for single-and multiple-award IDIQ contracts, and extent of competition for single-award IDIQ contracts and multiple-award orders. Data that were adjusted for inflation were adjusted to fiscal year 2015 dollars using the Fiscal Year Gross Domestic Product Price Index. To assess the reliability of the FPDS-NG data we used, we electronically tested for missing data, outliers, and inconsistent coding, and we compared data on selected IDIQ contracts to contract documentation we obtained. Based on these steps, we determined the data were sufficiently reliable to present IDIQ contract obligations for fiscal years 2011 through 2015. To provide context on agency use of IDIQ contracts, we also interviewed DOD contracting officials. For our second and third objectives, we focused our review on DOD since DOD was the largest user of IDIQ contracts. Within DOD, we focused on the four DOD components with the highest obligations on IDIQ contracts—the Army, Navy, Air Force, and Defense Logistics Agency. From these components, we selected a nongeneralizable sample of 31 IDIQ contracts, 53 single-award IDIQ orders, and 23 multiple-award IDIQ orders. The 53 single award IDIQ orders were placed under 18 single- award IDIQ contracts, while the 23 multiple-award IDIQ orders were placed under 13 multiple-award IDIQ contracts (see table 1). Only one offer was received on each of the 23 multiple-award orders selected, either because DOD only solicited one contractor or because only one contractor submitted an offer. We selected orders where only one offer was received so as to understand reasons why competition did not take place. We selected these contracts and orders based on factors such as obtaining a mix of products and services and whether the contracts were competed or noncompeted. The selection process for the components, commands, contracts and orders is described in detail below. To address the role of competition when awarding and using selected IDIQ contracts and orders at DOD, we collected and analyzed contract documentation, including acquisition plans, justification and approval documents, and other pertinent information, for contracts in our sample of IDIQ contracts and orders. In addition, we conducted interviews with DOD contracting and program officials to further discuss the reasons why single-award IDIQ contracts were needed, and why the government received only one offer on multiple-award IDIQ orders. To address when and how DOD contracting officials established prices for contracts and orders in our sample, we collected and analyzed contract documentation, including contract and order award documents, price negotiation memoranda, and other pertinent pricing information. In addition, we conducted interviews with contracting and program officials for the selected contracts and orders to discuss changes, if any, to pricing since award and to clarify information found in contract documentation. Furthermore, for orders where prices were established in the contract, we ensured that the orders followed the pricing agreed to in the contract. We selected the following four components within DOD—the Army, Navy, Air Force and the Defense Logistics Agency—because they had the highest obligation dollars on IDIQ contracts within the department from fiscal years 2011 through 2015. Within these components, we selected one command and location for review taking into consideration factors such as the total obligations at the command/location for single-award IDIQs from fiscal years 2011 through 2015, the proportion of contracts for products and for services, and the extent to which contracts at the command/location were competed or noncompeted. With consideration of these factors, we selected the following commands for review—the Army Materiel Command in Redstone Arsenal, Alabama; Navy Air Systems Command in Patuxent River, Maryland; Air Force Materiel Command in Dayton, Ohio; and the Defense Logistics Agency (Energy) in Fort Belvoir, Virginia. Within commands and locations listed above, we selected single-award IDIQ contracts awarded from fiscal years 2011 through 2015, ensuring our selections included a mix of products and services contracts, and competed and noncompeted contracts. We further selected orders from each of the single-award IDIQ contracts that were awarded in fiscal years 2014 and 2015, and were among those with the highest obligations. In addition, within the selected commands and locations, we selected multiple-award IDIQ orders where the government only received one offer and were placed in fiscal years 2014 and 2015. We also selected the multiple-award IDIQ contracts associated with these orders. We conducted this performance audit from January 2016 to April 2017 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings based on our audit objectives. In addition to the contact named above, Janet McKelvey, Assistant Director, Guisseli Reyes-Turnell, Analyst-in-Charge, Karen Cassidy, Lorraine Ettaro, Kurt Gurka, Stephanie Gustafson, Julia Kennon, Victoria Klepacz, Carol Petersen, Roxanna Sun, and Alyssa Weir made key contributions to this report. | Over the past 5 years, the federal government obligated over a hundred billion dollars annually through the use of IDIQ contracts. IDIQ contracts are awarded to one or more contractors when the exact quantities and timing for products or services are not known at the time of award. DOD uses IDIQ contracts more than all other agencies combined. The FAR establishes a preference for awarding multiple-award IDIQ contracts under a single solicitation such that a number of contract holders compete for subsequent orders. GAO was requested to examine federal agencies' use of IDIQ contracts. This report addresses (1) federal agencies' use of IDIQ contracts from fiscal years 2011 through 2015, the latest year for which complete data were available; (2) the role of competition when awarding selected IDIQ contracts and placing orders at DOD; and (3) when and how DOD contracting officers established prices for these contracts and orders. GAO analyzed Federal Procurement Data System-Next Generation data on civilian and DOD obligations for fiscal years 2011 through 2015; reviewed and analyzed a nongeneralizable sample of 31 IDIQ contracts and 76 IDIQ orders selected across four DOD components—Army, Navy, Air Force and Defense Logistics Agency; and interviewed DOD contracting and program officials. From fiscal years 2011 through 2015, the proportion of spending by federal agencies on indefinite delivery/ indefinite quantity (IDIQ) contracts remained stable and accounted for about a third of total government contract obligations. Agencies obligated more than $130 billion annually on these types of contracts, as shown in the figure. The Departments of Defense (DOD), Homeland Security, Health and Human Services, and Veterans Affairs were the main users of IDIQ contracts, with DOD accounting for about 68 percent of all IDIQ obligations from 2011 through 2015. About two-thirds of government-wide IDIQ obligations were for services, with the remainder for products. Although the Federal Acquisition Regulation (FAR) states a preference for multiple-award IDIQs, the majority of dollars government-wide, approximately 60 percent, were obligated through single-award IDIQs. About 70 percent of single-award IDIQ obligations and more than 85 percent of order obligations under multiple-award contracts were competed. Contracting officials at DOD cited flexibility as the main advantage for using IDIQ contracts, noting that it was easier and faster to place an order under an existing IDIQ contract than to award a separate contract when a specific need arose. Ten of the 18 single-award IDIQ contracts GAO reviewed at DOD were not competed, generally because only one contractor could meet the need. For the competed single-award contracts, contracting officials cited various reasons for choosing a single-award IDIQ approach, such as the need to build and maintain knowledge as orders were awarded over time. For about one-third of the multiple-award IDIQ orders GAO reviewed, DOD did not provide an opportunity for all contract holders to compete due to urgency or other reasons. Prices on IDIQ contracts and orders at DOD were established at different points, depending on how well-defined the requirements were at the time of contract award. For example, for a Navy contract to buy commercial radios used in fixed-wing aircraft, the pricing was established upfront in the contract since the radios were defined products that have been used for many years. In contrast, for an Air Force contract to buy research and development services for cybersecurity and malware detection, all pricing was established at the order level since specific research needs were not known when the contract was awarded. GAO is not making any recommendations at this time. DOD had no comments on a draft of this report. |
Our reports on cost-benefit analysis in the rulemaking process, rule development and regulatory reviews, and OMB’s role in reviews of agencies’ rules under Executive Order 12866 illustrate specific actions that, if taken, would increase the transparency of the rulemaking process. In our 2014 report on cost-benefit analysis in agencies’ rulemaking processes, we found that OIRA’s reviews of agencies’ rules sometimes resulted in changes, but also concluded that the transparency of the review process could be improved. We found that in the majority of the 109 significant rules that we reviewed, the rulemaking process was not as transparent as it could be. For example, in 72 percent of these rules, there was no explanation for why the rule was designated as significant, thus triggering additional oversight required by Executive Order 12866. We made two recommendations based on our review of the cost benefit analyses included in selected rules. We recommended that (1) OMB work with agencies to clearly communicate the reasons for designating a regulation as a significant regulatory action, and explain its reason for any changes to an agency’s initial assessment of a regulation’s significance; and (2) OMB encourage agencies to clearly state in the preamble of significant regulations the section of Executive Order 12866’s definition of a significant regulatory action that applies to the regulation. While OMB staff did not state whether they agreed or disagreed with the recommendations, they took action in 2015 to implement the first recommendation. In our 2009 report on the regulatory review process, we found that OIRA’s reviews of agencies’ draft rules often resulted in changes. Of the 12 case-study rules subject to OIRA review that we examined, 10 reviews resulted in changes, about half of which included changes to the regulatory text. Agencies used various methods to document OIRA’s reviews which generally met disclosure requirements. However, we found that the transparency of this documentation could be improved. In particular, there was uneven attribution of changes made during the OIRA review period and differing interpretations regarding which changes were “substantive” and thus required documentation. Both of these issues had been identified in our earlier work. We made four recommendations that OMB provide guidance to agencies to improve transparency and documentation of the OIRA review process, specifically that OIRA (1) define what types of changes made as a result of the review process are substantive and need to be publicly identified; (2) direct agencies to clearly state in final rules whether they made substantive changes as a result of OIRA reviews; (3) standardize how agencies label documentation of these changes in public rulemaking dockets; and (4) instruct agencies to clearly attribute those changes made at the suggestion or recommendation of OIRA. While OMB staff generally agreed with these four recommendations, to date, they have not implemented them. In 2003, we examined 85 rules from nine health, safety, or environmental agencies and found that the OIRA review process had significantly affected 25 of those 85 rules. OIRA’s suggestions appeared to have at least some effect on almost all of the 25 rules’ potential costs and benefits or the agencies’ estimates of those costs and benefits. The agencies’ docket files did not always provide clear and complete documentation of the changes made during OIRA’s review or at OIRA’s suggestion, as required by the executive order, even though a few agencies exhibited exemplary transparency practices. We made eight recommendations in 2003 targeting aspects of the OIRA review process that remained unclear and where improvements could allow the public to better understand the effects of OIRA’s review, including that the Director of OMB: 1. instruct agencies to document the changes made to rules submitted for OIRA review in public rulemaking dockets and within a reasonable time after the rules have been published; 2. define the types of substantive changes made during the review process that agencies should disclose; 3. disclose the reasons for withdrawal of a rule from OIRA review; 4. reexamine OIRA policy that only documents exchanged by agencies with OIRA branch chiefs and above during the review process need to be disclosed; 5. differentiate in OIRA’s database which rules were substantively changed at OIRA’s suggestion or recommendation and which were changed in other ways and for other reasons; 6. define transparency requirements to also include the informal review period when OIRA says it can have its most important impact on agencies’ rules; 7. encourage agencies to use best practice methods of documentation that clearly describe changes; and 8. disclose in OIRA’s logs of meetings with outside parties which regulatory action was being discussed and the affiliation of the meeting participants. OMB staff disagreed with the first seven of these eight recommendations but did implement the eighth. Improvements made to the transparency of the regulatory process benefit the public and aid congressional oversight. Four relevant reports covering the topics of regulatory guidance, retrospective regulatory review processes, and exceptions for expediting the rulemaking process illustrate additional opportunities to enhance transparency of federal regulations. OMB plays an important role in these activities through oversight and by providing guidance to regulatory agencies about how to comply with various requirements. Regulatory guidance, while not legally binding, provides agencies with flexibility to interpret their regulations, clarify policies, and address new issues more quickly than may be possible using rulemaking. However, concerns have been raised about the level of oversight for agencies’ guidance, whether agencies seek feedback from affected parties on guidance, and how to ensure that agencies do not issue guidance when they should undertake rulemaking. Given both the importance of guidance and the concerns about its use, in 2007 OMB recognized the need for good guidance practices. OMB established review processes for the guidance documents with the broadest and most substantial impact. In 2015, we reviewed guidance development processes at four departments—Agriculture (USDA), Education (Education), Health and Human Services (HHS), and Labor (DOL)—and 25 of their components. All four departments identified standard practices to follow when developing guidance and addressed OMB’s requirements for significant guidance to varying degrees. Education and USDA had written departmental procedures for approval of significant guidance as required by OMB. DOL’s procedures were not available to staff and required updating. HHS had no written procedures. Ensuring these procedures are available could better ensure that components consistently follow OMB’s requirements. We have long advocated the potential usefulness to Congress, agencies, and the public of conducting retrospective regulatory analyses. Retrospective analysis can help agencies evaluate how well existing regulations work in practice and determine whether they should be modified or repealed. In 2007, we found that agencies had conducted more retrospective reviews of the costs and benefits of existing regulation than was readily apparent, especially to the public. We made seven recommendations to improve the effectiveness and transparency of retrospective regulatory review. These included that OMB develop guidance to regulatory agencies to consider or incorporate into their policies, procedures, or agency guidance that govern regulatory review activities the following elements: 1. consideration of whether and how they will measure the performance 2. prioritization of review activities based upon defined selection criteria; 3. specific review factors to be applied to the conduct of agencies’ analyses that include, but are not limited to, public input; 4. minimum standards for documenting and reporting all completed review results and, for reviews that included analysis, making the analysis publicly available; 5. mechanisms to assess their current means of communicating review results to the public and identifying steps that could improve this communication; and 6. steps to promote sustained management attention and support to help ensure progress in institutionalizing agency regulatory review initiatives. We also recommended that OMB 7. work with regulatory agencies to identify opportunities for Congress to revise the timing and scope of existing regulatory review requirements and/or consolidate existing requirements. In 2011 and 2012, the administration issued new directives to agencies on how they should plan and conduct analyses of existing regulations that addressed each of our seven recommendations. In a 2014 report on reexamining regulations, we found that agencies often changed regulations in response to completed retrospective analyses, but could improve the reporting of progress and strengthen links between those analyses and the agencies’ performance goals. We also concluded that OMB could do more to enhance the transparency and usefulness of the information provided to the public. Although we found that agencies posted their retrospective review plans online, obtaining a comprehensive picture of the agencies’ progress was difficult because results were spread across multiple web sites. In addition, consistently providing links or citations to the supporting analyses and data, and including more detail on the methodologies and key assumptions used to estimate savings, would help Congress and the public to better understand the basis for projected results. We made three recommendations to OMB to (1) improve reporting on the outcomes of retrospective regulatory reviews, (2) improve how these reviews can be used to help agencies achieve their priority goals, and (3) ensure that OIRA, as part of its oversight role, monitors the extent to which agencies have implemented guidance on retrospective regulatory review requirements and confirm that agencies have identified how they will assess the performance of regulations in the future. Staff from OIRA generally agreed with the three recommendations, and the OIRA Administrator indicated last year that his agency was taking actions to address them. The Administrative Procedure Act (APA), which spells out the basic rulemaking process, generally requires agencies to publish a notice of proposed rulemaking (NPRM) in the Federal Register and solicit public comments before finalizing regulations. However, the APA and other statutes permit exceptions to proposed rules to expedite rulemaking in certain circumstances, such as for an emergency or other “good cause” or when issuing rules about an agency’s organization or management. In 2012, we reviewed a generalizable random sample of 1,338 final rules published over 8 years (from 2003 through 2010) to provide information on the frequency, reasons for, and potential effects of agencies issuing final rules without NPRMs. We found that agencies frequently used available exceptions to issue final rules without prior NPRMs. We also found that agencies, though not required, often requested comments on major final rules issued without an NPRM. However, they did not always respond to the comments received. This is a missed opportunity because we found that agencies often made changes to improve the rules when they did respond to public comments. To better balance the benefits of expedited rulemaking procedures with the benefits of public comments, and to improve the quality and transparency of rulemaking records, we recommended that OMB issue guidance to encourage agencies to respond to comments on final major rules issued without a prior notice of proposed rulemaking. OMB stated that it did not believe it necessary to issue guidance at that time and has not, to date, taken any action to implement our recommendation. We continue to believe that the recommendation has merit and urge OMB to reconsider its prior position. In summary, OIRA to date has implemented 9 of the 25 recommendations we made to improve transparency and effectiveness of the Executive Order review process and other aspects of federal rulemaking. We believe that the other 16 related recommendations cited in this statement that have not been implemented still have merit and, if acted upon, would improve the transparency of federal rulemaking. In a step in that direction, the OIRA Administrator in 2015 noted that OIRA has worked with agencies to help them with their Executive Order disclosure requirements. Chairman Meadows, Ranking Member Connolly, and Members of the Subcommittee, this concludes my prepared statement. Once again, I appreciate the opportunity to testify on these important issues. I would be pleased to address any questions you or other members of the subcommittee might have at this time. If you or your staff have any questions about this testimony, please contact Michelle Sager, Director, Strategic Issues, at (202) 512-6806 or sagerm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Tim Bober, Tara Carter, Andrea Levine, and Joseph Santiago. Regulatory Guidance Processes: Selected Departments Could Strengthen Internal Control and Dissemination Practices. GAO-15-368. Washington, D.C.: April 16, 2015. Federal Rulemaking: Agencies Included Key Elements of Cost-Benefit Analysis, but Explanations of Regulations’ Significance Could Be More Transparent. GAO-14-714. Washington, D.C.: September 11, 2014. Reexamining Regulations: Agencies Often Made Regulatory Changes, but Could Strengthen Linkages to Performance Goals. GAO-14-268. Washington, D.C.: April 11, 2014. Federal Rulemaking: Regulatory Review Processes Could Be Enhanced. GAO-14-423T. Washington, D.C.: March 11, 2014. Federal Rulemaking: Agencies Could Take Additional Steps to Respond to Public Comments. GAO-13-21. Washington, D.C.: December 20, 2012. Federal Rulemaking: Improvements Needed to Monitoring and Evaluation of Rules Development as Well as to the Transparency of OMB Regulatory Reviews. GAO-09-205. Washington, D.C.: April 20, 2009. Reexamining Regulations: Opportunities Exist to Improve Effectiveness and Transparency of Retrospective Reviews. GAO-07-791. Washington, D.C.: July 16, 2007. Federal Rulemaking: Past Reviews and Emerging Trends Suggest Issues That Merit Congressional Attention. GAO-06-228T. Washington, D.C.: November 1, 2005. Rulemaking: OMB’s Role in Reviews of Agencies’ Draft Rules and the Transparency of Those Reviews. GAO-03-929. Washington, D.C.: September 22, 2003. Regulatory Reform: Procedural and Analytical Requirements in Federal Rulemaking. GAO/T-GGD/OGC-00-157. Washington, D.C.: June 8, 2000. Regulatory Reform: Changes Made to Agencies’ Rules Are Not Always Clearly Documented. GAO/GGD-98-31. Washington, D.C.: January 8, 1998. Regulatory Reform: Agencies’ Efforts to Eliminate and Revise Rules Yield Mixed Results. GAO/GGD-98-3. Washington, D.C.: October 2, 1997. Regulatory Reform: Implementation of the Regulatory Review Executive Order. GAO/T-GGD-96-185. Washington, D.C.: September 25, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Federal regulation is a basic tool of government. Agencies issue regulations to achieve public policy goals such as ensuring that workplaces, air travel, foods, and drugs are safe; that the nation's air, water, and land are not polluted; and that the appropriate amount of taxes is collected. Congresses and Presidents have acted to refine and reform the regulatory process during the last several decades. Among the goals of such initiatives are enhancing oversight of rulemaking by Congress and the President, promoting greater transparency and public participation in the process, and reducing regulatory burdens on affected parties. Congress has often asked GAO to evaluate the implementation of procedural and analytical requirements that apply to the rulemaking process. The importance of improving the transparency of the rulemaking process emerged as a common theme throughout GAO's body of work. Based on that body of work, this testimony addresses (1) GAO's prior findings and OIRA's progress to date on recent GAO recommendations to improve the transparency of the regulatory review process, and (2) other challenges and opportunities GAO has identified for increasing the transparency and oversight of the rulemaking process. GAO has made 25 prior related recommendations of which OMB has implemented 9 to date. GAO has consistently found opportunities to improve the transparency of regulatory processes coordinated through the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA). Three GAO reports on OIRA's reviews of agencies' rules under Executive Order 12866 illustrate current and specific actions that would increase the transparency of that review process. In a 2014 report on cost-benefit analysis, GAO found that OIRA's reviews resulted in changes. However, in 72 percent of the 109 rules GAO reviewed, there was no explanation for why the rule was designated as significant. In a 2009 report on the development of rules, GAO found that documentation of OIRA's reviews could be improved. In reviews of 12 case studies, GAO found uneven attribution of changes made during the OIRA review period and differing interpretations regarding which changes required documentation. In a 2003 report, GAO examined 85 rules from nine health, safety, or environmental agencies. GAO found that, while the OIRA review process had significantly affected 25 of those rules, some agencies' files did not provide clear and complete documentation of changes made during OIRA's review. However, a few agencies exhibited exemplary transparency practices. Four GAO reports covering the topics of regulatory guidance, retrospective regulatory review processes, and exceptions for expediting the rulemaking process further illustrate opportunities for OMB to enhance transparency. In a 2015 report on guidance development processes at four agencies GAO found that all four identified standard practices to follow when developing guidance. However, the four agencies addressed OMB's requirements on significant guidance to varying degrees. In 2007 and 2014 reports on retrospective regulatory reviews, GAO found that, while such reviews often resulted in changes, OMB and agencies could improve the reporting of progress to enhance the transparency and usefulness of information provided to the public. In a 2012 report on exceptions to proposed rules, GAO reviewed a generalizable sample of final rules published over an 8 year period. GAO found that, although agencies often requested comments on final major rules (rules with an annual impact of $100 million or more) issued without a prior notice of proposed rulemaking, the agencies did not always respond to comments received. GAO made 25 recommendations to OMB to address the transparency issues identified in these seven reports. OMB has implemented 9 of the recommendations. GAO believes that the other 16 recommendations that have not been implemented still have merit and, if acted upon, would improve the transparency of federal rulemaking. In a step in that direction, the OIRA Administrator in 2015 noted that OIRA has worked with agencies to help them with their Executive Order disclosure requirements. |
The majority of children—about 62 percent in 1996—obtain health coverage as dependents through their parents’ employer-sponsored group plans. Most other children who are insured are covered by Medicaid, the largest public insurance program for children. The 14 percent of children without health insurance tend to be from families where one or both parents are unemployed, self-employed, or work for firms that either do not provide dependent coverage or offer this coverage at a price the parents consider unaffordable. In such cases, parents may purchase health coverage individually for themselves and their families. Since rates for family coverage in the individual market may be high relative to a family’s disposable income, some parents opt to forego coverage for themselves and only purchase coverage for their children. Divorced parents who are required by court order to provide health insurance for their children and grandparents who are retired but caring for their grandchildren are examples of consumers who typically rely on the individual market to purchase health coverage for children. Individual policies are available to children nationwide, and products that are priced specifically for children are available in almost all states. The benefit structure for child-only products was similar to comprehensive products typically available to adults in the individual market. However, the choice of carriers and products may be limited in some markets because many carriers perceive demand for child-only policies as low and, therefore, do not aggressively market this type of product. Furthermore, some carriers do not tend to operate in states with certain regulatory requirements. As long as an adult is the policyholder and is responsible for the premium payment, almost all of the carriers we contacted in the individual market will sell a product that provides comprehensive coverage for a child only. We found that at least one individual comprehensive health insurance product is available to children in all 50 states. Furthermore, among the carriers that provided information, we found that at least five sold a comprehensive health product to children in the individual market of most states. In addition, we found that 49 states and the District of Columbia currently have at least one carrier that offers a product priced specifically for children—that is, child rated. Most insurance agents and brokers we contacted in Georgia and Illinois were generally aware that these products are available from a number of carriers. Approximately 91 percent of the agents we contacted in Georgia and 74 percent of the agents we spoke with in Illinois either sold the products or referred us to a carrier that did. The benefit structure of comprehensive health products available to children was not notably different than products available to adults in the individual market. We found that comprehensive products available to children in our selected sample covered a wide range of benefits, including inpatient and outpatient hospital and medical and surgical services; emergency care; diagnostic services, such as laboratory tests and X rays; prescription drugs; and skilled nursing facility care. Most of these plans also included coverage for physical, occupational, and speech therapies; organ transplants; mental health; substance abuse; home health care; and hospice care. Similar to their adult products, two of the non-HMO multistate carriers—one of which marketed specifically to children—did not include as a core benefit preventive care, such as immunizations and well-baby visits. Coverage for these benefits is available from these two carriers but at an additional cost—ranging from $4 to $33 a month. In addition, another multistate carrier limited the preventive care benefits in its individual product to $50 per member in a calendar year. Although coverage is available nationwide, consumer choice among products and carriers may be limited in a number of states for at least two reasons. First, while many carriers are willing to offer their individual adult products to children, they perceive the demand for child-only policies as low and therefore do not aggressively market this product. Carrier officials told us that the adults who are likely to purchase this type of coverage represent a small share of individual purchasers. One multistate carrier reported that it has sold only a “handful” of child-only policies, while officials at other multistate carriers said they have about 7,000 to 9,000 of these policies currently in force nationally. Among the seven carriers we reviewed, child-only products represent a relatively small share of the carriers’ total individual health insurance sales—from under 1 percent to 20 percent. Further, since children’s products are often among the lowest priced individual products, the commission amount—which is usually based on a percentage of the premium—may not provide agents a strong incentive to actively sell these products. Second, few carriers tend to operate in states with insurance reforms in place, such as “guaranteed issue” requirements and premium rate restrictions. Guaranteed issue requires all carriers that participate in the individual market to offer at least one plan to all individuals and accept all applicants regardless of their demographic characteristics or health status. Thirteen states require carriers to guarantee-issue certain products to all applicants. Twenty states include provisions in their legislation that attempt in some way to limit the amount carriers can vary premium rates in the individual market or the characteristics they may use to vary these rates. Insurance industry representatives as well as some analysts and policymakers claim that these regulatory provisions can result in the tendency for individuals to wait to purchase insurance until medical care is needed. The potential result is “adverse selection,” where a disproportionate number of individuals with high health care costs seek insurance, which increases the average cost of coverage for all those insured. While such reforms can benefit individuals who may otherwise have difficulty obtaining coverage, the combination of guaranteed issue and rate restrictions discourages some carriers from entering or remaining in such a market. Children’s monthly premium rates may vary widely based on factors such as a child’s age and local market and product characteristics. Carriers also take into account the expected health care utilization of different age groups and the impact of various state regulations in calculating their premium rates. For the products we reviewed that are available to children, we found standard monthly premium rates for a healthy 15-year-old among our selected carriers ranged from a national low of about $42 for a $1,000 deductible PPO plan in Portland, Oregon, to one as high as $321 for a $250 deductible FFS plan in Los Angeles, California. In 18 selected geographically dispersed urban and rural markets, we found that nearly half of the products had premiums priced at more than $80 a month for one child. Even within particular markets, there were substantial differences in the premium prices of products that carriers offered. Table 1 illustrates some choices a consumer would encounter if shopping for coverage for one child in the individual insurance markets of certain cities. Although it is difficult to isolate one factor from another, the standard monthly premium rates generally vary based on the type of plan a consumer chooses and the deductible a consumer is willing to spend up front as well as how the carrier rates its product. Even within a single geographic market, premium prices for child-only products varied considerably. For example, a consumer in Chicago, Illinois, who wanted to purchase health insurance for a healthy 10-year-old could choose from among at least five different products offered by four carriers, with monthly premiums ranging from $63 to $142. Even products that seemed similar differed in price—such as the child-rated, PPO products with a $250 deductible offered by Carriers A and B in Chicago, Illinois, which differed in price by $39 a month. We identified several factors that affect monthly premium rates for child-only products: age and number of covered children in a family and their expected health care utilization; geographic location and state regulations; and plan type and design, including deductible and cost-sharing options. The seven selected carriers in our study priced their products using age and number of children covered from the same family in one of three ways: four carriers used a child rate that was tiered according to specified age groups, two used a single child rate for all enrollees aged 0 through 17 years, and one charged its child enrollees the lowest adult rate—that of an 18-year-old male. In the last case, when more than one child from the same family was covered, the carrier charged a combination rate, whereby the youngest child paid the lowest adult rate and additional children paid a lower, child’s rate. Insurance industry officials told us that charging a child rate as opposed to the lowest adult rate can reduce the premium for most children. This is because children are typically low users of health care services compared with adults and therefore are less expensive to insure. Some of the tiered child-rated products were priced differently to take into account the specific age of the child. While children overall are typically low users of health care services compared with adults, some age groups tend to use more services than others. For example, carrier officials stated that children under age 2 tend to be high users of health care services due to the number of immunizations and physical exams recommended by the American Academy of Pediatrics. Thus, to cover the cost of their higher expected utilization, some carriers that offer child-rated products that are tiered by age categories typically charge their youngest enrollees a higher premium than children in other age groups. Two of the regional HMO carriers we reviewed divide children into two age groups: (1) birth through age 2 and (2) age 3 through age 18 or 19. In both cases, the youngest children were charged monthly premiums about $20 higher than the older age group. We also found that two of the carriers, both of which market specifically to children, do not cover children during their first 6 or 12 months due, in part, to the high costs of immunizations and well-child visits. For the carriers in our study that offered child-rated products in three age categories, children aged 6 through 14 years typically had the lowest rates, while premium prices increased for older children—aged 15 through 19 years—to compensate for expected higher health costs during the teen years. Table 2 shows how carriers’ rating methods affect the premium prices for a family with three children in different age groups living in Chicago, Illinois. Premiums may also vary by geographic location, due largely to differences in physician and hospital costs as well as cost of living and state regulations. As table 1 illustrates, when Carrier B, Carrier C, and Carrier D are looked at across markets, consumers living in Omaha, Nebraska, are charged less for the same product than those living in Chicago, Illinois. For those carriers, depending on where the consumer resides, monthly premium rates ranged from $33 to $76 across the markets we reviewed. State regulations—guaranteed issue and rate restrictions, in particular—may also impact carriers’ determinations of premium rates. For example, in Illinois, where there are no rate restrictions, a healthy 10-year-old could obtain coverage for $63 a month; that same child may pay $192 for coverage of similar benefits in Vermont—a state that has community rating, which requires carriers to set premiums at the same level for all plan participants, regardless of their age, gender, health status, or any other demographic characteristics. The plan type and design offered by the carrier is another factor that may affect the price of an individual health product. Plan types include traditional FFS, PPO, and HMO structures. Usually, the more willing an enrollee is to use selected providers that have negotiated charges for health services with the carrier, such as in PPOs and HMOs, the lower the premium an enrollee will have to pay. Similarly, the cost-sharing arrangement selected by the consumer also determines the price of an individual insurance product. Cost-sharing refers to the policyholder’s contribution to the cost of the benefits received. Under traditional FFS plans, consumers pay an annual deductible and coinsurance up to a specified total limit on out-of-pocket expenses. HMOs typically require consumers to make copayments for each service rendered until an annual maximum is reached. The more potential out-of-pocket expenses the consumer could incur, the lower the premium usually will be. Child-only products that we examined included a wide range of cost-sharing alternatives. Deductibles for FFS and PPO plans typically ranged from $250 to $2,500; HMO copayments were typically $15 per physician visit and $100 to $500 per hospital admission. Table 3 shows the difference in one carrier’s premium prices for each of the plan types and deductible amounts ($250 and $500) it offers to a healthy 4-year-old in selected markets. In these markets, consumers would pay lower monthly premiums if they opted for the higher $500 deductible and the carrier’s more restrictive PPO option. The variation in premium rates attributable to different deductible amounts was also evident in the rates of a carrier in Oregon that we contacted. For this carrier, the monthly premium for the same individual product costs about $42, $70, or $98 a month, depending solely on whether the applicant opted for the $1,000, $500, or $200 deductible, respectively. While most children qualify for coverage at the standard rate, children with certain health conditions can be denied coverage, or their coverage may exclude an existing condition or treatment of certain parts of the body, or they may be charged a rate higher than the standard premium rate in states that allow medical underwriting. Under medical underwriting, carriers may evaluate an applicant’s health status on the basis of responses to a detailed health questionnaire. On these questionnaires, applicants may be required to indicate whether the child to be included on the policy has received medical advice or treatment of any kind within the child’s lifetime or within a more limited time frame. Applicants may also be required to indicate whether the child has experienced a broad range of specifically identified symptoms, conditions, and disorders. Applicants may have to indicate whether the child has any pending treatments or surgery, is taking any prescription medication, or has ever been refused or canceled from another health or life insurance policy. On the basis of these responses, carriers may request additional information—typically medical records—or may require a physical examination. The information obtained through this process may be used by carriers to determine whether to decline to cover the applicant altogether, accept the applicant but charge a higher than standard premium rate, or exclude from coverage an existing health condition or treatment of a part of the body. While the carriers we interviewed decline coverage to fewer child applicants than adult applicants, they still decline coverage to between 5 and 15 percent of child applicants. Furthermore, as previously mentioned, two of the carriers we reviewed that market specifically to children told us that they do not cover children during their first 6 or 12 months of life due, in part, to the lack of information about a child’s potential long-term health status. Carriers may treat certain health conditions differently, so a consumer who is denied coverage due to a particular condition by one carrier may be able to find coverage from another carrier, possibly at a higher rate. (See fig. 1.) For example, Carrier A, Carrier B, and Carrier C decline coverage to applicants with juvenile diabetes, but Carrier D may offer these applicants coverage but at a higher premium. Similarly, a carrier’s treatment of certain health conditions may vary depending on the severity and duration of the conditions. For example, Carrier D indicated that applicants with epilepsy could be (1) declined coverage altogether, (2) offered coverage but at a higher than standard premium rate, or (3) accepted for coverage at its standard rate. The criteria used to make these determinations vary among carriers and are considered proprietary. Although comprehensive health insurance coverage is generally available for healthy children in the private individual market across the United States, consumers would do well to shop carefully for the child-only product that best meets their needs. Depending on multiple factors—such as where a child resides, the plan type selected, and the amount of out-of-pocket expenses the purchaser is willing to spend—premium prices vary substantially. In selected markets we reviewed, nearly half of the products had premiums priced at more than $80 a month for one child, making this an expensive purchase for some families. Children who rely on the individual market for health insurance face problems similar to adults. Depending on where they live, premiums may be high relative to their family budget and choice of carriers and products may be limited. Furthermore, in many states, children—like adults—with certain health conditions may be charged a higher premium, have an existing health condition or part of the body excluded from coverage, or be denied coverage altogether. We provided a copy of this report draft to the American Association of Health Plans, BlueCross and BlueShield Association, and Health Insurance Association of America for their review and comment. Each offered clarifying and technical comments, which we incorporated as appropriate. As agreed with your offices, we plan no further distribution of this report for 30 days. At that time, we will make copies of this report available on request. Please contact me at (202) 512-7114 if you or your staff have any further questions. This report was prepared by Mary W. Freeman, Susan T. Anthony, Randy M. DiRosa, and Betty J. Kirksey under the direction of Sheila K. Avruch. Recent state and federal initiatives may have mitigated the effect of medical underwriting in many states in several ways. For example, 13 states that require all carriers to guarantee-issue one or more health plans to all applicants have effectively prohibited carriers from declining to provide coverage to applicants on the basis of their health status. In addition, 27 states have created high-risk insurance pools to act as a safety net to ensure that otherwise uninsurable individuals can obtain coverage, although at a cost that is generally at least 50-percent higher than the average or standard rate charged in the individual insurance market for a comparable plan. In addition to state-level initiatives, recently passed federal legislation also guarantees access to coverage to certain individuals. Under HIPAA, individuals who lose group coverage, exhaust their Consolidated Omnibus Budget and Reconciliation Act of 1985 (COBRA) coverage or other continuation coverage available, and meet several additional criteria have guaranteed access to individual market coverage. Thus, a child who was covered as a dependent under a parent’s group coverage (and who meets the eligibility criteria) typically would be eligible for HIPAA’s guarantee of access to coverage. In contrast, a child who never had access to group coverage, because the parent’s employer did not offer dependent coverage or any health coverage, would not be eligible for the access guarantee. Further, HIPAA’s guarantee applies only to those losing group coverage—not to those who have always relied on the individual market for coverage. In addition, HIPAA does not explicitly restrict the premiums carriers may charge for this coverage. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the availability of private sector health coverage for children in the individual insurance market, focusing on: (1) the availability and characteristics of private health insurance products that can be purchased only for a child and how these products differ from other individual private insurance products; (2) the costs of these child-only products; and (3) any barriers in access to individual private health coverage for children. GAO noted that: (1) comprehensive health coverage is available to children in the individual health insurance market across the United States; (2) at least one comprehensive product is available to most children in all 50 states; (3) in almost all states, a product that is priced specifically for children is available; (4) the insurance agents and brokers GAO contacted in two selected states were generally aware that products for children existed and could either sell the products themselves or refer GAO to someone who could; (5) the benefits covered under these products typically mirror those of products available to adults in the individual market; (6) while these products were available nationwide, among the carriers GAO contacted they represented a relatively small share of total individual sales--from under 1 percent to 20 percent; (7) furthermore, since many carriers do not tend to operate in states with certain regulatory requirements, consumers may have a more limited choice of benefit plans and carriers in these states; (8) as is the case with products for adults in the individual market, costs for child-only products varied considerably, both within and across selected markets; (9) standard monthly premium rates for the products GAO reviewed that are available to children are based largely on age, geographic location, plan type, and product design, including deductible and cost-sharing options; (10) in calculating rates, carriers also take into account the expected health care utilization of different age groups and the impact of various state regulations; (11) GAO found standard monthly premium rates for a healthy 15-year-old among its selected carriers ranged from a low of about $42 for a $1,000-deductible preferred provider organization plan in Portland, Oregon, to one as high as $321 for a $250-deductible fee-for-service plan in Los Angeles, California; (12) while these child-only products are available in all states--as is typical in the individual insurance market--many states do not require carriers to accept all applicants; (13) in these states, children with certain health conditions may be denied coverage, or their coverage may exclude an existing condition or treatments for particular parts of the body, or they may be charged a rate higher than the standard premium rate; and (14) of the carriers that GAO reviewed, two that market specifically to children do not cover children under these policies during their first 6 or 12 months of life, due to the high cost of early preventive care and lack of information about a child's possible future health problems. |
The Small Business Innovation Development Act of 1982 provided for a three-phase program. Phase I is intended to determine the scientific and technical merit and feasibility of a proposed research idea. Work in phase II further develops the idea, taking into consideration such things as the commercialization potential. Phase III generally involves the use of nonfederal funds for the commercial application of a technology or non-SBIR federal funds for continued R&D under government contracts. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR program through fiscal year 2000. The act emphasized the program’s goal of increasing private sector commercialization and provided for incremental increases in SBIR funding up to not less than 2.5 percent of agencies’ extramural R&D budgets by fiscal year 1997. Moreover, the act directed SBA to modify its policy directive to reflect an increase in funding for eligible small businesses, that is, businesses with 500 or fewer employees. This increased funding from $50,000 to $100,000 for phase I and from $500,000 to $750,000 for phase II, with adjustments once every 5 years for inflation and changes in the program. The agencies’ SBIR officials reported that they have adhered to the act’s requirement of not using SBIR funds to pay for the administrative costs of the program, such as salaries and support services used in processing awards. However, they added that the funding restriction has limited their ability to provide some needed administrative support. The program officials also believe that they are adhering to the statutory requirement to fund the program at 2.5 percent of agencies’ extramural research budget. Some of the officials expressed concern because they believe that agencies are using different interpretations of the “extramural budget” definition. This may lead to incorrect calculations of their extramural research budgets. For example, according to DOD’s SBIR program manager, all eight of DOD’s participating military departments and defense agencies that make up the SBIR program have differing views on what each considers an extramural activity and on the appropriate method for tracking extramural R&D obligations. As a result, the program and budget staff have not always agreed on the dollar amount designated as the extramural budget. Of the five agencies we reviewed, only two have recently audited their extramural R&D budgets. Both NSF and NASA conducted audits of their extramural R&D budgets in fiscal year 1997. DOD, DOE, and NIH have not conducted any audits of their extramural R&D budgets nor do they plan to conduct any audits in the near future. NSF’s audit, which was performed by its Inspector General, concluded that NSF was overestimating the size of its extramural R&D budget by including unallowable costs, such as education, training, and overhead. NSF estimated that these unallowable costs totaled over $100 million. The Inspector General’s audit report concluded that by excluding these “unallowables,” NSF will have reduced the funds available for the SBIR program by approximately $13 million over a 5-year period. Likewise, NASA has completed a survey of fiscal year 1995 budget data and is currently reviewing fiscal year 1996 data at its various field centers. NASA officials say this is an effort to (1) determine the amount spent on R&D and (2) categorize the R&D as either intramural or extramural activities. Most of the SBIR officials we interviewed believed that neither the application review process nor current funding cycles are having an adverse effect on award recipients’ financial status or their ability to commercialize their projects. Specifically, DOD, DOE, NSF, and NASA stated that their respective review processes and funding cycles have little to no adverse effect on the recipients’ financial status or the small companies’ ability to commercialize their technologies. Furthermore, NIH believes that having three funding cycles in each year has had a beneficial effect on applicants. SBIR officials did say that some recipients had said that any interruption in funding awards, for whatever reason, affects them negatively. One SBIR program manager stated that at DOD, most award recipients often have no way of paying their research teams during a funding gap. As a result, ongoing research may be delayed, and the “time-to-market”—that is the length of time from the point when research is completed to the point when the results of the research are commercialized—may be severely impaired, thus limiting a company’s commercial potential. As a result, most of the participating SBIR agencies have established special programs and/or processes in an effort to mitigate any adverse effect(s) caused by funding gaps. One such effort is the Fast Track Program, employed at DOD, whereby phase I award recipients who are able to attract third-party funding are given the highest priority in the processing of phase II awards. At DOE and NIH, phase I award recipients are allowed to submit phase II applications prior to the completion of phase I. NASA has established an electronic SBIR management system to reduce the total processing time for awards and is currently exploring the possibility of instituting a fast track program similar to that of DOD. The third phase of SBIR projects is expected to result in commercialization or a continuation of the project’s R&D. In 1991, we surveyed 2,090 phase II awards that had been made from 1984 through 1987 regarding their phase III activity. In 1996, DOD conducted its own survey, which closely followed our format. DOD’s survey included all 2,828 of DOD’s SBIR projects that received a phase II award from 1984 through 1992. While analyzing the response data from our 1991 survey, we found that approximately half of the phase II awards reported phase III activity (e.g., sales and additional funding) while the other half had no phase III activity. (See table 1.) Overall, 515 responses, or 35 percent, indicated that their projects had resulted in sales of products or processes, while 691, or 47 percent, had received additional developmental funding. Our analysis of DOD’s 1996 survey responses showed that phase III activity was occurring at similar rates to GAO’s survey. Our analysis of these responses showed that 765 projects, or 53 percent, reported that they were active in phase III at the time of the survey, while the other half did not report any phase III activity. The DOD respondents indicated that 442 awards, or 32 percent, had resulted in actual sales, while 588 reported the awards had resulted in additional developmental funding. Agencies are currently using various techniques to foster commercialization, although there is little or no empirical evidence suggesting how successful particular techniques have been. For example, in an attempt to get those companies with the greatest potential for commercial success to the marketplace sooner, DOD has instituted a Fast Track Program, whereby companies that are able to attract outside commitments/capital for their research during phase I are given higher priority in receiving a phase II award. The Fast Track Program not only helps speed these companies along this path but also helps them attract outside capital early and on better terms by allowing the companies to leverage SBIR funds. In 1996, for example, DOD’s Fast Track participants were able to attract $25 million in outside investment. Additionally, DOD, in conjunction with NSF and SBA, sponsors three national SBIR conferences annually. These conferences introduce small businesses to SBIR and assist SBIR participants in the preparation of SBIR proposals, business planning, strategic partnering, market research, the protection of intellectual property, and other skills needed for the successful development and commercialization of SBIR technologies. DOE’s Commercialization Assistance Program provides phase II award recipients with individualized assistance in preparing business plans and presentation materials to potential partners or investors. This program culminates in a Commercialization Opportunity Forum, which helps link SBIR phase II award recipients with potential partners and investors. NSF provides (1) its phase I award recipients with in-depth training on how to market to government agencies and (2) its phase I and II award recipients with instructional guides on how to commercialize their research. Similarly, NASA assists its SBIR participants through numerous workshops and forums that provide companies with information on how to expand their business. NASA also provides opportunities for SBIR companies to showcase their technologies to larger governmental and commercial audiences. Moreover, NASA has established an SBIR homepage on the Internet to help promote its SBIR technologies and SBIR firms and has utilized several of its publications as a way for SBIR companies to make their technologies known to broader audiences. Using SBA’s data, we identified phase I award recipients who had received 15 or more phase II awards in the preceding 5 years. On the basis of survey data from both GAO’s and DOD’s surveys, we compared the commercialization rates as well as the rates at which projects received additional developmental funding for these multiple-award recipients with the non-multiple-award recipients. This comparison of the phase III activity is summarized in table 2. This analysis shows that the multiple-award recipients and the non-multiple-award recipients are commercializing at comparable rates. According to both surveys, multiple-award recipients receive additional developmental funding at higher rates than the non-multiple-award recipients. However, the average levels of sales and additional developmental funding for the multiple-award recipients are lower than those for non-multiple-award recipients. When an agency funds research for a given solicitation topic where only one proposal was received, it may appear that there was a lack of competition. The majority of the SBIR officials we interviewed indicated that receiving a single proposal for a given solicitation topic is extremely rare. DOD reported that from 1992-96 there were only three instances when a single proposal was submitted for a given solicitation topic out of 30,000 proposals that were received for various solicitations. DOD’s SBIR official did state, however, that none of the cases resulted in an award. Both DOE’s and NASA’s SBIR officials reported that they did not receive any single proposals for this time period. Moreover, NASA’s SBIR officials stated that their policy is to revise a solicitation topic/subtopic if it receives fewer than 10 proposals or to drop the topic/subtopic from the solicitation. One of the purposes of the 1992 act was to improve the federal government’s dissemination of information concerning the SBIR program, particularly with regard to program participation by women-owned small businesses and by socially and economically disadvantaged small businesses. All of the agencies we reviewed reported participating in activities targeted at women-owned or socially and economically disadvantaged small businesses. All SBIR program managers participate each year in a number of regional small business conferences and workshops that are specifically designed to foster increased participation in the SBIR program by women-owned and socially and economically disadvantaged small businesses. The SBIR managers also participate in national SBIR conferences that feature sessions on R&D and procurement opportunities in the federal government that are available to socially and economically disadvantaged companies. Most of the SBIR agency officials we interviewed stated that they use the two listings of critical technologies as identified by DOD and the National Critical Technologies Panel in developing their respective research topics. The other agencies believed that the research being conducted falls within one of the two lists. At DOE, for example, research topics are developed by the DOE technical programs that contribute to SBIR. In DOE’s annual call for topics, SBIR offices are instructed to give special consideration to topics that further one or more of the national critical technologies. DOE’s analysis of the topics that appeared in its fiscal year 1995 solicitation revealed that 75 percent of the subtopics listed contributed to one or more of the national critical technologies. Likewise, NASA’s research topics, developed by its SBIR offices, reflect the agency’s priorities that are originally developed in accordance with the nationally identified critical technologies. At DOD, SBIR topics that do not support one of the critical technologies identified by DOD will not be included in DOD’s solicitation. Both NIH and NSF believe that their solicitation topics naturally fall within one of the lists. According to NIH’s SBIR official, although research topics are not developed with these critical technologies in mind, their mission usually fits within these topics. For example, research involving biomedical and behavioral issues is very broad and can be applied to similar technologies defined by the National Critical Technologies Panel. NSF’s SBIR official echoes the sentiments of NIH. According to this official, although NSF has not attempted to match topics with the listing of critical technologies, it believes that the topics, by their very nature, fall within the two lists. According to our 1991 survey and DOD’s 1996 survey, SBIR projects result in little business-related activity with foreign firms. For example, our 1991 survey found that 4.6 percent of the respondents reported licensing agreements with foreign firms and that 6 percent reported marketing agreements with foreign firms. It should also be remembered that both of these agreements refer to activities where the U.S. firm is receiving benefits from the SBIR technology and still maintaining rights to the technology. Sales of the technology or rights to the technology occurred at a much lower rate, 1.5 percent, according to our survey. The DOD survey showed similar results. These data showed that less than 2 percent of the respondents had finalized licensing agreements with foreign firms and that approximately 2.5 percent had finalized marketing agreements with foreign firms. Sales of the technology or the rights to the technology developed with SBIR funds occurred only 0.4 percent of the time. A recent SBA study stated that one-third of the states received 85 percent of all SBIR awards and SBIR funds. In fiscal year 1996, the states of California and Massachusetts had the highest concentrations of awards, 904 awards for a total of $207 million and 628 awards for a total of $148 million, respectively. However, each state has received at least two awards, and in 1996, the total SBIR amounts received by states ranged from $120,000 to $207 million. The SBA study points out that 17 states receive the bulk of U.S. R&D expenditures, venture capital investments, and academic research funds. Hence, the study observes that the number of small high-tech firms in a state, its R&D resources, and venture capital are important factors in the distribution and success of SBIR awards. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or the members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Small Business Innovation Research (SBIR) program, focusing on: (1) agencies' adherence to statutory funding requirements; (2) agencies' audits of extramural (external) research and development (R&D) budgets; (3) the effect of the application review process and funding cycles on award recipients; (4) the extent of companies' project activity after receiving SBIR funding and agencies' techniques to foster commercialization; (5) the number of multiple award recipients and the extent of project activity after receiving SBIR funding; (6) the occurrence of funding for single proposal awards; (7) participation by women-owned business and socially and economically disadvantaged business; (8) SBIR's promotion of the critical technologies; (9) the extent foreign firms benefit from SBIR results; and (10) the geographical distribution of SBIR awards. GAO noted that: (1) agencies have adhered to the Small Business Research and Development Enhancement Act's funding requirements; (2) agency program officials reported that they are not using SBIR funds to pay for administrative costs of the program; (3) program officials believe that they are adhering to the statutory requirement to fund the program at 2.5 percent of agencies' extramural budget; (4) some officials believe that agencies are using different interpretations of the extramural budget definition, which may lead to incorrect calculations; (5) of the five agencies reviewed, only two have conducted audits of their extramural budgets; (6) while most SBIR officials interviewed said that neither the application review process nor current funding cycles have had an adverse effect on award recipients' financial status or ability to commercialize, some recipients have said that any interruption in funding awards affects them negatively; (7) most participating SBIR agencies have established programs to minimize funding gaps; (8) companies reported that approximately 50 percent of their projects had sales of products or services related to research or received additional developmental funding after receiving SBIR funding; (9) the agencies identified various techniques to foster the commercialization of SBIR-funded technologies; (10) the number of companies receiving multiple awards had grown from 10 companies in 1989 to 17 in 1996; (11) multiple-award recipients and non-multiple-award recipients commercialized at almost identical rates; (12) agencies rarely fund research for a given solicitation topic where only one proposal was received; (13) of the five agencies examined, all reported engaging in activities to foster the participation of women-owned or socially and economically disadvantaged small businesses; (14) all agencies' SBIR officials believed that the listings of critical technologies are used in developing their respective research topics or that the research being conducted falls within one of the two lists; (15) little evidence of foreign firms benefiting from technology or products developed as a direct result of SBIR-funded research; (16) a Small Business Administration study reported that one-third of the states received 85 percent of all SBIR awards and funds; and (17) previous studies of SBIR have linked the concentration of awards to local characteristics. |
The North American Energy Standards Board serves as an industry forum for the development and promotion of standards that will lead to a seamless marketplace for wholesale and retail natural gas and electricity, as recognized by its customers, business community, participants, and regulatory entities. is a way to simplify royalty administration. In addition, MMS concluded that it would not need to audit RIK sales because the agency would sell th gas rather than relying on producers to accurately report their ow prices, as is done in the royalty-in-value program. The collecting, reporting, and auditing of cash royalty payments have been challenging for MMS because of concerns about the accuracy and reliability of productionand pricing data submitted by royalty payors and because there are about 29,000 leases producing oil and gas, many with several companies paying monthly royalties. MMS began a series of pilot sales of royalty oil and gas in 1998 and, based on the results, dramatically expanded its RIK progr am until 2007. In 2008 and 2009, the volumes taken in kind have, and are projected to, decrease as MMS decreases the number of properties tak in kind, in part because it identified and removed prop lower revenues than a fair market value benchmark. MMS is charged with ensuring that RIK oil and gas are not sold for less than market value and that revenues it receives are at least as great as the revenues it would have received had it taken the royalties in cash. T this requirement, MMS compares the estimated benefits of the RIK program with the estimated benefits it would have received if the ro had been taken in cash and reports this to Congress annually. MMS estimated that from fiscal years 2004 through 2007, the RIK program generated about $150 million more in net value to the government than MMS would have collected had it received royalties in cash. Of this $150 million, MMS estimated that (1) $131 million came from selling RIK oil and 2) gas for more than MMS would have received in cash royalty payments, ( $8 million came from interest that accrued because revenues from RIK sales were received earlier than cash payments would have been rece through the in-value program, and (3) $11 million came from savings accrued because the RIK p royalty-in-value program. rogram costs less to administer than the Through the RIK gas program, companies that produce gas on federal leases owe MMS a royalty, or a percentage, of the daily gas production. To ensure that the government obtains the fair value of RIK sales, MMS must ensure that it receives the percentage of total production volumes to which it is entitled. The volume of gas a company owes to MMS is determined by the following equation: royalty volume = total production volume x royalty percentage The royalty percentage for leases taken in kind varies somewhat b currently in the range of 12.5 percent to 16.67 percent. Measuring ut is production and allocating a percentage of that production is relatively straightforward when one company measures its own output from a federal lease and reports its own production to MMS. However, multip production companies sometimes combine the gas flowing from theirleases at a measurement point in order to share the risks, costs, and benefits of gas production. These companies often elect from among themselves a single company—called the operator—to allocate the gas flowing from each of the companies. Due to the complex nature of the natural gas market, operators cannot always allocate each producti on company or royalty owner its entitled amount of gas, resulting in a situation known as an “imbalance.” Imbalances—both positive and negative—are a common occurrence for MMS and all companies in the industry because, among other reasons, companies must estimate the volume of gas they will produce; in turn operators allocate gas based those estimates rather than actual production. The operator is also responsible for monitoring and reporting gas imbalances––the differen between the volume of gas owed to lease and royalty owners and the volume actually allocated. Currently, there are points and 550 leases in the RIK gas program. MMS risks losing millions of dollars in revenue because it does not accurately and promptly identify and collect on RIK gas imbalances. Specifically, MMS (1) estimates it is owed a net of $21 million for gas imbalances, but it lacks the necessary information to determine the exact amounts; (2) does not audit RIK gas operators’ production and allocatio n data, and thus cannot verify that it receives the correct volumes of RIK gas; (3) lacks adequate policies and procedures to reconcile and resolv imbalances; (4) does not have an information system that can provide accurate and timely data for reconciling and resolving imbalances; and (5) has insuffici ent staff and training to administer the program efficiently and effectively. We are not reporting the amount of MMS’s extraordinary threshold because the agency believes this will compromise its efforts to collect additional revenues associated with imbalances in a timely manner. Further, MMS determines when imbalances have reached this threshold by applying a fixed rate of $5 per million British thermal units to volume imbalances. MMS officials said they will re-evaluate the fixed rate and the “extraordinary” level in the future. indicate it has completely reconciled almost 99 percent of the imbalances for production occurring in fiscal year 2007, almost 98 percent for fiscal year 2008, and about 94 percent for fiscal year 2009. However, MMS does not know the exact amount it is owed for imbalances because it lacks at least three types of information. First, it does not verify all gas production data to ensure it receives its entitled percentage of RIK ciled gas from all leases taken in kind. Prior to February 2009, MMS recon gas imbalances through data from two operator-generated reports, imbalance statements and monthly production reports, and online third- party data from pipeline companies on the amount delivered to purchase of RIK gas. This verified whether MMS received the volumes of ga the operator reported, and whether that volume was the correct percentage of reported production according to operator-generated d However, it did not verify through third-party data that the operator correctly reported the total production at each lease in the first place. Therefore, MMS could not use this method to verify that the gas alloca by operators was equal to MMS’s entitled percentage of gas volum Recognizing this, in 2008, we recommended that MMS bolster its verification process for gas volumes owed to the government by using third-party production information, such as the data collected in the Offshore Energy and Minerals Management division’s gas verification system, in addition to the third-party delivery information it had already been using. MMS’s gas imbalance analysts began using the third-party data contained in the gas verification system in February 2009, but because these data only include total production at the measurement po rather than for each lease, analysts cannot use the system to verify that it was allocated the entitled percentage from each lease taken in kind. ata. es. Second, MMS lacks information on how to price gas imbalances and the point at which the agency should begin applying interest to the imbalanc for leases that have terminated from the program or those leases whe re production has ceased. Since the RIK program first began, MMS has updated its guidance letter to operators. Although MMS’s most recent guidance letter states that MMS will charge monthly interest on imbalances, past guidance letters state that interest will only be charged if the operator pays its imbalance later than 60 days after the final month the imbalance occurred. Interior is required by law to charge interest on late payments and underpayments of royalties. Further, while MMS’s c guidance letter to operators specifies that it will price imbalances according to its own contract price for the gas during the month the imbalance occurred, the previous guidance letters did not contain this language. MMS is not actively trying to collect on the imbalances of those leases that have been terminated from the program or those leases wh ere production has ceased because there have been discussions with the Office of the Solicitor for more than a year about these issues. In a January 2008 memo, MMS asked the Office of the Solicitor for an opinion on when to charge interest and whether its current methodology to price imbalances is consistent with law. In its memo, MMS proposed the following two pricing methods, in addition to its current method: 1. Calculating the price of the imbalances based on the value applicable editing to the month before settling the imbalance in cash and after cr any over-allocations existing since the first imbalance month. the price using the value when the last imbalance occurred. Recently, the Office of the Solicitor asked RIK program officials to ch the most appropriate pricing and interest methods before issuing an opinion on those methods. However, those methods have not yet been presented to the Solicitor, and MMS is currently not making additional requests for payment of imbalances for leases that have term the program or those leases where production has ceased. Finally, MMS could be forgoing revenue because it lacks information daily gas imbalances. Section 115 of the Federal Oil and Gas Royalty Management Act, as amended, provides that a lessee’s obligation does not become “due” until the end of the month following the month in which th e gas is produced. In its guidance letter to operators, MMS requests t deliveries be made on a daily basis equal to the royalty percentage. Because the statute authorizes MMS to enforce operator obligations only on a monthly basis, MMS believes it appropriate to calculate and monito r imbalances owed solely on a monthly rather than daily basis. However, this leaves open the possibility that some companies that owe RIK gas could provide less gas to MMS on days when gas prices are relatively high, hat and make up the difference by providing more gas on days when prices are relatively low. Because purchasers of RIK gas bid on two components of the amount of gas produced daily—a minimum volume set at a monthly price and an additional volume, if available, at a fluctuating daily or “spot price—MMS would lose revenue because it would miss the opportunity sell gas on days when spot prices are higher. Because MMS reconciles imbalances on a monthly––rather than daily––basis, such an occurrence could go undetected. MMS guarantees the purchaser of RIK gas the full minimum volume on a daily basis, except in the case of equipment failure or natural disaster. In contrast, industry officials we spoke with said that they monitor imbalances daily to ensure their companies do not lose revenue from daily imbalances. To investigate the extent to which MMS has been allocated its royalty percentage of RIK gas on a daily basis, we analyzed daily volumes of to production and allocation to MMS at a sample of measurement points. Because measurement points combine the gas from numerous leases may have differing royalty percentages, it is not possible to determine whether MMS received its royalty percentage on a daily basis using data. We therefore restricted our analysis to a random sample of the measurement points that had leases with a common royalty percenta These points account for about 85 percent of those in the RIK gas program. On most days––74 percent of those we examined––the alloca was within 25 percent of MMS’s royalty percentage. However, on 18 percent of the days, the allocation was more than 25 percent less than ntage and on 8 percent of days the allocation was MMS’s royalty perce more than 25 percent greater than MMS’s royalty percentage. On average, MMS received 15.9 percent of total production when its royalty percentag was 16.67 percent. ge. In addition, we collected daily data on the differential between the base and spot price for our sample of measurement points and identified a small correlation between higher prices and a lower percentage allocated to MMS. We estimated that the correlation we found would result in a loss of about $1,400 for each measurement point during a 6-month time period. Further, the common royalty percentage in the leases at the measurement points we examined—which accounts for about 85 percent of measurement points in the RIK gas program—makes it easier to detect this practice. At measurement points with a mix of different royalty percentages—about 15 percent of measurement points in the RIK gas program—there are no data available to MMS to detect this, which could encourage such behavior and result in higher revenue losses for these measurement points. See appendix II for our complete analysis. Daily imbalances may also be costing MMS because it does not track transactions called “keepwhole payments.” MMS must make such payments if RIK gas purchasers do not receive their minimum daily volume of gas. This is because purchasers typically enter into advance contracts to resell RIK gas, and if they do not receive their expected volumes they must buy that volume elsewhere in order to fulfill these e triggering keepwhole payments, contracts. Daily gas imbalances may b but MMS does not know the extent to which this occurs because it does n ot adequately track these payments. MMS also may be forgoing revenue because it does not audit operator d to ensure it has received its entitled royalty percentage. MMS has procedures for reconciling imbalances and uses third-party production data to verify some of the data it receives from operators. However, it has not assessed the risk of forgoing audits at those measurement points where it does not have complete data with which to verify that it has bee allocated its entitled percentage of gas. Although the RIK guidance lett er to operators states MMS’s right to audit operator information related to RIK gas produced and delivered, MMS has not done so because it has considered its verification of operator-generated data to be sufficient . MMS has also claimed that it has saved money as a result of not auditing and that this is a benefit of the RIK program. However, other royalty owners and members of the oil and gas industry regularly audit operator reported data. According to an industry representative, this entails traveling to an operator’s place of business to scrutinize gas production documentation. According to an official from the Texas General Land Office—the agency responsible for administering Texas’s RIK program— state audits often find that the office has not received the gas volu entitled to. Furthermore, the Council of Petroleum Accountants Societies (COPAS), a professional organization of oil and gas accountants, recommends that any royalty or working interest owner initiate an audit an operator’s response is unsatisfactory or if a discrepancy is considered significant. Industry representatives told us that oil and gas companies regularly audit to ensure that they have received the gas they are entitled to. Representatives from one company noted tha approach, auditing operators who allocate large volumes of gas because there is the greatest risk of error in these cases. t they use a risk-based Additionally, there are cases when available third-party production data not give MMS adequate information to determine whether it has rece its royalty percentage. For example, when RIK leases combined at one measurement point have different royalty percentages, MMS cannot ived determine from the available gas verification system data whether it has received its entitled royalty percentage. Figure 1 illustrates this using two hypothetical measurement points. Measurement point one has three leases flowing into it, all with a royalty percentage of 16.67 percent. Regardle whether each lease has different production volumes, MMS can calcula that it is owed 16.67 percent of the total production of 10,000 million ercent of the total production of 10,000 million British thermal units (MMBtu). However, measurement point two has te British thermal units (MMBtu). However, measurement point two has three leases flowing into it, with two leases owing a royalty percentage of three leases flowing into it, with two leases owing a royalty percentage of 16.67 percent and one lease owing a royalty percentage of 12.5 perc 16.67 percent and one lease owing a royalty percentage of 12.5 perc Because each lease will have a different volume of production and third-ent. Because each lease will have a different volume of production and third-ent. party data from the gas verification system only includes the total party data from the gas verification system only includes the total production volume at the measurement point, MM production volume at the measurement point, MMS is unable to verify it was allocated its entitled percentage of RIK gas without examining the S is unable to verify it was allocated its entitled percentage of RIK gas without examining the operator’s production records at the lea operator’s production records at the lease level. se level. se level. MMS does not have adequate policies and procedures to ensure it reconciles and resolves RIK gas imbalances efficiently. This shortcoming is apparent in three main areas. First, MMS policies do not adequately ensure that operators allocate MMS’s percentage of RIK gas. MMS’s guidance letter to operators requests that operators allocate to MMS the royalty percentage of gas on a daily basis, but MMS believes it does not have the authority to enforce this guidance. Further, RIK officials said MMS does not know what method operators use to allocate gas. Indeed, our analysis shows that, contrary to its guidance letter to operators, on many days MMS is not receiving its percentage of RIK gas. This could be happening because the operator’s allocation method ranks other leaseholders before MMS when allocatin g gas and total production is less than expected. In this instance, MMS cou ld receive less than its royalty percentage of gas or no gas at all. According to COPAS, when the output of gas from multiple leases is combined and measured at a single measurement point, it is imperative that all parties agree on the method the operator will use to allocate the gas. We lea from industry representatives that gas companies rely extensively on such agreements to ensure they receive the gas volumes they are owed and to minimize the negative impact of imbalances on company revenues. Second, MMS does not have adequate policies and procedures to compe operators to report imbalances promptly and in a standard format. Although the RIK gas guidance letter to operators requests that the operator provide an imbalance statement to MMS within 60 days of the month of production, the guidance is not enforceable and MMS cannot impose a penalty for failing to submit imbalance statements within time period. To allow MMS to take enforcement actions, regulations are required. These regulations must (1) go through the public notice and comment process, and thus be transparent to the public, oversight agencies, and Congress; and (2) carry the full force of the law and hold agency implementing the program and program participants accou to the terms specified in the regulations. RIK officials said MMS has operated the RIK program without regulations because of the onerous nature of establishing regulations and because industry had been cooperative. More recently, RIK officials told us they have recognized that it is necessary to implement regulations for the RIK gas program in order for the agency to receive imbalance statements in a timely manner, among other reasons, and have begun drafting these regulations. In contrast, the provincial government of Alberta, Canada, has regulations in place that state a company can be fined a portion of its royalty payment if it submit required production data on time. Similarly, COPAS guidelin the oil and gas industry provide that operators should submit imbalance statements to appropriate parties within 45 days of the month of production, unless other timing requirements have been agreed to. Following this guideline, gas companies we spoke with said they have es for policies in place to compel timely reporting. For example, one industry agreement we obtained states that if an operator fails to submit imbalance statements for four consecutive months, the operator could be subject to auditing. Our review of MMS’s spreadsheet for tracking imbalance statements shows that, from January 2007 through June 2008, at least 35 percent o expected imbalance statements were received late and about 10 p remain missing. As a result, MMS analysts spend a great deal of time repeatedly calling companies to inquire about missing imbalance statements. RIK officials agreed that this was not an efficient use of resources. MMS also does not have a policy to require operators to submit imbalanc statements in a standardized or electronic format. Operators submit imbalance statements by e-mail, but the statements commonly arrive in different file formats—even from a single operator. Additionally, some operators report gas volumes in MMBtu, the measurement unit used by MMS, while others use different units of measure, such as thousand feet. In these cases, MMS analysts must manually convert reported g volumes to a uniform measurement unit—increasing the chance of calculation errors—and must spend additional time combining the information from different reports into one format, rather than focusing on balance reconciling imbalances. MMS could require operators to submit im e statements in an MMS-approved standard format. In contrast to MMS, th government of Alberta requires companies to report gas volumes electronically in a standardized format and measurement unit, and these reports must pass data checks. Alberta officials have stated that standardized reporting has improved the efficiency of its RIK operations. The third area in which MMS does not have adequate policies and procedures is in collecting payment for an imbalance from a compan when a cash-out settlement between MMS and the company has not reached. When there is an extraordinary imbalance, MMS sends the y been operator an initial cash-out memo explaining the amount that MMS believes the company owes. The operator can either pay for the imbalance or dispute it by submitting evidence that the imbalance value is incorrect. To pay for the imbalance, the operator submits to MMS a royalty pa yment form, which indicates the company’s agreement with MMS’s calculation of the imbalance and classifies the imbalance as an open receivable, triggering the debt collection process with the Department of the Treasu (Treasury). The royalty payment form is the only means of triggering collection, but the operator would not submit this form if it disputes an imbalance. With no other bill or invoice to begin the debt collection process for disputed imbalances, MMS’s practice has been to allow the exchange of supporting evidence with the operator regarding the size and value of the imbalance to continue indefinitely. In one instance, MMS se nt an operator a cash-out memo in December 2006 for an imbalance valued at nearly $900,000 and, as of February 2009, was still negotiating with the operator. In such cases, because MMS has not sent a demand letter to a RIK company for payment, it has not referred a company to Treasury. officials stated that the agency has avoided debt collection for imbalances because it is an onerous process and because it is waiting for the Office ofthe Solicitor to issue an opinion on the pricing and interest associated imbalances for leases that hav such debts are not collected within 7 years, the statute of limitations renders them uncollectible. e reached the end of their contract term. If In contrast, MMS has debt collection policies and procedures in place to collect debt from companies that have purchased and received RIK gas from MMS but have not submitted payment for their purchase. Accordingto MMS policy, a company purchasing RIK gas receives an invoice, whic h triggers the debt collection process. If the company does not pay within time frame, MMS issues a demand letter for payment. If the the agreed amount due MMS is still unpaid after 180 days, the issue is referred to Treasury. MMS’s information system does not provide accurate and timely data on RIK gas imbalances, which reduces the agency’s ability to collect on thes imbalances. In 2003, MMS acquired a commercial, off-the-shelf software product and a custom-built database for the RIK program. The purpose e was to integrate all of the program’s information needs in a singl where it could monitor and track gross gas production, imbalance statement data, gas deliveries, and monthly and cumulative gas imbalances. However, the information system is not capable of provid accurate and timely information on RIK gas imbalances. For instance, MMS’s RIK Deputy Program Manager told us that the system cannot provide accurate information on the number and amount of keepwhole payments MMS has made and cannot calculate RIK cash-out imbalances. Therefore, as of June 2009, MMS was entering data manually into a spreadsheet and performing calculations based on the manually entered data. MMS officials further told us that gas imbalance information cannot analyze data from the operator-submitted imbalance statements, operator-submitted monthly production reports, and MMS’s gas verification system to calculate gas imbalances. As a consequence, more than half of MMS’s gas imbalance work, according to the RIK gas imbalance manager, is currently done manually. For example, two employees spend a portion of their time logging information from operator-submitted imbalance statements onto spreadsheets after which gas imbalance analysts manually upload imbalance statement data into MMS’s information system. An RIK manager said the manual processing of RIK gas imbalance data has put a considerable burden on the RIK gas imbalance staff. According to GAO’s Standards for Internal Control in the Federal Government, transactions from initiation to completion should be promptly recorded to maintain their relevance and value to management in controlling operations and making decisions. Similarly, according to Interior’s Internal Controls Handbook, accurate and timely information is essential for assuring the safeguarding of assets from waste, loss, unauthorized use, or misappropriation, as well as to assure compliance with laws and regulations. In its December 2007 report on mineral revenue collection, MMS’s Royalty Policy Committee recommended the electronic submission of all offshore production records to improve MMS’s compliance and enforcement activities. According to RIK officials, the committee’s recommendation was not specifically directed at, and therefore did not pertain to, the RIK program. Yet RIK program managers also told us that they recognized as early as August 2007 that the system needed improvements. According to the RIK gas imbalance manager, when MMS alerted the software manufacturer to these problems, there was a disagreement as to whether the manufacturer or the support services contractor were responsible. In July 2008, MMS contracted with the software manufacturer for support services, but this system is still n meeting MMS’s needs. At the time of our review, MMS had planned to enhance the system but was also exploring the possibility of acquiring a new information management system. According to RIK officials, one candidate system was the Petroleum Registry of Alberta (PRA), which the government of Alberta uses to manage its RIK program. PRA differs from MMS’s current system y, in several aspects. PRA was jointly developed by government and industr with the government providing about 73 percent of the $35 million bud , According to Alberta officials and the provincial government Web site th PRA improves compatibility by serving as the system of record for bo government and industry. In addition, companies participating in the Alberta RIK program are responsible for promptly entering accurate production data electronically. If a company does not enter accurate production data into PRA on time, one MMS RIK official told us, PRA w alert Alberta officials regarding the issue and the company can be fined. This official added that an automated system such as the PRA wou to be customized to fit MMS’s needs at some unknown cost, but that it could save RIK gas imbalance analysts’ hours of time currently spen t e- mailing and calling companies to submit their operator imbalance statements. According to MMS officials, they have decided not to PRA in part because customization could cause issues with future upgrades and fixes, regulation would be required for MMS to require online and standardized reporting, and the system would require significant buy-in from ind although they believe that a better information system would immensely improve RIK gas imbalance work, MMS does not have a timeline to acquire a more effective system. get. The RIK gas imbalance office, according to various MMS reports, has b een operating without sufficient staff and training to efficiently and effectively carry out its assigned duties. As a result, certain tasks—such as gas balancing work—have not received sufficient attention, leading to the development of a backlog of RIK gas imbalances. Effective managem an organization’s human capital—its employees, as well as their skills training—is essential to achieving results and an important p art of a program’s internal controls. Human capital has been a long-standing problem for the RIK gas program. Specifically, each of the following reports found that RIK human capital needed improvement. A January 2001 MMS report indicated that the RIK organization would need to evolve to fully support the RIK operational activity. The report also stated that the future RIK activity would require MMS staff training in handling imbalances, as well as several other areas. 2003 report prepared by an MMS contractor noted that, in order to support a permanent RIK program of significant scale, specific personnel requirements should be identified and filled for all RIK personnel. A May 2004 MMS report noted that enhancements to human resource capabilities would be necessary in order to meet the objectives of MMS’s RIK business plan. Therefore, the report indicated that specific skill sets and expertise should be acquired or developed in-house by March 2006. These human capital deficiencies continue to be a problem for the RIK gas program. For example, an RIK manager told us that, although mistakes canoccur in gas imbalance calculations, MMS does not have enough staff dedicate someone to review this work. However, beginning in Nove mber 2008, MMS began reviewing a sample of this work. In addition, according to internal MMS e-mails and our discussions with managers, RIK gas imbalance personnel have received training in oil and gas revenue accounting but managers noted that personnel need additional training seven different courses, especially a course on industry standards on gas imbalance calculations and a communication skills course for dealing with in external customers. Our review of employee training records showed, however, that RIK gas imbalance personnel received training in neither of these two courses and only about half of all the training identified. According to the MMS RIK gas imbalance manager, the training employees have received is sufficient given their workload dealing with gas imbalance improvement actions and current duties. According to GAO’s Standards for Internal Control in the Federal Government, operational success is dependent on assigning the right personnel for the job and providing them with adequate training and tools. Similarly, according to Interior’s Internal Controls Handbook, in order to eliminate or reduce financial reporting risks, an organization should have, among other things, sufficient resources to perform the various job functions and should provide staff with technical and ethical training. appropriate number of employees needed to perform an organization’s work. MMS has not conducted such an analysis. As of March 2009, MMS was in the process of entering into a 6-month contract for an assessment of the organization of RIK invoicing and imbalance work, procedures, and processes. Included in the tasks to be performed under this contract is determining whether: (1) staffing levels are sufficient to meet current and anticipated future workloads and (2) staffing levels, skill sets, education, and experience are comparable to industry. As of June 2009, this contracting effort was still ongoing results from that effort were not available to include in our review. Lastly, at our suggestion during the course of our review, MMS is reviewing the possibility of enrolling some of its employees in training classes offered by oil and gas companies to their employees participating in the RIK gas program. In offering this suggestion, we pointed out that MMS employees could (1) gain first hand knowledge into how industry does its gas imbalance work, (2) make strategic contact with industry gas imbalance employee counterparts, and (3) gain some insight into industry training requirements. With regard to the latter, whereas COPAS requires its oil and gas accounting members to receive 10 hours of continuing education annually, MMS officials told us that its RIK gas revenue specialists are not required to meet any annual education requirements. As of June 2009, MMS had not decided whether to use this industry training. GAO, A Model of Strategic Human Capital Management, GAO-02-373SP (Washington, D.C.: Mar. 15, 2002). To improve the Minerals Management Service’s oversight of the RIK gas program and help ensure that the nation receives its fair share of RIK gas, we recommend that the Secretary of the Interior direct the Minerals Management Service to take the following seven actions: Complete establishing policies and procedures to ensure outstanding imbalances are valued appropriately and tha interest is charged. t the correct amount of Monitor daily gas imbalances to determine whether the allocation practices of gas operators are extent that this is occurring, identify and propose specific legislative changes that MMS believes are needed to require operators to deliver MMS’s royalty percentage on a daily basis. resulting in lost revenues to MMS. To the Audit the operators and imbalance data of a sample of leases taken in and, on the basis of the audit findings, establish a risk-based aud program for RIK properties. Promulgate RIK program regulations that protect the federal govern erators to submit interests. At a minimum, regulations should require op imbalance statements in a standardized format within 60 days following the month of RIK production. They should also require the use of gas allocation methods MMS deems will ensure a fair return to the government. Establish procedures, with reasonable deadlines, for resolvin collecting all RIK gas imbalances in a timely manner. Determine the information system enhancements necessary to effectivel identify and resolve gas imbalances and put into practice such a system. Conduct an RIK staffing and training needs anal corresponding staffing and training program for MMS staff. We provided a draft of this report to Interior for review and commen Interior generally agreed with our findings and concurred with four of ou r recommendations, partially concurred with two of our recommendations, and did not concur with one recommendation. t. Specifically, Interior concurred with our recommendations to: (1) complete establishing policies and procedures to ensure outstanding imbalances are valued appropriately and that the correct amount of interest is charged; (2) establish procedures, with reasonable deadlines, for resolving and collecting all RIK gas imbalances in a timely manner; (3) determine the information system enhancements necessary to effectively identify and resolve gas imbalances and put into practice such a system; and (4) conduct an RIK staffing and training needs analysis and put into place a corresponding staffing and training program for MMS staff. Interior partially concurred with our recommendation to audit operator and imbalance data of a sample of leases taken in kind and, on the basis of these findings, establish a risk-based auditing program. Interior stated that it would conduct an analysis of the benefits of conducting risk-based audits on a step, we continue to believe it is important to conduct audits of a sample of leases taken in kind. Although MMS’s verification processes may uncover some discrepancies between their entitled percentage and the volumes delivered, we have shown that in some instances MMS’s verification processes are not sufficient to uncover discrepancies. Furthe sample of leases. While we believe this is an important first r, industry and other RIK programs audit to ensure they receive the royalties. Interior also partially concurred with our recommendation to promulgat RIK program regulations that protect the federal government’s interest and, at a minimum, require operators to submit imbalance statements in a standardized format, within 60 days following the month of production, and require the use of gas allocation methods MMS deems will ensure a fair return to the government. Interior stated that the drafting of regulations addressing the operator’s obligation to deliver, report, and account for production and to resolve or mitigate production imbalances is well underway, which we commend. MMS stated that it will evaluate whether it should require operators to submit imbalance statements in a standardized format. We continue to believe that requiring operators to submit standardized imbalance statements would allow MMS’s gas imbalance analysts to devote more time to reconciling imbalances and would reduce the chance of calculation errors. MMS also stated that it will evaluate whether to require operators to use gas allocation methods. W we believe this is a positive first step, we continue to believe that the use of allocation methods will minimize the negative impact of imbalances on revenues by ensuring MMS receives the gas volumes it is owed. Interior did not concur with our recommendation to monitor daily gas rators imbalances to determine whether the allocation practices of gas opeare resulting in lost revenue to MMS. Interior’s letter states that the agency believes the operator’s obligation to deliver MMS’s royalty percentage should be the same whether royalties are paid in kind or in value. However, the in-kind program is different from the in-value program in ly that MMS has an obligation to provide RIK gas to purchasers on a dai basis. Therefore, in order to provide reasonable assurance that the government is receiving its fair volumes of gas and in turn meeting its obligations to RIK gas purchasers, receipt of RIK gas volumes from operators should be monitored on a daily basis. While we acknowledge our report that the law authorizes MMS to enforce operator obligations only on a mo may provide less to MMS on days when gas prices are relatively high, and make up that difference by providing additional gas when prices ar relatively low. Further, we found that industry monitors imbalances on a daily basis to ensure they do not continue to believe that MMS should begin to monitor imbalances daily a changes requiring operators to deliver MMS the royalty percentage on a daily basis. nthly basis, this leaves open the possibility that operators lose revenue. For these reasons, we nd, to the extent that lost revenues are occurring, propose legislative Interior’s full letter commenting on the draft report is reprinted in appendix III. In addition, Interior made technical comments, which have addressed as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of the Interior, and other interested parties. The report will be available at no charge on the GAO Web Site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512- 3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO sta ff who made major contributions to this report are listed in appendix IV. We were asked to determine the extent to which MMS ensures the accurate and timely identification and collection of royalty-in-kind (RIK) gas imbalances. To address our objective, we reviewed various reports by the Department of the Interior (Interior) and Interior’s Minerals Management Service (MMS) on the history and current status of imbalances associated with the RIK gas program including: (1) a 2002 internal MMS assessment of RIK gas imbalances; (2) a 2002 report by Interior’s Office of Inspector General, which discussed, in part, MMS’s vulnerability to underreporting of gas receipts due to RIK gas imbalances; (3) MMS’s monthly action plan on RIK imbalances and open receivables, first prepared in August 2007; and (4) MMS’s periodic cumulative imbalance, cash-out, and keepwhole summary statements. We also reviewed various reports prepared on the direction and overall performance of the RIK program, including (1) an examination of a 2001 MMS report which outlined MMS’s future plans for the RIK program; (2) a 2003 MMS contractor report that assessed the RIK program; (3) a 2007 report by the Subcommittee on Royalty Management, part of the Royalty Policy Committee, which reviewed the operations of the RIK program; (4) a 2008 MMS internal review report on RIK processes; and (5) a 2008 interim report by the Royalty in Kind Subcommittee, also part of the Royalty Policy Committee, which examined various issues, including imbalances, associated with the RIK program. We also examined various reports prepared by other governmental entities—including the Alberta, Canada government and the Texas state government—regarding their RIK programs. We further discussed the issue of RIK imbalances with officials from MMS, gas production companies, gas operators, industry experts, and pipelines. To examine MMS’s management of RIK gas imbalances, we received a detailed walk-through of MMS’s processes for reconciling RIK gas imbalances. We reviewed a variety of MMS documentation including (1) MMS procedures manuals, (2) correspondence between MMS and Interior’s Office of the Solicitor on RIK legal requirements, and (3) MMS’s guidance letters to operators of RIK gas leases. We also reviewed federal and Interior’s internal control and management standards and policies, including: (1) GAO’s Standards for Internal Control in the Federal Government, (2) Interior’s Internal Controls Handbook, (3) MMS’s Training Needs Assessment Process, (4) the Office of Personnel Management’s Training Policy and Training Needs Assessment Handbooks, (5) Office of Management and Budget’s Circular A- 130 on management of federal information resources, (6) Office of Management and Budget’s Circular A-123 on management’s responsibility for internal control in federal agencies, and (7) the Information Technology Resources Board’s 1999 lessons-learned report on acquiring commercial-off- the-shelf software. Further, we reviewed various documents issued by the Council of Petroleum Accountants Societies such as its 1993 report on oil and gas operator and producer roles and responsibilities and its 2001 report on producer gas imbalances, and information generated by the North American Energy Standards Board. In addition to reviewing documentation, we also conducted interviews with MMS officials; gas production companies; purchasers of MMS’s RIK gas; the North American Energy Standards Board; pipeline companies; and industry experts. Lastly, we reviewed legislation pertinent to MMS’s management of the RIK gas program and RIK gas imbalances. This included the Mineral Leasing Act of 1920, as amended; the Outer Continental Shelf Lands Act of 1953, as amended; and the Debt Collection Improvement Act of 1996, as amended. Appendix II contains information on the scope and methodology we used to analyze the relationship between gas prices and the daily percentage of gas production allocated to MMS and the effect of this relationship on federal revenue. We conducted this performance audit from June 2008 to August 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To ensure that the government obtains a fair value for the RIK gas it sells, the Department of the Interior’s Minerals Management Service (MMS) must ensure that it receives the volumes of gas to which it is entitled. The difference between the RIK gas owed––MMS’s entitled percentage of gas–– and the percentage of gas it actually receives is referred to as an “imbalance.” As discussed in the body of this report, MMS attempts to reconcile gas imbalances monthly. The nature of gas production causes some daily variation in volume. For example, companies must estimate the volume of gas they will produce on any given day and determine allocations based on these estimates. If actual allocation volumes differ from the estimated volumes, MMS may receive either an under-delivery of gas or an over-delivery of gas. Daily imbalances may be resolved through a subsequent day’s under- or over- delivery, resulting in further variation in volume; however, MMS risks losing revenue if that variation is associated with a variance in price. Specifically, if operators allocate less than the royalty percentage of gas to MMS on days when the spot price is high and more than the royalty percentage of gas on days when the spot price is low, they could still meet the royalty percentage across the month. However, if this occurs, MMS may lose revenue because it may miss opportunities to sell the gas at the higher price, even if no long-term imbalances accumulate. This appendix describes our analysis of the relationship between prices and the percentage of gas allocated to MMS, and how it affects the revenue that MMS receives. Specifically, it (1) explains, in mathematical terms, the potential for lost revenue if the operators allocate less than the royalty percentages of gas when the spot price is high; (2) describes the data that we used to empirically examine the daily variation in percentage of gas allocated to MMS; (3) describes the methodology and results of our analysis of daily variation in percentages of gas allocated to MMS; (4) describes the methodology and results of our analysis of the relationship between the daily variation in percentage of gas allocated to MMS and gas prices; and (5) describes the methodology and results of our analysis of the potential amounts of lost revenue. To explain, in mathematical terms, the potential for lost revenue if operators allocate less than the royalty percentages of gas when the spot price is high, we examined how this relationship affects the expected, or average, return for an MMS lease. The royalties that MMS are owed can be expressed as follows: royalty volume = total production volume x royalty percentage On a daily basis, the royalty volume can be expressed by the product of the daily gas production and the daily volume of gas allocated to MMS: (1) RV = Vol x A where RV is the royalty volume at time t, Vol is the volume of gas allocated to MMS at time t, and A is the royalty percentage at time t. In equation (1), and the equations that follow, t stands for any given day. The monetary value of the gas allocated to MMS can then be expressed by multiplying the royalty volume and the gas spot price at the time of delivery. (2) Rev = P x RV Substituting equation (1) into equation (2) results in the following formula: (3) Rev = P x Vol x A where the revenue MMS receives is the product of the price, volume, and royalty percentage at that time. To determine how different levels of covariance affect the average revenue, we determined the expectation, as shown in equation (4). (4) E(Rev )= E(P x Vol x A) Because the focus of our analysis was the effect of daily variances in gas allocated to MMS that was associated with variances in the spot price, we assumed that the volume at the time of delivery is independent of the product of price and the royalty percentage, and that the volume is constant over the period. (5) E(Rev ) = E(Vol) x (E(P)E(A)+Cov(P ,A)) If higher prices tend to correspond with higher percentages of gas allocated to MMS, then the covariance term Cov(P ,A) will be positive, and the expected revenue will be higher. However, if high prices correspond with lower percentage of gas allocated to MMS, then the evenue will fall. covariance term will be negative, and the expected r The covariance describes both the relationship between the variables and the absolute variability of each. A substitute for the covariance would be to introduce the correlation coefficient. The correlation coefficient captures only the relationship between the variables and takes a value between negative 1 and 1. A correlation coefficient of zero would indicate that there was no relationship between the variables. A correlation coefficient close to 1 would indicate a strong positive relationship, while a correlation coefficient close to negative 1 would indicate a strong negative relationship. Using the correlation coefficient, an alternate expression for the equation (5) would be the following: (6) E(Rev ) = E(Vol) x (E(P)E(A)+Corr(P,A) x SD(P) x SD(A)) From equation (6), it is apparent that, all things being equal, the more the price and percentage of gas allocated to MMS are negatively correlated, the greater the loss in revenue. However, the size of the effect is scaled by the absolute variability in each, SD(P ) and SD(A). ) x (E(V )E(A )+ Corr(V ,A ) x SD(V ) x SD(A )). Therefore, if high volumes correspond to lower royalty percentages, then the covariance term will be negative and the expected revenue will fall. the supply of natural gas that is last to be taken and first to be curtailed and absorbs production variations. The spot price varies daily. Delivery data: We collected delivery data from MMS’s Entegrate database. MMS downloads final delivery volumes from the electronic bulletin boards for regulated pipelines, or it receives delivery volumes from either operator or purchaser pipeline statements, or both. MMS enters the actual volumes into the Entegrate database monthly. Volume data: We collected volume data from the Offshore Energy and Minerals Management division of MMS, which collects hardcopy pipeline statements. MMS provided copies of the pipeline statements, which a contractor keypunched. We checked the keypunched data, and found no errors. We then matched the daily production volume data to the daily price and delivery data for use in our analyses. Because pipeline statements do not report production volume at the lease level, we could not analyze allocation percentages at the lease level. For all three sources, we collected data at the level of the measurement point—the metered point at which gas is measured. A measurement point may combine the gas flowing from numerous leases. In addition, we excluded from our sample measurement points whose leases had differing royalty percentages. For cases in which the measurement points had differing royalty percentages, it would not have been possible to calculate whether MMS was allocated its share of gas. For example, in figure 1, measurement point one has three leases flowing into it, all with the same royalty percentage of 16.67 percent. Therefore, regardless of whether each lease has different production volumes, MMS can calculate that it is owed 16.67 percent of the total production of 10,000 MMBtu. However, measurement point two has three leases flowing into it, with two leases owing a royalty percentage of 16.67 percent and one lease owing a royalty percentage of 12.5 percent. Because each lease will likely have a different volume of production and MMS will only have the total production volume available from third party data, it is unable to determine its entitled volume of RIK gas. Because of this limitation, we restricted our analysis to a random sample of those measurement points that had leases with a common royalty percentage. Then, for each of the randomly selected 32 measurement points, we obtained 6 months of daily observations––October 2007 through March 2008––resulting in 5,856 daily observations. MMS officials suggested that we use this 6 month time period in order to avoid hurricane season, which typically occurs during the summer months, but gas prices during these months may differ from those included in our time period. However, 677 days had no production, and data for 366 days was missing values for allocation volumes to MMS. Because we could not produce a percentage of gas allocated to MMS in those cases, our ultimate sample contained 4,829 daily observations with values for volume of gas allocated to MMS and the differential between spot and base price and 31 measurement points. To determine the extent to which the daily percentage of gas allocated to MMS deviated from its royalty percentage of gas for the measurement points in our sample, we calculated the daily percentage of gas allocated to MMS by dividing the volume of gas allocated to MMS from that measurement point on a given day by the volume of gas produced at the measurement point. We then counted the days that the percentage of gas allocated to MMS differed from the prescribed amount of 16.67 percent by a substantial amount, which we defined as more than 25 percentage points. Our analysis of daily data found variation in the percentage of gas allocated to MMS; however, on the majority of days, the allocation did not substantially differ from MMS’s royalty allocation, as shown in Figure 2. Specifically, 3,573 of the 4,829 days––about 74 percent––had an allocation that was between 75 and 125 percent of the entitled royalty percentage of one-sixth or 0.167. But on many days, the royalty percentage of gas allocated to MMS was much less or much greater. For example, on 883 days––about 18 percent of the total, shown as the sum of the bottom three bars on figure 2––the royalty percentage of gas allocated to MMS was less than 75 percent of the prescribed amount. On the other hand, on 373 days—about 8 percent of the total, shown in the top two bars—more than 125 percent of the royalty percentage of gas allocated to MMS. On average MMS received 15.9 percent. While there may be inherent daily variation in the percentage of gas allocated to MMS, the loss of revenue is determined by the extent to which that variation is associated with price. To analyze whether the percentage of gas allocated to MMS varies with price, we used the daily data on the differential between the base and spot price for our sample of measurement points and measured the correlation between these two variables for each measurement point. We found a small negative average and median correlation between higher prices and a lower percentage of gas allocated to MMS. Specifically, the average correlation was negative 0.014, while the median was negative 0.038. Although the average was slightly negative, we found that correlations had a wide range. Figure 3 presents the frequency of the correlations of the differential between spot price and base price and percentage of gas allocated to MMS for the 31 measurement points in our sample. The maximum, or the most positive, correlation in our sample was 0.645. The minimum, or most negative, was negative 0.560. As figure 3 shows, the vast majority of measurement points had a correlation between negative 0.25 and 0.25. The potential amount of lost revenue depends on the size and variability of the percentage of gas allocated to MMS, gas produced, and the spot-minus- base differential. To estimate the revenue loss that would be associated with a certain correlation, we used an hypothetical measurement point that had the same average characteristics as the ones in our sample. We then generated data that had the same average mean and standard deviation as our hypothetical example, but different correlations between the variables. We computed the average revenue for that hypothetical measurement point during a 6-month time period. We used a wide range of correlations, including the median value found in the above example. Finally, we compared the revenue to a baseline of zero correlation. We estimate that the median correlation we found would result in a revenue loss of about $1,400 for each measurement point during a 6-month time period, as shown in table 1. Each row of the table is the result of one million simulations of data with the given correlation and the mean and average standard deviation of the measurement points in our sample. However, the common royalty percentage in the leases at the measurement points we sampled from––which accounts for about 85 percent of measurement points in the RIK gas program––would make it easier to detect the under-delivering when prices were high. It follows that this may introduce a bias into our distribution of correlations. Specifically operators at those measurement points may be less likely to link gas allocations to price because they fear detection, therefore we would be less likely to find negative correlations. At measurement points with a mix of different royalty percentages––about 15 percent of measurement points in the RIK gas program––the potential for this practice may increase, and could result in more negative correlations. As table 1 shows, a more negative correlation would result in higher revenue losses for these measurement points. For example, a correlation of negative 0.5 would result in a loss of about $21,000 during a 6-month time period for that measurement point. In addition to the individual named above, key contributors to this report included Karla Springer, Assistant Director; Robert Baney; Benjamin Bolitzer; Melinda Cordero; Cindy Gilbert; Alison O’Neill; Dae Park; Justin Reed; Holly Sasso; Ben Shouse; and Barbara Timmerman. | Companies that develop and produce oil and gas from federal lands and waters are required to report their production volumes and other data to the Department of the Interior's (Interior) Minerals Management Service (MMS) and to pay royalties either in value (cash) or in kind (oil or gas). In fiscal year 2008, MMS estimated that it had collected more than $2.4 billion in royalty-in-kind (RIK) gas. It is important that MMS ensure that it receives the RIK gas to which it is entitled. The difference between the RIK gas owed--MMS's entitled percentage of gas--and the percentage it actually receives is referred to as a "gas imbalance." GAO was asked to evaluate the extent to which MMS can provide reasonable assurance that it is accurately identifying and collecting RIK gas imbalances in a timely fashion. GAO analyzed MMS documents and data, documentation of industry standards, and interviewed MMS and industry officials. MMSisforgoing revenues for gas royalties owed to the federal government because it does not provide reasonable assurance that it accurately and promptly identifies and collects on RIK gas imbalances. GAO found that MMS is forgoing revenues for the following reasons: (1) MMS estimates that it is owed a net of $21 million for past imbalances but it lacks the information necessary to calculate the full amount of revenues due. MMS does not have sufficient data to determine whether it has received its full percentage of RIK gas. Also, MMS's estimate does not include interest on some unpaid imbalances because MMS has not determined when interest begins to accrue on imbalances, as required by law. Further, MMS monitors imbalances on a monthly, rather than daily basis, which leaves open the possibility that some companies owing RIK gas could provide less gas to MMS when gas prices are relatively high, making up the difference by providing more gas when prices are relatively low, something that could cost MMS additional revenues because it could miss the opportunity to sell gas on the days when prices are high. (2) MMS does not audit gas companies' production and allocation data, therefore it cannot verify that it is receiving its entitled percentage of gas. MMS does not audit, in part, because it believes that its verification procedures are sufficient. However, other governments and gas companies routinely audit their imbalances and uncover inaccuracies that would result in lost revenues if left unchecked. (3) MMS lacks adequate policies and procedures for accurately and promptly identifying and collecting gas imbalances. For instance, the agency does not know how companies allocate gas among all parties having a claim on a share of gas produced; this may affect whether MMS receives its percentage of gas on a daily basis. In addition, MMS does not compel companies to document production and deliveries in a consistent format and meet deadlines. As a result, MMS analysts spend time gathering and reformatting data instead of identifying and collecting on imbalances. MMS also allows companies to negotiate imbalances indefinitely. For example, MMS has been negotiating with a company for more than 2 years regarding a $900,000 imbalance. (4) MMS's information system does not provide accurate and timely data on RIK gas imbalances. For instance, MMS's information system cannot calculate cash settlements for imbalances or compare various types of data that companies submit. Consequently, MMS processes more than half of its gas imbalance data manually. (5) MMS has been operating for many years without sufficient staff to reconcile gas imbalances, and the staff it has is not sufficiently trained. For instance, according to RIK management, MMS does not have sufficient staff to dedicate someone to fully review RIK gas analysts' work on imbalances, even though mistakes in that work often occur. MMS recently hired one new gas imbalance analyst but has not formally assessed staffing needs. In addition, RIK gas imbalance staff lack, among other things, training on industry standards on gas imbalance calculations. |
Before enactment of the Employee Retirement Income Security Act of 1974 (ERISA), few rules governed the funding of defined benefit pension plans, and participants had no guarantees that they would receive their promised benefits. Among other things, ERISA created the PBGC to protect the benefits of plan participants in the event that plan sponsors could not meet the benefit obligations under their plans. ERISA also established rules for funding defined benefit pension plans, instituted pension insurance premiums, promulgated certain fiduciary rules, and developed annual reporting requirements. When a plan is terminated with insufficient assets to pay its guaranteed benefits, PBGC takes over the plan and assumes responsibility for paying benefits to participants. According to PBGC’s 2004 annual report, PBGC provides insurance protection for over 29,000 single-employer pension plans, which cover 34.6 million workers, retirees, and their beneficiaries. PBGC receives no direct federal tax dollars to support the single-employer pension insurance program. Instead, the program receives the assets of terminated underfunded plans and any of the sponsor’s assets that PBGC recovers during bankruptcy proceedings. PBGC finances the unfunded liabilities of terminated plans with premiums paid by plan sponsors and income earned from the investment of program assets. Premiums have two components: a per participant charge paid by all sponsors (currently $19 per participant), and a variable-rate premium that some underfunded plans pay based on the level of unfunded benefits. The single-employer program has had an accumulated deficit—that is, program assets have been less than the present value of benefits and other obligations—for much of its existence. (See fig. 2.) In fiscal year 1996, the program had its first accumulated surplus, and by fiscal year 2000, the accumulated surplus had increased to about $10 billion, in 2002 dollars. However, the program’s finances reversed direction in 2001, and at the end of fiscal year 2002, its accumulated deficit was about $3.6 billion. In fiscal year 2004, the single-employer program incurred a net loss of $12.1 billion, and its accumulated deficit increased to $23.3 billion, up from $11.2 billion a year earlier. Furthermore, PBGC estimated that total underfunding in single-employer plans exceeded $450 billion, as of the end of fiscal year 2004. In defined benefit plans, formulas set by the employer determine employee benefits. DB plan formulas vary widely, but benefits are frequently based on participant earnings and years of service, and traditionally paid upon retirement as a lifetime annuity, or periodic payments until death. Because DB plans promise to make payments in the future, and because tax- qualified DB plans must be funded, employers must use present value calculations to estimate the current value of promised benefits. The calculations require making assumptions about factors that affect the amount and timing of benefit payments, such as an employee’s retirement age and expected mortality, and about the expected return on plan assets, expressed in the form of an interest rate. The present value of accrued benefits calculated using mandated assumptions is known as a plan’s current liability. Current liability provides an estimate of the amount of assets a plan needs today to pay for accrued benefits. ERISA and the Internal Revenue Code (IRC) prescribe rules regarding the assumptions that sponsors must use to measure plan liabilities and assets. While different assumptions will change a plan’s reported assets and liabilities, sponsors eventually must pay the amount of benefits promised; if the assumptions used to compute current liability differ from the plan’s actual experience, current liability will differ from the amount of assets actually needed to pay benefits. Funding rules generally presume that a pension plan and its sponsor are ongoing entities, and plans do not necessarily have to maintain an asset level equal to current liabilities every year. However, the funding rules include certain mechanisms that are intended to keep plans from becoming too underfunded. One such mechanism is the additional funding charge (AFC), which applies to plans with more than 100 participants. The AFC requires plan sponsors to make additional contributions to plans that fall below a prescribed funding level. With some exceptions, plans with reported asset values below 90 percent of current liabilities are affected by the AFC rules. A combination of recent events, long-term structural problems, and weaknesses in the legal framework governing the DB system has left PBGC with a significant long-term deficit and many large plans badly underfunded. Lower interest rates and equity prices since 2000 have combined to significantly increase pension underfunding through an increase in the present value of pension liabilities, and decreases in the value of pension plan assets. Meanwhile, intense cost competition as a result of globalization and deregulation has led to bankruptcies of plan sponsors in key industries like steel and airlines, and is exposing PBGC to the risk of significant future losses in these and other industries. This competitive restructuring has occurred simultaneously with a long term decline in defined benefit plan participation that threatens PBGC’s revenue base. In addition, the basic legal framework governing pension insurance and plan funding has failed to safeguard the benefit security of American workers and retirees and the PBGC’s financial condition. Too many companies are making pension promises that they are not required to deliver on, in part because of perverse incentives and “put options” created under the current pension insurance system. PBGC’s current premium structure does not properly reflect the risks to its insurance program and facilitates moral hazard by plan sponsors. Further, current pension funding rules have not provided sufficient incentives, transparency, and accountability mechanisms for plan sponsors to properly fund their benefit obligations and deliver on their promises. As a result, bankrupt plan sponsors, acting rationally and within the rules, have transferred the obligations of their large and significantly underfunded plans to PBGC. These weaknesses in the legal framework contribute to and are exacerbated by a lack of transparent information that makes it difficult for interested stakeholders to understand the true financial condition of and risk associated with selected pension plans. Over the last 5 years, many large pension plans have been adversely affected by simultaneous declines in broad equity indexes and long-term interest rates, as well as by the financial difficulties of their plan sponsors. Poor investment returns from stock market declines affected the asset values of pension plans to the extent that plans invested in stocks. According to the ERISA Industry Committee, assets in private sector defined benefit plans totaled $2.056 trillion at the end of 1999, dropped to $1.531 trillion at the end of 2002, and climbed back to $1.8 trillion by the end of 2004. Lower equity values since the end of 1999 have been particularly problematic because interest rates have also declined and thus increased the present value of plan liabilities. Some sponsors of large pension plans that were terminated were not in sufficiently strong financial condition to meet their pension funding requirements because of weaknesses in their primary business activities. Bankruptcies and pension plan terminations increased around the U.S. economic recession of 2001 and around prior recessions. These conditions played a part in increasing the unfunded liabilities of plans terminated by bankrupt sponsors since 2000. For example, according to the filing of its annual regulatory report for pension plans, Bethlehem Steel’s plan went from 86 percent funded in 1992 to 97 percent funded in 1999. From 1999 to its plan termination in December 2002, plan funding fell to less than 50 percent as assets decreased and liabilities increased and sponsor contributions were not sufficient to offset the changes. Long-term trends in some sectors of the economy and in defined benefit pension coverage are threatening both PBGC’s future solvency and the economic security in retirement of workers and retirees. PBGC’s risk of inheriting underfunded pensions largely stems from the fact that more than half of the pension participants it insures are in the manufacturing and airline sectors, which have been exposed to lower cost competition because of several factors including globalization and deregulation. A potentially exacerbating risk to PBGC is the cumulative effect of bankruptcy in these industries: if a critical mass of firms go bankrupt and terminate their underfunded pension plans, their competitors may also declare bankruptcy to similarly avoid the cost of funding their plans. PBGC also faces the possibility of long-term revenue declines from demographic changes in the population of defined benefit plan participants and a shrinking number of DB plans. Over the long term, an aging population of defined benefit plan participants threatens to reduce PBGC’s ability to raise premium revenues as participants die and are not replaced by enough new participants. The percentage of participants who are active workers has declined from 78 percent in 1980 to just under 50 percent in 2002. Furthermore, PBGC cannot effectively diversify its risk from the terminations of plans in declining economic sectors because companies in other growing industries have generally not sponsored new defined benefit plans. As plan sponsors in weak industries go bankrupt and terminate their pension plans, PBGC not only faces immediate changes in its financial position from taking over underfunded plans, but also faces losses of future revenues from these terminated plans. A related factor eroding PBGC’s premium base is the growth of lump-sum pension distributions. More and more plan participants are exiting the defined benefit system by taking lump-sum distributions from their plans. After a lump-sum distribution is paid, the participant is out of the defined benefit system and the plan sponsor no longer has to contribute to the pension insurance system on the participant’s behalf. In addition, lump- sum distributions to participants in underfunded plans can create the effect of a “run on the bank” and worsen a plan’s underfunding. In such cases, the plan may terminate without enough assets to pay full benefits to other participants and PBGC may incur losses. The increasing prevalence of lump-sum distributions in defined benefit plans and the growth of defined contribution plans also raise significant questions about whether many Americans will enjoy an economically secure retirement. Many Americans are at risk of outliving their retirement assets as life expectancies, health care, and long-term care costs continue to increase. Existing laws and regulations governing pension funding and premiums have contributed to PBGC’s financial difficulties and exposed PBGC to greater risks from the companies whose pension plans it insures. PBGC’s current premium structure does not properly reflect the risks to its insurance program and facilitates moral hazard by plan sponsors. Further, the pension funding rules, under ERISA and the IRC, have not ensured that plans have the means to meet their benefit obligations in the event that plan sponsors run into financial distress. First, the current rules likely allowed plans to appear better funded than they actually were, in both good years and bad years. And even these reported funding levels indicated significant levels of underfunding in our study of the 100 largest DB plans. Second, plan sponsors often substituted “account credits” for cash contributions, even as the market value of plan assets may have been in decline. And third, the AFC, the primary mechanism for improving the financial condition of poorly funded plans, was ineffective in doing so. These weaknesses contribute to and are exacerbated by a lack of transparent information that makes it difficult for plan participants, investors, and others to have a clear understanding of their plan’s financial condition. As a result, financially weak benefit plan sponsors, acting rationally and within the current law, have been able to avoid large contributions to underfunded plans prior to bankruptcy and plan termination, thus adding to PBGC’s current deficit. PBGC’s current premium structure does not properly reflect risks to the insurance program. The current premium structure relies heavily on flat- rate premiums, which, since they are unrelated to risk, result in large cost shifting from financially troubled companies with underfunded plans to healthy companies with well-funded plans. PBGC also charges plans a variable-rate premium based on the plan’s level of underfunding. However, these premiums do not consider other relevant risk factors, such as the economic strength of the sponsor, plan asset investment strategies, the plan’s benefit structure, or the plan’s demographic profile. PBGC is currently operated somewhat more on a social insurance model, since it must cover all eligible plans regardless of their financial condition or the risks they pose to the solvency of the insurance program. In addition to facing firm-specific risk that an individual underfunded plan may terminate, PBGC faces market risk that a poor economy may lead to widespread underfunded terminations during the same period, potentially causing very large losses for PBGC. Similarly, PBGC may face risk from insuring plans concentrated in vulnerable industries affected by certain macroeconomic forces such as deregulation and globalization that have played a role in multiple bankruptcies over a short time period, as has happened recently in the airline and steel industries. One study estimates that the overall premiums collected by PBGC amount to about 50 percent of what a private insurer would charge because its premiums do not adequately account for these market risks. Others note that it would be hard to determine the market-rate premium for insuring private pension plans because private insurers would probably refuse to insure poorly funded plans sponsored by weak companies. Current pension funding and insurance laws create incentives for financially troubled firms to use PBGC in ways that Congress likely did not intend when it formed the agency in 1974. At that time, PBGC was established to pay the pension benefits of participants, subject to certain limits, in the event that an employer could not. However, since that time, some firms with underfunded pension plans may have come to view PBGC coverage as a fallback, or “put option,” for financial assistance. The very presence of PBGC insurance may create certain perverse incentives that represent what economists call moral hazard—where struggling plan sponsors may place other financial priorities above funding up their pension plans because they know PBGC will pay guaranteed benefits. Firms may even have an incentive to seek Chapter 11 bankruptcy in order to escape their pension obligations. As a result, once a plan sponsor with an underfunded pension plan experiences financial difficulty, these moral hazard incentives may exacerbate the funding shortfall for PBGC. This moral hazard effect has the potential to escalate, with the initial bankruptcy of firms with underfunded plans creating a vicious cycle of bankruptcies and terminations. Firms with onerous pension obligations and strained finances could see PBGC as a means of shedding these liabilities, thereby providing these companies with a competitive advantage over other firms that deliver on their pension commitments. This would also potentially subject PBGC to a series of terminations of underfunded plans in the same industry, as we have already seen with the steel and airlines industries in the past 20 years. Moral hazard effects are likely amplified by current pension funding and pension accounting rules that may also encourage plans to invest in riskier assets to benefit from higher expected long-term rates of return. In determining funding requirements, a higher expected rate of return on pension assets means that the plan needs to hold fewer assets in order to meet its future benefit obligations. And under current accounting rules, the greater the expected rate of return on plan assets, the greater the plan sponsor’s operating earnings and net income. However, with higher expected rates of return comes greater risk of investment volatility, which is not reflected in the pension insurance program’s premium structure. Investments in riskier assets with higher expected rates of return may allow financially weak plan sponsors and their plan participants to benefit from the upside of large positive returns on pension plan assets without being truly exposed to the risk of losses. The benefits of plan participants are guaranteed by PBGC, and weak plan sponsors that enter bankruptcy can often have their plans taken over by PBGC. The pension funding rules, under ERISA and the IRC, have not provided sufficient incentives for plan sponsors to properly fund their benefit obligations. The funding rules generally presume that pension plans and their sponsors are ongoing entities and therefore allow for a certain extent of plan underfunding that can be made up over time. However, the measures of plan funding used to determine contribution requirements can significantly overstate the true financial condition of a plan. And even these reported funding levels indicated significant levels of underfunding in our study of the 100 largest DB plans. Furthermore, when plan sponsors make contributions to their plans, they can use account credits, rather than cash, even in cases when plans are underfunded. The funding rules include certain mechanisms—primarily, the AFC—that are intended to prevent plans from becoming too underfunded. However, our analysis shows that for several reasons, the AFC proved ineffective in restoring financial health to poorly funded plans. Rules May Allow Plans to Overstate Their Current Funding Levels Current funding rules may allow plans to overstate their current funding levels to plan participants and the public. Because many plans in our sample chose legally allowable actuarial assumptions and asset valuation methods that may have altered their reported liabilities and assets relative to market levels, it is possible that funding over our sample period was actually worse than reported. Although as a group, funding levels among the 100 largest plans were reasonably stable and strong from 1996 to 2000, by 2002, more than half of the largest plans were underfunded (see fig. 3). On average, each year 39 of these plans were less than 100 percent funded, 10 had assets below 90 percent of their current liabilities, and 3 plans were less than 80 percent funded. In 2002 there were 23 plans less than 90 percent funded. Reported funding levels may have been overstated for a number of reasons. These include the use of above-market interest rates, which leads to an understatement of the cost of settling benefit obligations through the purchase of group annuity contracts. Also, actuarial asset values may have differed by as much as 20 percent from current market value of plan assets. The funding rules allow for smoothing out year-to-year fluctuations in asset and liability values so that plan sponsors are gradually, and not suddenly, affected by significant changes in interest rates and the values of their assets. When current interest rates decline, the use of a 4-year weighted average interest rate lags behind, and thus measurements of the present value of plan liabilities do not accurately reflect the cost of settling a plan’s benefit obligations. The terminations of the Bethlehem Steel and LTV Steel pension plans in 2002 (two of the largest plan terminations, to date) illustrate the potential discrepancies between reported and actual funding. In 2002, the Bethlehem Steel Corporation reported that its plan was 85.2 percent funded on a current liability basis, yet the plan terminated later that year with assets of less than half of the value of promised benefits. In 2001, LTV Steel reported that its plan for hourly employees was 80 percent funded, yet when the plan terminated in March 2002, it was only 52 percent funded. From these terminations PBGC’s single-employer program suffered losses of $3.7 billion and $1.6 billion, respectively. Most Sponsors Most Years Made No Cash Contributions to Plans but Satisfied Funding Requirements through Use of Accounting Credits The amount of contributions required under IRC minimum funding rules is generally the amount needed to fund benefits earned during that year plus that year’s portion of other liabilities that are amortized over a period of years. This minimum contribution requirement may be met by the plan sponsor putting cash into the plan or by applying earned funding credits. These funding credits are not measured at their market value and are credited with interest each year, according to the plan’s long-term expected rate of return on assets. When the market value of a plan’s assets declines, the value of funding credits may be significantly overstated. For the 1995 to 2002 period, the sponsors of the 100 largest plans each year on average made relatively small cash contributions to their plans (see fig. 4). Annual cash contributions for the 100 largest plans averaged approximately $97 million on plans averaging $5.3 billion in current liabilities (in 2002 dollars). This average contribution level masks a large difference in contributions between 1995 and 2001, during which period annual contributions averaged $62 million (in 2002 dollars), and in 2002, when contributions increased significantly to $395 million per plan. Further, in 6 of the 8 years in our sample, a majority of the largest plans made no cash contribution to their plan. On average each year, 62.5 plans received no cash contribution, including an annual average of 41 percent of plans that were less than 100 percent funded. As stated earlier, Bethlehem Steel and LTV Steel both had plans terminate in 2002 that were only about 50 percent funded. Yet each plan was able to forgo a cash contribution each year from 2000 to 2002, instead using credits to satisfy minimum funding obligations, primarily from large accumulated credit balances from prior years. Despite being severely underfunded, each plan reported an existing credit balance at the time of termination. AFC, Primary Mechanism for Improving Funding of Underfunded Plans, Proved Ineffective The funding rules’ primary mechanism for improving the financial condition of underfunded plans, the additional funding charge proved ineffective in helping underfunded plans for four main reasons: 1. Very few plans in our sample were actually assessed an AFC because the rules, despite the statutory threshold of a 90 percent funding level for some plans to owe an AFC, in practice require a plan to be much more poorly funded to be subject to this requirement. From 1995 to 2002, an average of only 2.9 of the 100 largest DB plans each year were assessed an additional funding charge, even though on average 10 percent of plans each year reported funding levels below 90 percent. Over the entire 8-year period, only 6 unique plans that were among the 100 largest plans in any year from 1995 to 2002 owed an AFC. These 6 plans owed an AFC during the period a total of 23 times in years in which they were among the 100 largest plans, meaning that plans that were assessed an AFC were likely to owe it again. 2. AFC rules also specify a current liability calculation method that may overstate actual plan funding, relative to market-value measures, thereby reducing the number of plans that might be assessed an AFC. The specified interest rate for this calculation exceeded current market rates in 98 percent of the months between 1995 and 2002. 3. The AFC rules generally call for sponsors to pay only a percentage of their unfunded liability, rather than requiring restoration of full funding. On average, by the time a plan was assessed an AFC, it was significantly underfunded and was likely to remain chronically underfunded in subsequent years. Among the 6 plans that owed the AFC, funding levels rose slightly from an average of 75 percent when the plan was first assessed an AFC to an average of 76 percent, looking collectively at all subsequent years. All of these plans were assessed an AFC more than once. 4. Plan sponsors can meet the AFC requirement by applying funding credits earned in prior years in place of cash contributions. The account value of these credits, which accumulate interest, may not reflect the underlying value of the assets in the plan. Many plans experienced significant market value losses of their assets between 2000 and 2002 while they were able to apply these funding credits. Among the 100 largest plans, just over 30 percent of the time a plan was assessed an AFC, the funding rules allowed the sponsor to forgo a cash contribution altogether that year. The experience of two large terminated plans illustrates the ineffectiveness of the AFC. For example, Bethlehem Steel’s plan was assessed an AFC of $181 million in 2002, but the company made no cash contribution that year, just as it had not in 2000 or 2001, years in which the plan was not assessed an AFC. When the plan terminated in late 2002, its assets covered less than half of the $7 billion in promised benefits. LTV Steel, which terminated its pension plan for hourly employees in 2002 with assets of $1.6 billion below the value of benefits, had its plan assessed an AFC each year from 2000 to 2002, but for only $2 million, $73 million, and $79 million, or no more than 5 percent of the eventual funding shortfall. Despite these AFC assessments, LTV Steel made no cash contributions to its plan from 2000 to 2002. Both plans were able to apply existing credits instead of cash to satisfy minimum funding requirements. In addition, both sponsors had unused funding credits at the time their plans were terminated. Unclear measures of pension funding and a lack of timely information have made it difficult for plan participants, investors, regulators, and policy makers to accurately assess the financial condition of pension plans. Without timely and reasonably accurate data about the financial condition of pension plans, the various stakeholders cannot make timely and informed decisions on retirement savings, employment, and other key life issues. The primary regulatory filing for pension plans—the Form 5500--requires multiple measures of pension assets and liabilities, yet none of these measures tell PBGC and plan participants what share of the benefit obligations are funded in the event of plan termination. Furthermore, by the time these regulatory reports are publicly available, the information is usually at least 2 years old. In a time of significant changes in interest rates and equity prices, it is possible that reported measures of pension funding will substantially differ from current measures of plan funding. PBGC does receive more current information about plans that are underfunded by at least $50 million. This more current information includes estimates of funding measures if the plan were to be terminated; however, by law this information is not disclosed to the public. Our cash-based budgetary framework for federal insurance programs also contributes to a lack of transparency that, at worst, may create disincentives for policy makers to enact reform measures. With the current cash-based reporting, premiums for insurance programs are recorded in the budget when collected, and outlays are reported when claims are paid. This focus on annual cash flows generally does not adequately reflect the government’s cost for federal insurance programs because the time between the extension of the insurance, the receipt of premiums and other collections, the occurrence of an insured event, and the payment of claims may extend over several budget periods. As a result, the government’s cost may be understated in years that a program’s current premium and other collections exceed current payments and overstated in years that current claim payments exceed current collections. This is especially problematic in the case of pension insurance because of the erratic occurrence of plan terminations as well as the mismatch between premium collections and benefit payments that can extend over several decades. Cash-based budgeting also may not be a very accurate gauge of the economic impact of federal insurance programs. Although discerning the economic impact of federal insurance programs can be difficult, private economic behavior generally is affected when the government commits to providing insurance coverage. In the case of PBGC, the existence of pension insurance may encourage plan sponsors and employees to agree to pension benefit increases in lieu of wage increases when the plan sponsor faces economic difficulties. Cash-based budgeting for federal insurance programs may provide neither the information nor incentives necessary to signal emerging problems, make adequate cost comparisons, control costs, or ensure the availability of resources to pay future claims. Because the cash-based budget delays recognition of emerging problems, it may not provide policy makers with information or incentives to address potential funding shortfalls before claim payments come due. Policy makers may not be alerted to the need to address programmatic design issues because, in most cases, the budget does not encourage them to consider the future costs of federal insurance commitments. Thus, reforms aimed at reducing costs may be delayed. In most cases, by the time costs are recorded in the budget, policy makers do not have time to ensure that adequate resources are accumulated to pay for them or to take actions to control them. The late budget recognition of these costs can reduce the number of viable options available to policy makers, ultimately increasing the cost to the government. In light of the intrinsic problems facing the defined benefit system, meaningful and comprehensive pension reform is required to ensure that workers and retirees receive the benefits promised to them and to secure PBGC’s financial future. While PBGC’s current financial condition does not represent a crisis, delaying reform will result in serious adverse consequences for plan participants, the federal budget, and our nation’s economy. At this time, the Administration, members of Congress, and others have proposed reforms that seek to address many of the problems facing PBGC and the defined benefit system. Such comprehensive effective pension reform would likely include elements that would improve measures of pension funding and enhance transparency of plan information, strengthen funding rules (while preserving some contribution flexibility for plan sponsors, modify certain PBGC guarantees, develop an enhanced and more risk-based insurance premium structure, and resolve outstanding controversies concerning hybrid plans, such as cash balance plans. Pension reform is a challenge because of the necessity of fusing together so many complex, and sometimes competing, elements into a comprehensive proposal. Ideally, effective reform would improve the accuracy of plan funding measures while minimizing complexity and maintaining contribution flexibility; revise the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; develop a more risk-based PBGC insurance premium structure and provides incentives for sponsors to fund plans adequately; address the issue of underfunded plans paying lump sums and granting modify PBGC guarantees of certain plan benefits (e.g., shutdown benefits); resolve outstanding controversies concerning hybrid plans by safeguarding the benefits of workers regardless of age; and improve plan information transparency for pension plan stakeholders without overburdening plan sponsors. Furthermore, if policy makers decide to provide measures of relief to sponsors of poorly funded pension plans, there should be mechanisms built into such laws that would prevent any undue exacerbation of PBGC’s financial condition. Developed in isolation, solutions to some of these concerns could erode the effectiveness of other reform components or introduce needless complexity. As deliberations on reform move forward, it will be important that each of these individual elements be designed so that all work in concert toward well-defined goals. Even with meaningful, carefully crafted reform, it is possible that some defined benefit plan sponsors may choose to freeze or terminate their plans. While these are serious concerns, the overarching goals of balanced pension reform should be to protect workers’ benefits by providing employers the flexibility they need in managing their pension plans while also holding those employers accountable for the promises they make to their employees. The debate over defined benefit pension reform should not take place in isolation of larger related issues. Challenges in the defined benefit system, together with the recent public debate over the merits of including individual accounts as part of a more comprehensive Social Security reform proposal, should lead us to consider fundamental questions about how who should bear certain risks and responsibilities for economic security in retirement. Individual savings require greater responsibility and offer greater potential rewards and the possibility of bequeathing any unused retirement savings. However, longevity risk—the risk of outliving retirement savings—and poor investment choice are significant concerns, particularly as health care and long-term care costs and life expectancies continue to rise. The federal government is in the best position to share risk across the population, and social insurance programs, including Social Security, Medicare, and Medicaid already reflect this fact. However, the current structure of existing federal retirement programs is unsustainable. Employer-sponsored pensions can alleviate longevity risk for plan participants and are generally presumed to be better placed to manage investment risk. However, poor management of plans can lead to shortfalls in funding that can damage the competitiveness of the plan sponsors. Furthermore, many employers are cutting or reducing retiree health benefits, and even employee health benefits, as growing health care costs threaten their competitiveness. Earlier this year, GAO convened a forum on the future of the defined benefit system and the PBGC that included a diverse group of about 40 pension experts, representing various interests, to discuss various reforms to the defined benefit pension system. In addition to debating changes to the funding rules and PBGC premiums, participants also talked about ways to address pension legacy costs (the costs of terminated and underfunded pension plans) and features of pension plans that government policy should encourage. According to participants in the GAO forum, resolution of pension legacy costs and clarification of the legal status of cash balance and other hybrid pension plans could play a significant role in shoring up the defined benefit system. Separating legacy costs from the existing and future liabilities of the remaining defined benefit plans might encourage plan sponsors to remain in the defined benefit system. Many plan sponsors are concerned that through increased PBGC premiums, they may be required to pay for the failures of other companies to responsibly fund and manage their pension plans. Some participants added that resolving legacy costs could be a key component of any pension reform legislation that tightened the funding rules and assessed premiums according to PBGC’s risk. Also, some participants supported, and other participants opposed, the idea of separately addressing the pension legacy costs of specific industries, such as airlines and steel, which have imposed the most significant costs on PBGC. Separately addressing pension legacy costs does not necessarily imply a taxpayer bailout, as some participants suggested other ways to cover their cost, such as through an airline ticket fee to cover the airlines’ share of PBGC’s deficit. Others noted that resolving the uncertain legal status of cash balance and other hybrid pension plans could encourage greater participation in the defined benefit system. Expanding the universe of pension plan sponsors could lead to an increase in PBGC’s premium income. Some forum participants also suggested that the debate over federal retirement policy needs to move beyond distinctions between defined benefit and defined contribution plans. Others added that discussions of retirement policy need to focus on ways to create incentives and remove barriers for employers to set up retirement plans, and how to get American workers to build adequate retirement savings and security. This may be achieved by thinking about the interaction of private pensions and Social Security and by looking at hybrid pension plans, such as cash balance plans and plans that combine the best features of defined benefit and defined contribution plans. Participants suggested new pension plan designs be developed that explore the following features: allowing automatic participation of the covered population in order to expand pension coverage generally; improving the portability of pension benefits to accommodate workers who frequently change jobs; providing for professional money management and pooled investment minimizing early withdrawals and borrowing—a problem known as leakage—from retirement savings; and providing incentives to receive benefits in the form of a fixed annuity, rather than a lump-sum distribution. Widely reported recent large plan terminations by bankrupt sponsors and the resulting adverse consequences for plan participants and the PBGC have pushed pension reform into the spotlight of national concern. Our analysis here suggests that a variety of factors have contributed to the current state of affairs: recent declines in interest rates and financial markets, a soft economy, industry restructuring because of changes in the national and world economies, weaknesses in the legal framework governing pensions that has encouraged moral hazard by sponsors, the underfunding of plans, and a lack of timely, accurate, useful and transparent information that limits participants, unions, investors and other stakeholders from being able to make accurate and timely decisions. In light of the intrinsic problems facing the defined benefit system, meaningful and comprehensive pension reform is required to ensure that workers and retirees receive the benefits promised to them. At this time, the Administration, members of Congress, and others have proposed reforms that seek to address many of the problems facing PBGC and the defined benefit system. This is a promising development that can be a critical first step in addressing part of the long-term fiscal problems facing this country. Such reform will demand wisdom and patience, given the necessity of fusing together so many complex, and sometimes competing, elements into a comprehensive proposal. Ideally, effective reform would improve the accuracy of plan funding measures while minimizing complexity and maintaining contribution flexibility; revise the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; develop a more risk-based PBGC insurance premium structure and provides incentives for sponsors to fund plans adequately; address the issue of underfunded plans paying lump sums and granting modify PBGC guarantees of certain plan benefits (e.g., shutdown benefits); resolve outstanding controversies concerning hybrid plans by safeguarding the benefits of workers regardless of age; and improve plan information transparency for pension plan stakeholders without overburdening plan sponsors. However, it is also necessary to keep in mind that pension reform is only part of the broader fiscal, economic, workforce, and retirement security challenges facing our nation. If you look ahead in the federal budget, Social Security, together with the rapidly growing health programs (Medicare and Medicaid), will dominate the federal government’s future fiscal outlook. These are far larger and more urgent challenges, representing an unsustainable burden on future generations. Furthermore, pension reform should be considered in the context of the problems facing our nation's Social Security system. How we reform DB pensions has crucial implications for directions taken in reforming Social Security. For example, pension reforms that reduce the scope of the private pension system or change the dominant form of private pension design may have consequences for those elements of Social Security reform packages that reduce benefits or include an individual accounts feature. This also means that acting sooner rather than later will make reform less costly and more feasible. Though smaller in scale than actuarial deficits in Social Security, Medicare, and Medicaid, PBGC’s deficit threatens to worsen our government’s long-term fiscal position. Finally, as with Social Security, it is also important to evaluate pension reform proposals as comprehensive packages. The elements of any reform proposal interact; every package will have pluses and minuses, and no plan will satisfy everyone on all dimensions. If we focus on the pros and cons of each element of reform by itself, we may find it impossible to build the bridges necessary to achieve consensus. We look forward to working with Congress on these crucial issues. Mr. Chairman, this concludes my statement. I would be happy to respond to any questions you or other members of the Committee may have. For further information, please contact Barbara Bovbjerg at (202) 512- 7215. Individuals making key contributions to this testimony include David Eisenstadt and Charlie Jeszeck. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | More than 34 million workers and retirees in over 29,000 single-employer defined benefit plans rely on a federal insurance program managed by the Pension Benefit Guaranty Corporation (PBGC) to protect their pension benefits. However, the single-employer insurance program's long-term viability is in doubt, and this may have significant implications for the federal budget. In fiscal year 2004, PBGC's single-employer pension insurance program incurred a net loss of $12.1 billion, and the program's accumulated deficit increased to $23.3 billion. Further, PBGC has estimated that it is exposed to almost $100 billion of underfunding in plans sponsored by companies with credit ratings below investment grade. This testimony provides GAO's observations on the nature of the challenges facing PBGC and why it is preferable for Congress to act sooner rather than later. This testimony also notes the broader context in which reform proposals should be considered and the criteria that GAO has suggested for reform. A combination of recent events, long-term structural problems, and weaknesses in the legal framework governing the defined benefit system has left PBGC with a significant long-term deficit and many large plans badly underfunded. Lower interest rates and equity prices since 2000 have increased the present value of pension liabilities and lowered the value of significant portions of pension plan assets. Meanwhile, PBGC is exposed to significant risk from underfunded plans in key industries at the same time that its revenue base is threatened by the long-term decline in defined benefit plan participation. In addition, the basic legal framework governing pension insurance and plan funding has failed to help ensure that plan sponsors deliver on their pension promises and safeguard the PBGC's financial condition. PBGC's current premium structure does not properly reflect the risks to its insurance program and facilitates moral hazard behavior by plan sponsors. Further, current pension funding rules have not provided sufficient incentives for plan sponsors to properly fund their benefit obligations. As a result, bankrupt plan sponsors, acting rationally and within the rules, have transferred the obligations of their large and significantly underfunded plans to PBGC. These weaknesses contribute to and are exacerbated by a lack of timely, accurate and transparent information that make it difficult for participants, investors, and others to have a clear understanding of the true financial condition of pension plans. Comprehensive reform is required to ensure that workers and retirees receive the benefits promised to them. Ideally, effective reform would (1) improve the accuracy of plan funding measures while minimizing complexity and maintaining contribution flexibility; (2) revise the current funding rules to create incentives for plan sponsors to adequately finance promised benefits; (3) develop a more risk-based PBGC insurance premium structure and provides incentives for sponsors to fund plans adequately; (4) address the issue of underfunded plans paying lump sums and granting benefit increases; (5) modify PBGC guarantees of certain plan benefits (6) resolve outstanding controversies concerning hybrid plans by safeguarding the benefits of workers regardless of age; and (7) improve plan information transparency for pension plan stakeholders without overburdening plan sponsors. Pension reform is only part of a broader fiscal, economic and retirement security challenge. Looking ahead in the federal budget, Social Security, together with Medicare and Medicaid, will dominate the federal government's future fiscal outlook. Reform should also be considered in the context of the problems currently facing our nation's Social Security system. Importantly, as is the case with Social Security, acting sooner rather than later will make comprehensive pension reform less costly and more feasible. |
VA operates one of the nation’s largest health care systems at a cost of more than $16 billion a year. The system has 173 hospitals and 220 clinics that are geographically remote from a VA hospital. VA hospitals typically operate these clinics themselves and staff them with VA personnel. Since its inception in 1930, the VA health care system has developed into a direct delivery system, with the government owning and operating its own health care facilities, in response to a time when there was virtually no public or private health insurance. Traditionally, many veterans traveled long distances to use VA facilities. About one-half of all veterans live more than 25 miles from a VA hospital, including 6 percent who live more than 100 miles from one. Over one-third of all veterans live 25 miles or more from a VA clinic. Currently, VA serves about 10 percent of the 27 million veterans eligible for care including many who travel long distances. Other veterans have often said that they do not use VA facilities for their health care because they live too far from the nearest hospital or clinic. Until 1995, VA required its hospitals to meet rigid criteria to establish outpatient facilities located apart from the hospitals. These criteria included a minimum number of veterans to be served in a clinic and a minimum distance that clinics must be from the VA hospitals. For example, community-based clinics were required to (1) have a projected workload of at least 3,000 visits annually, (2) be 100 miles or 3 hours travel time away from the nearest VA facility, and (3) have more than one-half of the counties in the targeted veteran population in health manpower shortage areas. In anticipation of national health care reform, VA determined that it needed to expand its ability to provide outpatient care, especially for veterans who are geographically distant from VA hospitals. The Amarillo VA hospital is recognized as the first facility to establish access points. Amarillo’s first access point began operations in January 1994. In February 1995, VA encouraged all its hospitals to consider establishing access points, like those that Amarillo operates. In doing this, VA eliminated many of its restrictions concerning the workload and location of proposed clinics. In addition, VA policy encouraged hospitals to provide care not only in VA-operated facilities, but also by contracting with other providers. VA gave hospital and veterans integrated service network (VISN) directors the authority to propose and approve access points. When developing new access points, directors are to consider the (1) eligible veteran population, (2) services to be provided, (3) costs of available alternatives, and (4) sources of funds. To date, nine VA hospitals have opened 12 access points (see fig. 1). VISN directors have considerable freedom to develop their own goals and objectives as well as their own implementation strategies; however, they are encouraged to discuss plans with interested parties as well as inform VA headquarters. Each of the 12 new access points generally shares four common operating characteristics. They each have a (1) designated health care provider, (2) prescribed package of medical services, (3) target veteran population, and (4) predetermined cost. VA staff operate four of the access points and contract with county or private clinics to operate the remaining eight. During a veteran’s initial visit, access points that have contracted with VA “enroll” the veteran in the facility. The contract access point agrees to care for the veteran for 1 year. For that care, the access point is paid a capitated fee—a one-time payment to cover the veteran’s care for a 12-month period, regardless of how many times the veteran seeks care. When new access points are established, VA encourages veterans currently receiving VA health care to enroll along with veterans who have not previously received care. However, some VA hospitals have limited enrollment to veterans with service-connected conditions or current VA users. As of March 1996, the 12 access points had enrolled nearly 5,000 veterans. Veterans receive primary care at access points comparable to that available during visits to a private physician’s office. With the exception of emergencies, enrolled veterans are referred to VA hospitals, not local hospitals, for inpatient or specialized care. In early 1996, VA notified the Congress that 47 hospitals (including 5 of the 9 hospitals that already had access points) were ready to open an additional 58 access points. Another 200 were under development and could be operating by December 1996. Subsequently, the 22 VISN directors began developing 1-year tactical, 2- or 3-year strategic, and 5-year target plans. VA expects that new access points will be an important element of the networks’ tactical/strategic plans. VA has drafted guidance to be used by VISN directors when planning for new access points. This draft guidance states that the intent of access points is to primarily enroll current users who find it difficult due to location or medical condition to travel to a VA facility. Toward this end, the guidance suggests that directors provide a more thorough analysis of such key factors as eligible veteran population, costs, and source of funds when submitting proposals to establish new or realign existing access points. For example, directors are to complete a workload analysis that describes and distinguishes those patients that will be redirected from the existing service population and those that are new. The guidance also provides a specific set of desirable characteristics that should be considered when siting an access point, including that it be generally within 30 minutes travel time of veterans’ residences. Historically, the Congress has limited VA’s authority to provide medical care to veterans, expanding it in a careful and deliberate manner. Although VA’s authority has increased significantly over the years, important limitations were not recognized by VA in establishing and operating the access points we visited. “for the mutual use, or exchange of use of specialized medical resources . . . only if such an agreement will obviate the need for a similar resource to be provided in a [VA] health care facility.” Specialized medical resources are equipment, space, or personnel that—because of cost, limited availability, or unusual nature—are unique in the local medical community. VA officials asserted that primary care provided at access points is a specialized medical resource because its limited availability to veterans in areas where VA facilities are geographically inaccessible (or inconvenient) makes it unique. One significant aspect of VA’s reliance on this authority is that it effectively broadens the eligibility criteria for contract outpatient care, thus allowing some veterans, who would otherwise be ineligible, to receive treatment. In our view, this statute does not authorize VA to provide primary care through its access points. The absence of a VA facility close to veterans in a particular area does not make primary care physicians unique in the local medical community, within the meaning of the statute. The purpose of allowing VA to contract for services under the specialized medical resources authority is not to expand the geographic reach of its health care system, but to make available to eligible veterans services that are not feasibly available at a VA facility that presently serves them. Furthermore, contracting for the provision of primary care at access points does not obviate the need for primary care physicians at the parent VA facility. VA has specific statutory authority (38 U.S.C. 1703) to contract for medical care when its facilities cannot provide necessary services because they are geographically inaccessible. This authority could be relied on to authorize contracting for the operation of access points. However, both the types of services available and the classes of veterans eligible for care under this authority are more limited than those under the authority upon which VA relies (38 U.S.C. 8153). For example, under 38 U.S.C. 8153, a veteran who has income above a certain level and no service-connected disability is eligible for pre- and posthospitalization medical services and for services that obviate the need for hospitalization. But under 38 U.S.C. 1703, that same veteran is not eligible for prehospitalization medical services or for services that obviate the need for hospitalization. If access points are established in conformance with 38 U.S.C. 1703, VA would need to limit the types of services provided to all veterans except those with service-connected disabilities rated at 50 percent or higher (who are eligible to receive treatment of any condition). All other veterans are generally eligible for VA care based on statutory limitations (and to the extent that VA has sufficient funds). For example, veterans with service-connected disabilities are eligible for all care needed to treat those conditions. Those with disabilities rated at 30 or 40 percent are eligible for care of nonservice-connected conditions at contract access points to complete treatment incident to hospital care. Furthermore, veterans with disabilities rated at 20 percent or less and those with no service-connected disability may only be eligible for limited diagnostic services and follow-up care after hospitalization. Most veterans currently receiving care at access points do not have service-connected conditions and, therefore, do not appear to be eligible for all care provided. VA is required to assess each veteran’s eligibility for care on the merits of his or her situation each time that the veteran seeks care for a new medical condition. We found no indication that VA requires access point contractors to establish veterans’ eligibility or priority for primary care or that contractors were making such determinations for each new condition. Last year, VA proposed ways to expand its statutory authority and veterans’ eligibility for VA health care. A bill has been passed in the Congress that, if signed by the President, would authorize VA hospitals to establish contract access points and provide more primary care services to veterans in the same manner as the access points are now doing. Access points have significant financial implications for VA hospitals, veterans, and non-VA health care providers. In general, VA hospitals will probably experience these effects only after access points have operated for a few years. In contrast, veterans and non-VA providers could experience financial effects immediately. VA hospital directors are likely to experience a series of financial challenges as they establish new access points. Initially, VA hospitals must finance access points within their existing budgets; this generally will require reallocating resources among other activities and services with no net change in their respective budgets. Over time, however, VA hospitals may incur significant cost increases to provide care to veterans who would otherwise not have used VA’s facilities. We have suggested that these additional increases at least in the near term may be offset if these new clinics enable hospitals to conserve money by serving users more efficiently. To date, the nine VA hospitals have funded new clinics by using money saved from hospital-based staff reductions and other hospital-based efficiencies. At one hospital, officials are financing their new clinics by using funds saved by reducing the hospital staff. They estimated savings in excess of $900,000 by eliminating the equivalent of 15.5 positions. Another hospital expects to save up to $400,000 by reviewing patients’ use of prescription medications. At other hospitals, such reviews have reduced the number of prescribed medications and have achieved cost savings in procuring, storing, and dispensing drugs. Savings can also be achieved by reducing the staff involved in primary care at the hospitals. Officials at one hospital told us that if a sufficient number of veterans currently receiving care at their hospital can be enrolled in access clinics, they can reduce the size of their primary care staff and use the resulting savings to fund additional access points. Each primary care team at the hospital treats approximately 1,500 patients; consequently, for every group of 1,500 patients they can shift to access points, the hospital can eliminate one hospital-based primary care team. Most VA hospital directors have concluded that it is more cost effective to contract for care in targeted locations than to operate new access points themselves. In many instances it is the only cost-effective option available. One of VA’s goals in negotiating contract rates was to obtain a rate that was less than the estimated cost of a VA primary care team providing the same services. While VA does not have a financial system capable of tracking procedure-specific costs, VA hospitals with new access points attempted to estimate VA costs related to primary care services. These hospitals used their cost estimates as the basis to compare bids from clinics interested in establishing VA access clinics. In areas where the veteran population is too small to justify a VA-operated clinic, contracting may be the only cost-effective method available to provide primary care. VA guidance suggests that 3,000 visits per year are needed to justify a VA-operated clinic. In the rural areas served by most new access points, veteran populations are small. For example, in one area served by an access point, only 173 veterans who use VA health care live there, far below the amount needed to justify a full-time VA clinic. Health providers that have agreed to establish access points to serve veterans on a contractual, capitated basis also benefit because they have an existing nonveteran patient base and excess capacity to meet VA’s needs. Hospitals also plan to finance clinics by using the savings that result from implementing a managed care delivery system. Clinics will have a major role in this system that plans to be based on a strong primary care network with clinics conveniently located near patients. VA contends that by making primary care more accessible, patients will be more likely to seek preventive care and VA hospitals will experience a consequent reduction in specialist and hospital use. VA believes that veterans should experience an improvement in their health status as VA shifts its emphasis from inpatient to preventive care. VA officials anticipate a significant decrease in the use of specialty clinics and diagnostic services as a result of VA focusing on preventive medicine. VA officials contend that veterans who live several hours away from a VA facility do not receive sufficient preventive care. Typically these veterans would wait until their condition worsened before they would seek treatment. Consequently, when veterans ultimately sought care, the care they would then need would be more intensive, more extensive, and more costly. By providing care closer to where veterans live, VA officials predict that veterans will be more likely to seek and receive care before their condition becomes serious. Additionally, by obtaining their primary care from caregivers in local clinics rather than specialists in VA hospitals, VA anticipates a reduction in the number of diagnostic tests, which are used more frequently by VA specialists than by local primary care givers. If the clinics succeed in improving veterans’ health status and reducing the need for specialty and inpatient care, VA hospitals should realize significant cost savings. If the emphasis on primary care results in a reduction of the number of days of hospitalization, that in turn could result in further medical ward consolidations and fewer hospital-based staff. The majority of savings would result from hospital staff reductions and associated salary and benefit savings. For example, when one hospital consolidated inpatient wards and eliminated 23 beds, it saved an estimated $250,000. These savings were used to finance access clinics. Over time, the initial savings that VA experiences with access points may ultimately be reversed and expenses may rise. In a recent study, VA researchers compared two groups of veterans who had been discharged from nine VA hospitals. One group of veterans was given traditional VA services following an inpatient stay and the other group received intensive primary care intervention involving close follow-up by a nurse and a primary care physician beginning before discharge and continuing for the next 6 months. After 6 months, the rehospitalization rate was greater for the group receiving the intensive primary care treatment than for the group receiving traditional VA follow-up services. Although the results are preliminary and the veterans involved in the study suffered from serious medical conditions, the implications of this study relative to increasing the numbers of access points should be carefully considered. The longer-term effects of access points on VA’s budget are less certain. Our work has shown that VA has not clearly delineated its goals and objectives nor has it developed a strategic plan that specifies the number of potential access points, time frames for beginning operations, and associated costs. If access point clinics attract a significant number of new users—veterans who heretofore have not used VA for their health care needs—VA hospital specialty use and hospitalization rates may actually increase. The effect on VA’s medical budget will depend largely on the number and willingness of these “new” veterans who are referred by clinics to receive specialized treatment at VA hospitals. For example, as of March 1996, 40 percent of the 5,000 veterans enrolled at VA’s 12 new access points were new users. If new users receive care only at the clinics and not at VA hospitals, the budget effect may be small. However, if a significant number of new users begin using VA hospitals for specialty and inpatient care, overall VA use could remain stable or even increase with a corresponding increase in VA’s expenses. Therefore, the projected savings attributable to managed care could be offset by increased costs at VA hospitals. Overall, both veterans and veterans service officers indicated their satisfaction with the care that veterans have received at the new access points, but some concerns have been expressed about the ownership and operation of the clinics. One veterans service officer at a clinic we visited said that the access point was an improvement for veterans seeking care. Previously, veterans now using the clinic had to travel long distances to get to the nearest VA medical center. The representative said that he had not heard any veteran complaints and that the clinic is especially effective in providing preventive care. He added that the veterans were happy to have medical care available to them at the clinic. He also told us that now veterans are more likely to see a physician more frequently because it is much more convenient to seek care and not wait until the last minute. A veterans service officer at another clinic was very supportive of the clinic, but said she would prefer that the clinic be VA-owned and operated. She was concerned because the clinic only had a part-time physician. If a veteran arrived at the clinic without an appointment, the veteran might have to be cared for by a physician assistant or nurse. She indicated that veterans want to be seen by a physician. She also said there had been problems with medical files not being transferred to or available at the clinic. As a consequence, medical care was delayed. The same representative said that veterans’ demand for care may overwhelm the clinic. She said that some of the veterans getting care at the clinic had not received medical care before because it took 3 hours to drive to the nearest VA facility. The veterans are now using the clinic because it is more accessible. About one-half of the veterans we interviewed said that as long as VA paid for the care, they were not bothered by the fact that the care they received was given at the access point rather than at a VA facility. Access points may prove more attractive to veterans than VA hospitals in part because access points moderate barriers such as geographic inaccessibility. The financial benefits that will accrue to veterans using new access points will vary depending on whether veterans are currently using VA hospitals or are new users of VA services. Current users should realize savings related to travel expenses. New low-income users will save these costs in addition to any costs they previously incurred by receiving care at non-VA providers. Savings realized by new high-income users will be offset by VA copayments that will be required. Current VA users will benefit primarily from reduced travel costs. VA reports that many veterans must travel several hours to get to a VA hospital. Because of the distances involved, many elderly patients are not able to travel to and from their homes and receive medical treatment all in one day. Often, veterans and those assisting them must stay in lodging the day before or after a scheduled appointment. Although VA may reimburse these veterans a set amount of money for each mile they travel, lodging and meals are not reimbursed. Clinics located closer to current users would save these veterans both time and money. Veterans new to the VA system have the potential to experience significant cost savings. Besides the savings that current users would receive associated with travel, new users would realize additional savings at rates dependent on the amount that they were spending for health care before they used VA’s access points. For example, an insured veteran could avoid a deductible of $250 or more by using VA. In addition, low-income veterans, who previously may have received minimal health care because they lacked the means to travel or pay for care, would no longer have to forgo care. The financial effect on non-VA providers will vary depending on whether they provide care to veterans under contract with VA or compete with VA by providing the same care to veterans while being reimbursed by some other source. When VA enters a community as a payer of community providers, some local providers have the potential to benefit financially. Clinics that have excess capacity are in the best position to benefit from a VA primary care contract. For example, one official at a new access point clinic reported that the clinic’s contract with the local VA hospital helped to offset its fixed costs without adding much to its variable costs. Because the general population was getting smaller, local primary care staffs were underutilized. In addition, the populations served by the clinics were disproportionately elderly, poor, and underinsured. Combined, these factors enabled the clinics to better utilize their existing staff and benefit financially by contracting with VA. The veterans service officer at one location said that if it were not for the VA contract, the clinic would probably not have survived. Therefore, not only do the veterans benefit, but VA’s presence has public health implications as well. An additional benefit cited by one clinic physician for contracting with VA was the convenience for both veterans and their families to receive care at the same location. While VA pays only for a veteran’s health care, a veteran’s family can receive treatment at the same location. After VA selects a health care provider to establish a new access point, those providers not selected will lose income to the extent that their veteran patients switch to the VA-sponsored clinic for their care. At one access point, a local physician complained to the clinic that one of his patients switched to the VA access point. The physician expressed concern about losing his other veteran patients. The likelihood that veterans will move from one provider to another depends on a variety of factors, including the number and types of providers available in the same geographic area. VA believes that contracting with existing local health care providers will be less disruptive to the local health community overall. On the other hand, if VA established a VA-operated clinic in a community with sufficient capacity to treat the target veteran population, VA would most likely be viewed as a competitor duplicating existing medical resources. The financial effect on other health care financing organizations will vary depending on whether they are publicly or privately sponsored. Seventy percent of the veterans using access points that we interviewed had Medicare coverage and 7 percent had Medicaid coverage. These public insurers may process fewer claims for these veterans because they are now using VA’s access points. Under current law, Medicare and Medicaid are not allowed to pay VA for eligible veterans treated at a VA facility. VA recently asked the Congress for authority to be reimbursed by Medicare for providing care to such veterans. Under the VA proposal, Medicare would reimburse VA for care at a rate no greater than 95 percent of the prevailing rate at which private Medicare providers are reimbursed. Private insurers will likely realize little financial change. About one-half of the veterans that we interviewed reported that they had private insurance coverage. Typically, insurers would be billed by providers. Access points, however, are paid by VA. For veterans with private insurance coverage, VA bills the insurer to recover its costs. VA’s new access points represent a proactive effort to transition from a hospital-based delivery system to an integrated network of VA-operated hospitals and non-VA primary care providers. The potential effect of access points on the future role of VA hospitals as health care providers for veterans depends to a large extent on hospitals’ operational goals and objectives. To date, VA has not developed a strategic plan for its access points initiative, relying instead on VISN directors to develop their own goals and objectives. In effect, the access points may be considered pilot projects that provide useful information to assess the implications of different network integration goals and veterans’ satisfaction with an integrated service delivery network. The effect of the access points on demand for VA health care services is uncertain. Improved accessibility, however, could greatly affect future demand. Each of the three hospitals we studied has established access points to improve the convenience of primary care for their current users. At two of the hospitals, VA officials had decided that the veterans who would benefit most from access points would be those who lived the farthest from their respective medical center. Veterans who received care at these two hospitals had to travel 108 miles on average with some veterans having to travel as many as 300 miles from their homes. While VA’s goal is intended to benefit its current veteran population, all but two access points have attracted veterans who had not previously used VA for their health care. The extent to which this occurs depends on a variety of factors, including the number of veterans living in areas served by access points. Despite the intent, access points should help VA improve service delivery for users, which in turn should improve user satisfaction with VA’s health care system. Depending on the location of the access point and the number of veterans who live in the area, enrolling new users could significantly affect VA’s mission and budget. VA officials at one hospital anticipate a 20-percent increase in the number of new users. To date, about 10 percent of its access point users have been veterans new to the VA health care system. There are 3,848 veterans in the area surrounding the access point clinic who are not currently using VA. In theory, this represents the potential customer base for the access point. VA officials anticipate the number of new users for this access point to be moderate because of the characteristics of the geographic area. Specifically, the access point service area consists of veterans whose homes are scattered throughout a rural area and many would still have to travel long distances to get to the access point. Consequently, a new access point would not be an attractive alternative to a veteran unless it was within a comparable travel distance to his or her current health care provider. In more densely populated areas, however, VA’s ability to attract new users is more significant. For example, one VA hospital has contracted with a clinic in a more urbanized area to provide primary care for up to 1,656 veterans. However, there are 4,048 veterans in the service area who currently use VA services and 24,856 veterans who live in the same area who can be considered potential patients. Because veterans who live close to a VA facility are more likely to use VA services, there exists the potential for increasing VA’s market share. Additionally, the potential for treating new veterans is much greater in urban areas than in the remote rural areas where the number of potential patients is far lower. VA hospitals are contracting with access points to care for a limited number of veterans. VA hospital resources available to fund access points are finite and are limited to the extent that hospitals have a set of core activities and services that must be maintained and funded. Because demand for service at access points may outstrip VA hospitals’ ability to fund the extra clients, VA hospitals have developed procedures to ration care provided at access points. VA hospitals have the discretion to increase the number of veterans covered by contracts, but if demand for medical care at access points exceeds the VA hospitals’ resources, the VA hospitals may need to limit care. VA hospitals have discretion on how to ration care. For example, veterans with high incomes and nonservice-connected disabilities might be refused care, but care might also be rationed by medical condition. While the VA hospital officials with whom we spoke did not anticipate having to ration care, they said that if it became necessary they would do so on a first-come, first-served basis rather than limiting care on the basis of VA eligibility criteria. This could result in a situation where veterans who have been using the VA system could be denied care at the access point if they sought care after an access point had enrolled its maximum number of veterans. Simultaneously, veterans who had never used VA health services before going to the access point would continue to use the clinic if they had been enrolled before the maximum number of enrollees had been reached. VA’s plans to establish access points could represent a defining moment for its health care system as it prepares to move into the 21st century. The results of this action could range from improving access for a modest number of current or new users who live the greatest distances from VA facilities or in medically underserved areas to opening hundreds of access points and expanding VA’s market share by attracting hundreds of thousands of new users. VA’s growth potential is, in essence, limited by the availability of resources and statutory authority, new veteran users’ willingness to be referred to VA hospitals, and other health care providers’ willingness to contract with VA hospitals. Although VA should be commended for encouraging hospital directors to serve veterans using their facilities in the most convenient way possible, VA did not establish access points in conformance with applicable statutory authority. In addition, VA has not developed a plan to ensure that hospitals establish access points in an affordable manner. If developed, such a plan should articulate the number of new access points to be established, target populations to be served, time frames to begin operations, and related costs and funding sources. It should also articulate specific travel times or distances that represent reasonable veteran travel goals that hospitals could use in locating access points. Given the uncertainty surrounding resource needs for new access points, such a plan should also articulate clear goals for the target populations to be served. Hospitals should be directed to provide care at new access points following the statutory service priorities. If sufficient resources are not available to serve all eligible veterans expected to seek care, new access points that are established should first serve veterans with service-connected disabilities; then other categories of veterans; and finally, higher-income veterans. This approach should provide for more equitable access to VA care than VA’s current strategy of allowing local hospitals to establish access points that could result in veterans being served on a first-come, first-served basis and then having services rationed to them when resources run out. VA proposed ways to address the legal concerns, and on October 9, 1996, the President signed legislation (P.L. 104-262) that provides VA hospitals with the authority to establish new access points. VA has also drafted guidance to address concerns about equity of access, convenience of access, and enrolling new users. However, the guidance has not been finalized and directors have great latitude in deciding how to use it. Consequently, 22 VISN directors must decide what is the fairest way to use their limited resources to establish new access points that could result in 22 different, potentially conflicting approaches. Given limited resources, our work suggests that VA should first focus on improving the convenience of access for current users, with a goal of equalizing access systemwide. Once this is accomplished, VA could then evaluate the costs and availability of resources to decide whether to pursue seeking new users. This approach seems fair for two reasons. First, veterans will not encounter situations where VA hospitals in certain parts of the country may provide convenient access for new users while veterans who have used VA hospitals in other parts of the country for from 5 to 20 years will be required to travel long distances for care. Second, VA hospitals’ efforts to add new users will exacerbate the potential resource shortfalls, resulting in hospitals running out of money sooner than they otherwise would. Ensuring equity of access for current users before adding new users will also provide VA hospitals with additional time to assess the financial implications of the access points and better plan outreach strategies for new users. We recommend that the Secretary of Veterans Affairs direct the Under Secretary for Health to establish a travel time or distance standard to be followed by VA hospitals as they plan for additional access points in their service areas. We also recommend that the Secretary direct the Under Secretary to require VA hospitals to establish their access points in a manner that focuses on (1) the equalization of access for current users of the VA health care system on the basis of the designated time or distance standard and (2) the enrollment of any new users of the system in accordance with statutory priorities for VA care. Finally, we recommend that the Secretary direct the Under Secretary to provide the Congress a report that presents VA’s overall plan and time schedule for the systemwide establishment of access points to assist the Congress in determining the affordability of VA’s plan. In commenting on our draft report, VA agreed, in principle, with all but one of our recommendations. For example, VA stated that its ongoing network planning will include activities that should achieve our overall objectives of improving, in an equitable manner, veterans’ access to care. Each VISN director is expected to consistently work to achieve specific desirable outcomes and goals and to consider desirable characteristics including travel time or distance criteria when making decisions about new access points for hospitals in his or her network. VA cautioned, however, that applying a single national standard as we recommended may be difficult given the diverse nature of the veteran population and VA’s current health system that involves both urban and rural locations. For these reasons, VA believes that it is critical that the 22 VISN directors have considerable discretion in the placement of access points given veterans’ travel times or driving distances. In the draft report provided to VA for its comment, we recommended that VA comply with the then-existing statutes regarding both veterans’ eligibility for health care services and contracting for those services. In response to that recommendation, VA said that its general counsel is reviewing each new request for access points. In VA’s opinion, the recently passed reform bill will help resolve disagreements over its interpretation and implementation of existing statutes. In view of the recent congressional action, we have deleted our recommendation from this final report. VA did not agree that it is necessary to provide the Congress with a report solely on VA’s overall plans for systemwide establishment of access points. VA believes that the 22 networks’ efforts to develop 1-year tactical and 2- or 3-year strategic plans will serve the same purpose. These 22 network plans will be consolidated into a national business plan that will include planned activities relating to the establishment of access points. While we agree that VA’s national plan could provide a means to achieve the intent of our recommendation, it is not known at this time whether the plan will ultimately provide sufficient detail to afford the Congress enough information to determine the overall extent and cost of establishing access points. Copies of this letter are being sent to the Ranking Minority Members of the House Committee on Veterans’ Affairs and the Senate Subcommittee on VA, HUD and Independent Agencies, Committee on Appropriations and the Secretary of Veterans Affairs. Copies also will be sent to other interested congressional committees and made available to others upon request. Please call me at (202) 512-7101 if you have any questions or need additional assistance. Other major contributors to this report include Paul Reynolds, Assistant Director; Michael O’Dell, Senior Social Science Analyst; Patrick Gallagher and Abigail Ohl, Senior Evaluators; Robert Crystal, Assistant General Counsel; Sylvia Shanks, Senior Attorney; Linda Diggs and Larry Moore, Evaluators; and Joan Vogel, Evaluator (Computer Science). VA Health Care: Efforts to Improve Veterans’ Access to Primary Care Services (GAO/T-HEHS-96-134, Apr. 24, 1996). VA Health Care: Exploring Options to Improve Veterans’ Access to VA Facilities (GAO/HEHS-96-52, Feb. 6, 1996). VA Health Care: How Distance from VA Facilities Affects Veterans’ Use of VA Services (GAO/HEHS-96-31, Dec. 20, 1995). VA Clinic Funding (GAO/HEHS-95-273R, Sept. 19, 1995). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Veterans Affairs' (VA) efforts to establish health care access points to provide outpatient care for veterans who are geographically distant from VA hospitals. GAO found that: (1) the new access points represent a proactive effort to transition from a direct delivery system to an integrated network of VA-operated hospitals and VA and non-VA outpatient providers; (2) VA ignored statutory limitations in its legal authority to provide primary care to veterans, but legislation has been enacted which expands VA authority to contract for the provision of such care and veterans' eligibility to receive such services; (3) VA hospitals must finance access points within their existing budgets, which will generally require reallocating resources among current activities and services; (4) although access points should in time allow VA hospitals to serve current users more efficiently, the efficiencies may not generate enough savings to offset the increased costs associated with caring for increased numbers of veterans who may use the new clinics; and (5) because VA has not developed a strategic plan for expanding veterans' access to its medical care system, it is difficult to accurately gauge the number of access points VA will need or the effect they will have on the VA mission. |
Examinations by federal banking regulators are intended to assess the safety and soundness of banks and identify conditions that may require prompt corrective action to remedy unsafe and unsound banking practices. In recent years, banking regulators have changed their examination techniques by placing increased emphasis on an institution’s internal control systems and on the way it manages and controls its risks. This evolution to a risk-focused approach is in response to rapid changes in the banking industry and the speed with which an institution’s risk profile can change. This approach is particularly important since, in recent years, major consolidations have resulted in a number of large, complex banking organizations with diverse risks and sophisticated risk management systems. This trend can be expected to continue in light of the recent enactment of the Gramm-Leach-Bliley Act of 1999 that allows banks, securities firms, and insurance companies to acquire one another. The Federal Reserve and Office of the Comptroller of the Currency (OCC) have developed similar examination programs specifically for large, complex banks; but the two agencies differ in their implementation of the programs. Because of the growing number of large, complex banking organizations, the Chairwoman and Ranking Minority Member, Subcommittee on Financial Institutions and Consumer Credit, House Committee on Banking and Financial Services asked that we study the risk-focused approaches used by the Federal Reserve and OCC to examine these institutions. The objectives of this report are to (1) describe the general characteristics of the regulators’ risk-focused approach to examinations of large, complex banks, explaining how they differ from past examination practices; (2) compare the implementation of the Federal Reserve’s and OCC’s risk- focused examination approaches; and (3) identify the challenges faced by both agencies as they continue to implement their examination programs for large, complex banks. Section 111 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA) generally requires that each appropriate federal banking and thrift agency conduct a full-scope, on-site examination of federally insured depository institutions under its jurisdiction at least once during each 12-month period. The primary objectives of bank examinations done by the federal bank regulators are (1) to provide an objective evaluation of the bank’s safety and soundness, ensuring that it maintains capital commensurate with its risk, (2) to appraise the quality and overall effectiveness of management systems, and (3) to identify and follow up in those areas where corrective action is required to strengthen the bank’s performance and compliance with laws and regulations. The bank examination assesses six components of a bank’s performance – capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. These components combine to form the CAMELS rating system, which includes a rating for each component and an overall composite CAMELS rating. Each CAMELS element and the composite is rated on a five-point scale. This rating is to be updated annually. Commercial banks in the United States are supervised by three different federal agencies, depending on their type of charter. The OCC supervises nationally chartered banks. The Federal Reserve Board supervises state chartered banks that are members of the Federal Reserve System. The Federal Reserve Board has delegated its examination authority to the 12 Federal Reserve district banks. The Federal Deposit Insurance Corporation (FDIC) supervises state banks that are not members of the Federal Reserve System. Most banks are owned or controlled by a bank holding company. Holding companies may consist of one or more bank subsidiaries, nonbank subsidiaries, and even other holding companies. The largest bank subsidiary in a holding company is typically referred to as the lead bank and often holds most of the company’s assets. The Federal Reserve is responsible for supervising all bank holding companies while OCC, FDIC, or the Federal Reserve may be the supervisor for the lead bank. Our focus for this report is on the examination of the lead bank of large, complex banking organizations. However, as is discussed further below, when examining large, complex banks, examiners are to consider the operation of the organization’s other subsidiaries because their risk can affect the risk profile of the lead bank. For the purposes of this report, we use the term “bank” to refer to the lead bank in a large banking organization. Either the Federal Reserve or OCC supervises the largest most complex banks operating in the United States. Therefore, in our discussion, we discuss those two agencies. Technological advances and financial product innovation, combined with regulatory and legislative changes, have expanded the type and scope of activities undertaken by banks. Since the 1970s, significant changes have been occurring in the financial services industry due to a number of market shocks, combined with advances in and application of financial theory and information technology. The interaction of these factors has led to significant expansion of such financial products as derivatives and asset-backed securities, improved methods of measuring and managing risks, increased competition in financial services, and mergers of financial firms within and across financial sectors. The creation and growth in derivatives, large increases in other trading activities, including the development of new secondary markets, along with the creation of asset-backed securities, have changed the financial landscape. Advances in information technology and financial theory have helped reduce various barriers to competition. The increased speed and lower costs in communicating and transmitting data over large geographic distances has reduced such distance as an obstacle to competition. Moreover, new financial theories and faster computers helped financial firms handle large amounts of data at low cost and analyze the risks and returns created by new financial products. Swaps, options, and other derivatives, which have been growing rapidly, are examples of such technology- and theory-dependent products. The Regulators also have acted in ways to expand the activities in which banks may engage. For example, the Federal Reserve Board has approved several additional financial products that banks are permitted to offer, including providing investment advice, underwriting insurance related to the extension of credit, tax planning and preparation, data processing, and operating a credit bureau or collection agency. The Federal Reserve Board also approved bond and stock underwriting powers for Section 20 subsidiaries of bank holding companies. Effective in March 1997, the Federal Reserve Board enhanced these powers when it increased from 10 to 25 percent, the share of total revenues a bank holding company’s Section 20 subsidiary may derive from corporate equity and debt underwriting. On the basis of these decisions, banks have increasingly acquired or created securities broker-dealer affiliates or subsidiaries. OCC has amended its regulations to permit subsidiaries of national banks to engage in activities that OCC determines, on a case-by-case application basis, to be “part of or incidental to the business of banking.” Consolidation in the banking industry in recent years has resulted in a growing number of large, complex banking organizations. Banking resources are now concentrated in fewer and larger banking organizations. According to FDIC, at year-end 1998, the 25 largest banking organizations held approximately 54 percent of industry assets compared with about 22 percent at year-end 1990. These developments have resulted in a number of large complex banking organizations with risk profiles that include traditional banking along with differing amounts of trading and other activities. Not only are some of the profiles different, but they are subject to a rapid change. Many of these companies have aligned their risk-management processes along lines of business like commercial lending. In some cases, the alignment of risk management along lines of business results in operations being managed in a unified manner, where possible, without regard to charter. Such institutions are also subject to oversight by more than one regulator. For example, a bank could include several bank charters, some of which engage in securities activities. To keep pace with the changes occurring in the risk profile of such institutions, examinations must focus on management’s ability to control rapidly changing risks. Examining such banks requires that the primary regulators coordinate with other regulators in assessing the entire risk profile of the institution. With the continued consolidation of the banking industry, both the Federal Reserve and OCC have developed separate examination programs for community banks and large, complex banking organizations. The development of separate programs is in recognition of differences in the supervisory requirements for small community banks and large, complex banks. These differences include the complexity of financial products, sophistication of risk-management systems, management structure, geographic dispersion of operations, and the importance of coordinating with other supervisory agencies who have supervisory responsibility for various parts of the complex organization. In December 1995, OCC issued a revised Comptroller’s Handbook for large bank supervision, which became the cornerstone of its new supervision by risk approach to bank examination. This handbook was revised in April 1996 and July 1998. In August 1997, the Federal Reserve issued its handbook entitled “Framework for Risk-Focused Supervision of Large Complex Institutions.” More recently, the Federal Reserve issued a supervisory letter entitled, “Risk-Focused Supervision of Large Complex Banking Organizations.” Large, complex banks are defined by both the Federal Reserve and OCC as those that generally have a functional management structure; a broad array of products, services, and activities; operations that span multiple supervisory jurisdictions; and consolidated assets of $1 billion or more. OCC has further designated the largest most complex banks, with assets of $25 billion or more, for supervision by one of three deputy comptrollers in Washington, D.C. The Federal Reserve has also identified certain large banks as being the largest and most complex and therefore subjects these institutions to heightened scrutiny, assigning a Federal Reserve Board analyst, in addition to staff from the Federal Reserve district bank. We selected banks from these groups for our review. Each of the agencies’ programs includes similar elements, such as continuous monitoring of the bank and frequent contact with the bank’s top management. OCC’s program covers the largest national banks operating in the United States. Because the Federal Reserve has responsibility for bank holding companies as well as state banks that are members of the Federal Reserve System, many of the institutions included in its program include bank holding companies for the national banks that fall under OCC’s program. The Federal Reserve has overall supervisory authority for foreign banking organizations (FBO) operating in the United States, and the largest of these are included in the Federal Reserve’s large, complex bank list as well. As of September 30, 1999, the Federal Reserve’s and OCC’s large bank programs each included approximately 30 institutions. In this report, we use the term “risk-focused supervision” to describe both the Federal Reserve’s risk-focused supervision program and OCC’s supervision by risk. The Federal Reserve and OCC risk-focused examination programs for large banks have similar goals and techniques for achieving them. Although the agencies did not formally coordinate the development of their programs, they did develop their programs in the same environment, with informal communication between the agencies regarding their programs. Both agencies have developed specific terminology for the purpose of shaping their risk analyses and communicating the results of those analyses to bank management. Both agencies develop supervisory strategies through ongoing monitoring of the bank and engage in ongoing communication with bank management. The structures of the banks covered by their programs require that they coordinate their examinations with other regulators and that both agencies employ specialists to understand and assess the increasingly complex operations of large banks. Although the principles of their respective approaches are similar, the Federal Reserve and OCC differ in the way they implement their programs. Chapter 3 discusses differences between the two agencies’ programs. The Federal Reserve’s risk-focused supervision and OCC’s supervision by risk have several common goals: to determine the condition of the bank and the risks associated with current and planned activities, including risks originating in relevant subsidiaries and affiliates; to be more flexible and responsive to changing conditions at the bank in planning examinations, rather than reacting to prior events; to use examiner and bank resources more efficiently. Risk-focused supervision does not replace the CAMELS rating system. Examiners use the CAMELS rating to report their conclusions about a bank’s current condition. Under risk-focused supervision, examiners focus their attention on areas of current and emerging risk to judge the bank’s condition, which is summarized and reported using a CAMELS rating. The risk assessment is a key phase of the examination planning process. It is intended to identify both the strengths and vulnerabilities of an institution and provide a foundation from which to determine the procedures to be completed during the examination. Examination staffs for OCC and the Federal Reserve said that they do not have sufficient resources to do an in-depth examination of every risk at a bank. The risk assessment is therefore necessary to focus examiner resources on those risks with the largest potential impact on the safety and soundness of the bank. Risk assessments entail the identification of the financial activities in which the banking the determination of the types and quantities of risks to which these activities expose the institution; and the consideration of the quality of the management and control of these risks. In performing the risk assessment, examiners are to make and record judgments regarding risk exposure and the ability of a bank to manage that exposure, and to determine the anticipated future direction of risk at the bank for the coming year. The risk assessment is to form the basis for a supervisory strategy for the organization. The evaluation of the risk management process for each activity or business line also assists in determining the extent of transaction testing that should be planned for each area. Assessing risk at large, complex banks often requires that examiners consider risks posed by subsidiaries that are regulated by other regulatory agencies. Therefore, examiners must coordinate their examination activities with examiners from those agencies, including bank and securities regulators. Because the Federal Reserve examines state banks, it is necessary for Federal Reserve examiners to coordinate their activities with examiners from state banking agencies. Such coordination and avoidance of unnecessary duplication are essential to effective supervision of large, complex banks. Both the Federal Reserve and OCC encourage their examiners, as appropriate, to incorporate the findings and conclusions of other supervisors into their overall assessment of the consolidated banking organization. The Federal Reserve and OCC have agreements in place to guide their coordination with the Securities and Exchange Commission (SEC), other bank regulators, and each other. Under risk-focused supervision, both the Federal Reserve and OCC have developed sets of risk definitions for use in communications between examiners and bank management and to serve as a basis for examination strategies that are customized to the risks of each bank. As presented in table 1.1 and 1.2, the Federal Reserve has six risk categories and OCC has nine. Along with their own common risk terminologies, OCC and the Federal Reserve have issued risk assessment guidelines intended to assist examiners to make consistent risk assessments across geographic lines and products, regardless of the diversity or complexity of the financial institution. These guidelines present factors that examiners should consider to quantify risks as low, moderate, or high and to assess the management of those risks as weak, acceptable, or strong. Under the risk-focused approach of both the Federal Reserve and OCC, examiners are to engage in ongoing monitoring and communication to keep abreast of the current financial condition and business strategies of a bank. Ongoing monitoring includes a formal quarterly update of a bank’s risk assessment. This periodic assessment is based, in part, on internal management reports, internal and external audit reports, and publicly available information. Information for ongoing monitoring is also collected through frequent contact with key bank officials. As described in more detail in chapter 3, examination activities may be conducted during targeted examinations done throughout the year. Prior to the adoption of risk-focused supervision, examiners conducted out-of- cycle targeted examinations in addition to annual examinations when regulators identified specific areas of immediate supervisory concern. Targeted examinations are now considered routine and are used to focus examination activities on a specific activity or line of business at the bank. For example, targets can include the examination of a bank’s internal audit function; a review of a particular lending activity such as energy lending; or an assessment of the bank’s management of derivatives activities in a specific market. A targeted examination will generally result in a letter to bank management describing the results of the targeted examination. Depending on the examination findings and bank management’s reaction to them, the results of the targeted examination may or may not be included in the annual report of examination for the bank. Under the risk-focused approach, the Federal Reserve and OCC continue to produce an annual report of examination. However, examination reports for both agencies are generally a summary of events that occurred over the course of a year. However, they may not mention supervisory issues that were raised by examiners to management and resolved since the last examination report. Regulators told us that issues that were not remedied during the year would be included in the examination report . To raise issues as early as possible and before they further adversely affect the bank, examiners employ various communication vehicles to communicate with bank management and the bank’s board of directors throughout the year. The Chairwoman and Ranking Minority Member of the Subcommittee on Financial Institutions and Consumer Credit, House Banking Committee asked us to provide information on banking regulators’ risk-focused approaches to large domestic bank examinations. Our objectives were to (1) describe the general characteristics of the regulators’ risk-focused approach to examinations of large, complex banks, explaining how they differ from past examination practices; (2) compare the implementation of the Federal Reserve’s and OCC’s risk-focused examination approaches; and (3) identify the challenges faced by both agencies as they continue to implement their examination programs for large, complex banks. Large, complex banks are defined by both the Federal Reserve and OCC as those that generally have a functional management structure; a broad array of products, services, and activities; operations that span multiple supervisory jurisdictions; and consolidated assets of $1 billion or more. OCC has further designated the largest most complex banks, with assets of $20 billion or more, for supervision by one of three deputy comptrollers in Washington, D.C. The Federal Reserve has also identified certain large banks as being the largest and most complex and therefore subjects these institutions to heightened scrutiny, assigning a Federal Reserve Board analyst in addition to staff from the Federal Reserve district bank. We selected banks from these groups for our review. The largest banks chartered in the United States are either national banks or state member banks of the Federal Reserve whose primary federal regulators are either OCC or the Federal Reserve, respectively. Accordingly, this report does not address the efforts of the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift Supervision (OTS) to shift to risk-focused safety and soundness examinations. To gather information on the structure and rationale for implementing a risk-focused approach as well as the key differences between past and present examination approaches, we conducted interviews with supervisory officials from the Federal Reserve and OCC. We also reviewed various documents from the agencies, including bank examination handbooks, guidance to examiners and banking industry officials on risk- focused examinations, and supervisory officials’ testimonies and speeches related to this subject matter. To further enable us to describe the risk-focused approach, we reviewed each agency’s implementation of their approach at seven large, complex banks. We selected three large, complex banks supervised by the Federal Reserve and four by OCC. Our selection was based on the criteria that the banks be included on the agencies’ list of large, complex institutions; that the institutions selected would spread across several Federal Reserve and OCC districts; and that the institutions were primarily engaged in commercial banking activities. The results of this work are not projectible to the rest of the large, complex banks examined by the Federal Reserve and OCC. In preparation for our interviews with the examination staff, we reviewed the supervisory strategies and risk-assessment documents prepared for those seven banks. Using a structured interview guide, we interviewed examination staff assigned to these banks on their overall planning and scoping of examination activities. In addition, using a data collection instrument, we reviewed examination work papers for two bank activities that were examined at each of the seven banks. We attempted to select similar areas in each of the bank examinations; but because of the diversity in the scope of the examinations, we were not always able to do this. We were, however, able to identify and review a credit and internal audit related examination activity for most of the banks. To identify the challenges faced by both agencies as they continue to implement their examination programs for large, complex banks, we spoke to Federal Reserve and OCC officials and examination staff as well as staff from OCC’s Quality Assurance Division. In addition, we reviewed various studies that analyzed bank examinations in the 1980s and early 1990s. This report also draws upon work that we have done this year on the near failure of the Long-Term Capital Management hedge fund. We did our work in accordance with generally accepted government auditing standards, between May 1999 and November 1999 in Washington, D.C., and other cities where Federal Reserve and OCC examination staff for the large, complex banks included in our review were located. We obtained written comments on a draft of this report from the Federal Reserve and OCC. Their comments are reprinted in appendixes I and II. Both the Federal Reserve and OCC commented that this report presented an accurate description of their risk-focused programs for supervising large banks. In addition, both the Federal Reserve and OCC expanded on a number of points made in the draft pertaining to their large bank examination programs and provided clarifying and technical comments that were incorporated where appropriate. The Federal Reserve and OCC also both commented that their programs will continue to develop in response to changes in the industry, such as the recent passage of the Gramm-Leach-Bliley Act. As implemented by the Federal Reserve and OCC, the risk-focused examination procedures for large, complex banks differ from earlier procedures in several important ways, as outlined in table 2.1. First, the risk-focused procedures provide a perspective for supervisory assessments of banks’ safety and soundness that differs from the perspective of earlier examination procedures. In the past, examinations were aimed at determining a bank’s safety and soundness at a specific point in time, along with the bank’s compliance with banking laws. Although examiners were to review a bank’s risk-management, the earlier procedures emphasized transaction testing to verify the existence and value of bank assets and provide an assurance that the bank operated at a specific point in time, in a safe and sound manner. Risk-focused examinations are based on the belief that a large, complex bank’s risk profile changes too rapidly to expend extensive resources testing transactions that may offer little insight to the bank’s current condition. Therefore, risk-focused examination procedures are designed to be more forward looking; they emphasize proactively assessing a bank’s actions to manage risks. Examiners are to focus on individual bank’s risk-management practices and controls, using transaction testing to validate the findings from these process reviews. Under the risk-based approach, transaction testing may be less extensive and may require fewer resources from supervisory agencies and banks, compared with resource requirements of the earlier approach. A second key difference between the two approaches is the organizational scope of the examination. Under previous approaches, examinations focused on bank operations defined by their charters or legal entities. However, as more large banking organizations have begun managing their key activities along business lines and centralized risk-management systems that cross legal entities, the Federal Reserve and OCC have focused their examination activities in the same way. Consequently, the risk-focused approach generally incorporates risk assessments and examination procedures that are organized by lines of business. Finally, other differences between risk-focused examinations and the earlier approach are differences in the planning of examinations, allocation of examiner resources, ongoing monitoring of bank operations, and communication of examination findings. One way in which the current risk-focused approach differs from the previous approach is that it is more forward looking. While past examination procedures included reviews of risk-management processes, they primarily tested a bank’s records of its transactions to validate the bank’s valuation of its assets and thus judge whether the bank is being safely and soundly managed. In contrast, the risk-focused approach is designed to stress reviews of ongoing management practices, internal controls, and internal audit activities. Transaction testing remains important but is intended to validate examiners’ judgment on the reliability of an institution’s controls. Past examination procedures provided a historic picture of a bank and were largely a retrospective look at how risks were managed. According to Federal Reserve officials, in the past 10 years, bank examinations placed significant reliance on transaction testing procedures to determine a bank’s condition at a point in time. Transaction testing is defined to include examination of underlying support for transactions and the reconciliation of internal accounting records to financial reports (to evaluate the accuracy of account balances), the comparison of day-to-day practices to the requirements of policies and procedures (to assess compliance with internal systems), and all other supervisory testing procedures, such as the review of the quality of individual loans and investments. For example, examiners determined the risk posed by a loan portfolio through a transaction-by-transaction review of a sample of loans. To evaluate the credit administration process, the quality of loans, and the allowance for loan and lease losses (ALLL), examiners reviewed a high percentage of the loan files for commercial and industrial (C&I) loans and for commercial real estate loans. In contrast, Federal Reserve and OCC officials said that the risk-focused approach is an attempt to look forward and to provide a proactive assessment of a bank’s actions to manage risks. Rather than focusing on the results of practices based on past decisions, examiners are to communicate with bank management to understand and strengthen their risk-management strategies. Examinations now place a greater emphasis on evaluating the appropriateness of risk-management processes and have moved away from a high degree of transaction testing. Our review of two examination segments from each of the seven examinations found that the examiners evaluated the soundness of management policies and practices and used transaction testing to validate these process reviews. In one examination that assessed a bank’s credit asset review function, the examiners traveled to offices of the banking organization that conducted significant numbers of credit reviews to determine review procedures. The examiners discussed the procedures with key managers and working level staff and reviewed randomly selected credit files to validate their discussions. This process review determined that asset appraisals were not being obtained in a timely manner and resulted in a clarification of the bank’s policies on obtaining appraisals. Our review of work papers from the 14 bank examination segments indicated that, in the instances where transaction testing was performed, examiners tested transactions to support their assessments of risk- management rather than to verify the bank’s valuation of its assets. As an example, the workpapers for a bank’s credit administration examination indicated that the examiners reviewed a sample covering 59 percent of the bank’s commercial loan portfolio. However, using their discretion, the examiners did not specifically target commercial real estate loans from this sample. The workpapers noted several reasons for that decision: The prior year’s examination, which covered a 70 percent statistical sample of real estate credits over $25 million, as well as a 20 percent statistical sample of those credits below this amount, did not note major discrepancies between the examiner’s and the bank’s internal credit risk ratings. The bank had historically maintained very conservative classification guidelines and management was quick to downgrade credits internally when warranted. The bank’s internal audit review of the overall quality of the loan portfolio, which included 61 percent of real estate loans, did not find any systemic or trend weaknesses evident in the bank’s total loan portfolio. Instead of relying as extensively on transaction testing, risk-focused examinations may use the results of the banks’ internal audit and loan review functions, provided that examiners find those results reliable. Both Federal Reserve and OCC officials said that risk-focused examination plans often involve some test of the internal audit or loan review function in a bank to determine whether these functions yield useful self- assessments. We found this to be true in the supervisory plans we reviewed. The Federal Reserve and OCC sought to “leverage” the work of these functions by using the results of the banks’ findings if the examiners found them to be reliable. Of the 14 examination segments we selected, 7 included a review of one of these functions. Another way in which the approach has changed is the departure from the traditional alignment of examinations with legal entities. As chapter 1 notes, large, complex banking organizations generally contain several banks, sometimes with different bank charters and management teams, as well as other businesses providing financial services, such as leasing or residential mortgages. Most large, complex banking organizations have centralized their operations and shifted to a centralized functional management approach for business lines that cross legal banking charters. In response to such changes, examination strategies have shifted as well. Rather than examining each entity in a banking organization separately, examiners are centralizing examination activities to assess the risks generated by each line of business. Federal Reserve inspections of bank holding companies have often involved institutions with different bank charters. The risk-focused approach to bank examinations is designed to recognize that risks at the lead bank may be mitigated or increased by the entire banking organization as a whole. In the past, examinations were largely undertaken on the basis of legal entities. If entities within a banking organization were chartered by different agencies, regulators from those respective agencies generally supervised them. While regulators still must be cognizant of legal entities, Federal Reserve and OCC are also interested in how banking organizations are actually managed. Many large, complex banks manage their key bank activities on a business line basis (for example, lending, treasury, or retail banking) that crosses the legal structure of the organization, including different banking charters and entities conducting nontraditional banking activities. Accordingly, the bank may not maintain certain information or manage risk according to which subsidiary, branch, or department “books” a transaction. Risk management and bank information is commonly organized by type of activity, for example whether it is a trading or credit function, and the risk posed by the activity. A key implication of this shift in management structure is that much of the information and insight gathered on examinations of individual legal entities can only be fully understood in the context of examination findings of other related legal entities or centralized functions. Consequently, under the risk-focused approach, examiners are to focus on how business lines and activities that cut across legal entities are managed and controlled and how they affect the overall risk profile of the organization. Examination staff said that given the structure of their assigned financial institutions, their examinations have focused on business lines and the management practices that support the business lines across the various corporate entities. As an example, one examination we reviewed was an evaluation of the quality of credit risk-management as it related to the bank’s trading credit. This bank had a centralized trading credit review function that supported its foreign exchange and derivatives trading activities. Instead of evaluating the quality of credit risk-management during each examination of foreign exchange and derivative products, the examiners conducted their evaluation of trading credit review by examining the centralized function as a separate examination activity. In another examination, the examiners grouped the bank’s operations into related business lines and organized their examinations along these lines: retail banking, which encompassed retail deposit gathering and retail secured and unsecured consumer lending products; commercial lending, which encompassed commercial and industrial mortgage banking, which encompassed residential first mortgages and the bank’s servicing and investment portfolios; and fiduciary activities, which encompassed personal trust accounts, employee benefit accounts, and corporate trust and agency activities. To ensure that all of the risks inherent in a particular line of business are properly addressed, examiners may need to cross legal boundaries within organizations to trace information flows and control mechanisms. This may involve banking operations that are organized as subsidiaries of national banks (under OCC supervision) or those organized as subsidiaries of the bank holding company (under Federal Reserve supervision). In some cases, this can mean that OCC is interested in the risk-management practices of the bank holding company. OCC officials said that they are interested in business activities that can materially affect the safety and soundness of the national bank for which they are responsible, but not other entities or activities that do not affect the condition of the national bank. For example, one of the national banks in our sample had a large portion of its assets located overseas. Based on the legal organization of the national bank and its bank holding company, most of that bank’s international operations were conducted in the national bank or its subsidiaries and thus fell under OCC’s supervision. However, some important operations were conducted in other subsidiaries of the bank holding company and thus fell under Federal Reserve supervision. According to the examination staff, however, the lead bank managed the risk of these operations centrally. Our review of OCC’s supervisory strategies for this bank noted that, in assessing credit risk associated with international operations, OCC examiners included all international operations (including those outside the bank) in their risk assessments and examination activities as well. In another example, the supervisory strategy for one of the three Federal Reserve member banks whose examination we reviewed said that the bank had over half of its credit exposure in consumer credit. The majority of the consumer credit portfolios were located in the bank’s holding company’s national bank subsidiaries, which were supervised by OCC. The strategy said that to fully assess that bank’s credit risk, Federal Reserve examiners had to coordinate with OCC examiners to jointly examine certain operations of that bank. Further, in cases where the bank holding company contained banks with OCC charters, the Federal Reserve and OCC coordinated reviews of the banks’ operations, sometimes doing them jointly. These reviews included audit and control systems as well as the bank’s efforts to address potential Year 2000 computer problems. Other differences between OCC’s and the Federal Reserve’s risk-focused approach to examinations of large, complex banks and earlier procedures include differences in the planning of examinations, allocation of examiner resources, ongoing monitoring of bank operations, and communication of the results of the examination to a bank’s management and board of directors. Compared with past examination practices, present-day risk-focused supervision adopts a more formal examination planning process. In the planning process, examiners are to identify an individual bank’s key risk areas and tailor examination activities to the bank’s unique risk profile. This results in certain bank operations receiving less scrutiny than others. Such an approach necessarily relies on examiner judgement in identifying sources of greatest risk to a bank. Previously, examinations were planned, but plans were seldom institutionally unique. We reviewed the supervisory plans for all the banking organizations that we selected for our analysis. Although we did not independently verify any of the information upon which decisions were based, we found that examiners considered the size, activities, and organizational structure of the institution in developing the plan. Generally, the plans we reviewed described the areas examiners would review throughout the course of the year, established priorities for examinations, and considered resource needs and coordination with other supervisors. Some of the banks whose examinations we reviewed were undergoing major mergers. In these cases, we observed that the risk assessments and supervisory strategies in the plans were modified to reflect changes in resources and examination requirements. At one bank, examination staff said that the plan and examination scope was altered when bank management informed them of a decision to eliminate a business function. In some cases where merger-related reorganizations were under way, we noted in our review that some planned activities were delayed until the reorganization was completed. The risk-focused approach is intended, in part, to optimize the use of examiner resources and provide the most useful and relevant examination results by concentrating on the riskiest areas. Traditionally, examinations were planned and staffed by examiners who often did not possess specific knowledge of the banking organization. This required examiners to spend more time at the onset of the examination learning about the bank’s policies and procedures, and use procedures and checklists designed to ensure that they covered as many of the bank activities as possible. In contrast, the risk-focused approach is designed to institute a team of examiners at each large, complex banking organization. While the Federal Reserve and OCC differ in their implementation strategy, as explained in chapter 3, both agencies are making a conscious effort to ensure that the examiners remain a part of a bank’s examination team long enough to develop expertise and institutional knowledge. This approach also more explicitly incorporates examiner judgment to identify and apply appropriate examination procedures, compared to prior approaches. A concept common to both the past and present risk-focused supervision process is ongoing monitoring. In the past, however, monitoring generally did not target anticipated risks but tracked past performance and sometimes acted as a stopgap measure for postponed on-site examination activity. Under a risk-focused approach, examiners are to maintain ongoing monitoring and communication to keep abreast of the current financial condition and business strategies of a bank and use this information to update their supervisory strategies. They are to do this through the review of a variety of management reports and frequent meetings with key bank officials. Examination staff said that they have been able to identify anomalies or changes in risk profiles that warrant further examination. For example, after examiners identified a large loss at one bank’s trading operations through review of bank data, they decided to examine that operation more closely. Similarly, through discussions with another bank’s management, examiners learned of that bank’s plans to acquire an investment entity. Therefore, the examiners planned to complete an examination of the risk-management processes for the new entity. Formerly, communication outside of the examination cycle or in a form other than the annual examination report was often considered pejorative. Under the current risk-focused approach, examination staff are to communicate with bank management frequently, and both formally and informally. Examination staff told us that they communicate with bank management formally through the quarterly risk assessments and the annual report of examination. They also issue less formal letters to a bank’s management on issues that do not require top management or board of director attention. In addition, some examiners told us they often have informal meetings with bank management. In the 1990s, the Federal Reserve and OCC developed and refined risk- focused approaches to supervise and examine large, complex banks. According to both agencies, the process has been and will continue to be one of continuous evolution to adapt to the growing complexity of these organizations. The Federal Reserve and OCC programs are generally similar in their increased focus on planning, continuous monitoring, risk- focused examinations, and communication with the banking organizations’ management as described in chapter 2. There are some differences, however, in the way they manage their programs, with a decentralized Federal Reserve System and a more centralized OCC. Although both agencies maintain continuous oversight of a bank’s operations and management, they do so in different ways, with OCC depending on a continuous on-site presence while the Federal Reserve continues to do much of its oversight off site. The Federal Reserve also continues to focus most of its on-site examination activities on a single point in time during the year, while OCC conducts continuous examination activities on a year-round basis. OCC strives for continuity in its examinations by maintaining examiner staffs full time at a single large bank. While the Federal Reserve strives to maintain a measure of continuity in its examinations, it does not maintain a continuous examiner presence at large banks. Board officials have stated that they are at an earlier stage of implementing their large bank program than OCC and some elements of their risk-based program, including examination staffing and timing, may change over time to a model more closely resembling that currently employed by OCC. Because of the structure of the Federal Reserve System, the Federal Reserve operates its large bank program using a decentralized structure that combines local control exercised by each reserve bank, with broad oversight from the Board of Governors. Meanwhile, OCC manages its program centrally from its headquarters. Centralized control of the program by three deputy comptrollers and reviews by a Quality Assurance Division are key features of the program designed to ensure consistency across examinations of large banks. Federal supervision of state-chartered banks that are members of the Federal Reserve System, including large, complex banks, is designed to be a coordinated effort among the Federal Reserve Board of Governors (Board), located in Washington, D.C., and the 12 Reserve Banks located throughout the United States. The Reserve Banks, under delegated authority from the Board of Governors, conduct the day-to-day supervisory activities of the Federal Reserve, including safety and soundness examinations. The Board of Governors reviews examination reports prepared by the Reserve Banks and conducts special studies of issues related to supervision. The Board also issues guidance on examination policy and procedure through its Division of Banking Supervision and Regulation. The Board first issued formal guidance on risk-focused supervision of large, complex banking organizations in October 1997. On June 23, 1999, the Federal Reserve issued additional guidance to its supervisory staff, specifically tailored for the largest of these banking organizations- -those whose “growth and consolidation have reached a scale and diversity that would threaten the stability of financial markets around the world in the event of their failure.” The guidance reemphasized the importance of assessing an organization’s key risk-management processes and ongoing monitoring on the organization’s risk profile. The guidance also provided for the designation of a senior supervisor as the “Central Point of Contact.” While the Reserve Banks do not have a staff of examiners assigned continuously to specific large banks, the guidance does call for the assignment of a defined, stable supervisory team composed of reserve bank staff who possess skills to understand and evaluate the business lines and risk profile of large, complex banks. For example, teams may comprise examiners who have concentrated training and experience in the trust function, information systems, capital markets, and securities activities. However, reserve bank officials said they attempt to maintain some degree of continuity from year to year by assigning examiners who have participated in a previous examination at the bank or who have reviewed a similar activity at another bank. Under the Federal Reserve program, the Board provides overall program direction, oversight, and coordination of reserve bank supervision activities to foster consistency, quality, and compliance with Board policies and procedures. The individual Reserve Banks are responsible for managing the Central Point of Contact and the supervisory teams. In addition, the Reserve Banks are responsible for providing the examiner resources necessary to carry out the supervisory strategy planned for an institution. This is consistent with the Board’s delegation of supervisory authority to the district Reserve Banks. Because of the autonomy of the Reserve Banks, there is variation in the way the banks are structured to manage the large bank program. For example, the Federal Reserve Bank of New York has organized its banks into four clusters. Each cluster has a similar portfolio with a money center bank, a foreign banking organization, and a large regional bank as well as several smaller institutions. Both the money centers and foreign banking organizations may be included in the large, complex banking organization program. However, the Federal Reserve Bank of Chicago supervises large, complex banks under its “Global Supervision” group. This group supervises the largest financial institutions and branches of foreign banks in that district. Federal Reserve officials view this structural variation as a healthy situation that promotes experimentation and innovation as well as the sharing of best practices. One way in which the Board maintains oversight of the process is the assignment of Board analysts to work with the supervisory teams and participate in the development and execution of supervisory plans and programs. The analysts may also participate in examinations and other supervisory reviews. While some analysts are responsible for a single organization, others are assigned more than one, depending on the size and complexity of the organizations. Federal Reserve officials said that the analysts meet frequently to exchange information and share perspectives on supervisory activities or other relevant topics related to their assigned institutions. Supervisory strategies and plans are approved in the Reserve Banks, but Board staff also has the opportunity to provide comment and input. According to Federal Reserve officials, the assignment of dedicated analysts and possible Board staff involvement in the planning process are relatively new aspects of the program. In addition, as previously discussed, the Board has defined a framework of processes and products to facilitate consistency, communication, and coordination within the system. According to Federal Reserve officials, it is unlikely that the Board would move toward more centralized management of the program. However, these officials said they recognize a need to better define and develop supervisory teams in terms of matching available resources with an institution’s risk profile. Even though individuals with appropriate skills are not always available where they are needed within the Reserve Banks, examination staff at the Federal Reserve Bank of New York said that they have drawn resources from other districts in staffing their examinations. For example, examiners from the Federal Reserve Bank of Philadelphia who were specialists in capital market risks participated in an examination of a New York bank. In another examination, examiners also from the Philadelphia district conducted a review of that bank’s fund transfer business located in the Philadelphia district. Under such circumstances, maintaining consistent treatment of similar activities across banks becomes an increasing challenge. In October 1999, the Federal Reserve established a senior staff level position for coordinating supervisory staff resources on behalf of Reserve Banks for whom maintaining a large bank examination staff is not efficient because there are fewer large, complex banking organizations in their districts. The goal of this new position is to ensure an efficient allocation and deployment of expert resources across the Federal Reserve System. The new senior level officer is to work with existing Board and Reserve Bank managers to optimize the use of existing resources and develop and implement strategies to address any gaps in skills or expertise. This senior level officer is to work closely with supervising officials at the Board and New York Reserve Bank, whose district contains the largest number of large, complex banks. OCC’s large bank supervision program, which was formally established in 1995, previously was directed out of its district offices but now is centrally managed by the Bank Supervision Operations group located in its Washington, D.C. headquarters. As part of an agencywide reorganization in January 1997, OCC consolidated oversight of large bank supervision in its headquarters and structured its district operations to focus on community and mid-sized national banks. According to OCC, the reorganization reflected the continuing consolidation of the banking industry and took into account the basic distinction in supervisory needs between large banks and mid-sized/community banks. All banks in the large bank supervision program have a resident examiner- in-charge (EIC) and dedicated team of examiners and specialists. The EICs report directly to one of three deputy comptrollers in Bank Supervision Operations that are each assigned a portfolio of the banks included in the large bank program. The deputy comptrollers approve all supervisory plans and strategies. OCC also established a parallel structure of four geographic teams to provide administrative support to the large bank EICs. Each team has a resource coordinator who is to work with the EIC to ensure that examination activities are staffed and to provide examiners opportunities to enhance their skills and work experiences. OCC has also established a quality assurance program for its large bank supervision program. The goal of the program is to help ensure that the objectives of bank supervision are being achieved. The program is administered by OCC’s Quality Assurance Division and includes several processes and initiatives that are designed to assess OCC’s supervision processes before and after the fact. Among them are (1) EIC self- assessments about the supervisory processes they employ at their assigned banks; (2) collaborative sessions with EIC’s assigned to companies with similar product lines, risks, or business strategies to share views before supervisory activities are performed; (3) special focus reviews to assess individual institutions for which questions have been raised about whether the supervision is effective; and (4) surveys to obtain feedback from OCC employees, bank management, and others about how well OCC supervision is working. The Quality Assurance Division conducts supervisory program reviews and supervisory process studies. Supervisory program reviews are intended to determine whether the EIC had completed the supervisory program designed for the bank. According to Quality Assurance staff, they have generally been able to complete supervisory program reviews for three examinations annually. Supervisory process studies are horizontal reviews that assess whether the overall objectives of the large bank program are being met across a population of banks. Quality Assurance staff said that in 1999 they selected the supervision of internal audit function for the horizontal review. They studied how examiners supervised the internal audit function across 22 large and midsize banks, whether they had adhered to the core assessment, and whether they had conducted the necessary amount of transaction testing. We did not review the results of this study because the report was not completed at the time of completion of our review. The Federal Reserve and OCC place emphasis on continuous monitoring of the activities of the institutions in their programs to develop and maintain an understanding of the institutions’ operations and risk profiles. Both agencies accomplish this, in part, through a combination of ongoing planning and monitoring activities and maintaining continuity in staff. Reserve banks do not maintain an on-site presence at the institutions in their program, while OCC conducts its oversight activities through the use of on-site, resident examiners. While Federal Reserve officials said they are transitioning to a continuous on-site presence in its large institutions similar to OCC, they do have concerns that such a presence could undermine examiner independence. Board officials said that a continuous on-site presence may ultimately be desirable, however, some reserve bank staff suggested that it would compromise independence. Reserve bank staff said that they do not maintain an on-site presence primarily to maintain independence from the day-to-day activities of the institutions but also because such a presence could be intrusive to bank management and personnel. Although they see the advantages, they also are concerned about independence and said there was not a need for resident examiners because (1) the banks are located near their offices, and (2) they have ready access to the information and bank personnel they need to maintain an ongoing understanding of the banks’ activities and risk profile. OCC officials also expressed such concerns and said they take a number of steps to preserve independence, such as moving staff among banks, and through the Quality Assurance process. However, officials of both agencies said that, whether continuous monitoring is done on site or off site, it is critical to have staff move periodically not only to allay concerns about independence, but also to have frequent injection of different perspectives. Reserve banks monitor an institution through off-site review of information from various sources, such as publicly available information, internal management reports, regulatory reports, information from internal and external auditors, and information from other supervisors. For two of the banks in our review, reserve bank staffs had on-line access to the banks’ information systems, including key audit and management reports and senior management and board committee minutes. OCC conducts its supervision and examination activities through the use of on-site, resident examiners at each of the banks in its large bank program. According to OCC officials, having resident staff improves their access to bank management and staff and their ability to understand a bank’s risk-management processes and to redirect work quickly in response to changes in a bank’s risk profile or management. OCC officials said that examiner independence is a major concern and they attempt to foster independence in several ways. One method is through periodic rotation of EICs and examiners. Also, they said examiners are routinely assigned to work on examinations of other banks, which not only helps preserve independence but also provides them with a better perspective in doing work at their primary banks and opportunities to enhance their skills. In addition, they said the EICs and assigned staff regularly receive input from headquarters’ management and technical support staff. For example, the three deputy comptrollers in OCC headquarters are to review and approve all supervisory strategies for large, complex banks. OCC also can assign technical experts, based in headquarters, to assist in assessing the large banks’ risk models. Both the Federal Reserve and OCC guidance on large bank supervision require that examiners perform work and analyses necessary to satisfy the requirements of a full scope examination (i.e., the nature and scope of their supervisory activities must be sufficient to support safety and soundness determinations and the assignment of supervisory ratings). For the institutions included in our review, Reserve Banks conducted on-site, point-in-time examinations supplemented by off-site monitoring while OCC conducted examinations and on-site monitoring activities throughout the supervision cycle. Federal Reserve officials said they are in transition from the use of annual, point-in-time examinations to a continuous, targeted examination approach, similar to that of OCC’s. Some Reserve Banks have begun to do targeted examinations throughout the examination cycle, but most are conducting full scope, point-in-time examinations. Federal Reserve officials said that one reason for this is that state supervisors, with whom the Federal Reserve shares supervisory responsibility for state banks that are members of the Federal Reserve System, have not all adopted the risk-based approach with its use of targeted examinations throughout the examination cycle. In this respect, the Federal Reserve wants to avoid a situation where states are doing full-scope, point-in-time examinations while Reserve Banks perform examinations throughout the year. The officials said this would result in an unreasonable burden on banks. Both agencies still issue annual reports of examination to the banks. OCC views the reports as summaries of events that occurred during the year and does not detail all examination findings because examiners communicate those findings and recommendations, in writing or meetings, throughout the year with a bank’s management and board of directors. The Federal Reserve views the report as a major method to communicate and emphasize matters of supervisory concern to management and the board of directors. The Reserve Banks issue less formal letters to a bank’s management on matters that do not require top management or board of director attention. The Federal Reserve and OCC face a number of challenges as they continue to implement their examination programs for large, complex banks. While some of these challenges existed under previous examination approaches, others are affected by, or attributable to, the risk-focused approach and the presence of an increasing number of large, complex banks. Recent passage of the Gramm-Leach-Bliley Act of 1999, which removed many of the legal barriers between banks, security firms, and insurance companies will likely increase the number of large, complex banks and the complexity of their operations. One key challenge, inherent in the design of the risk-based program, is how to identify the aspects of bank operations where examiner attention should be concentrated. A second challenge is maintaining an awareness of industrywide risk in an institution-specific examination program. Another is to ensure that examiners’ assessments of risk are sufficiently independent of the bank’s risk-management systems. The Federal Reserve and OCC have both stated that it is a challenge to apply their programs to banks with decentralized operations. The continued consolidation of the banking industry in the form of bank mergers or acquisitions presents another challenge because it can interrupt or postpone planned examination activities by disrupting the management structure of the bank and therefore planned examinations of various parts of that structure. Finally, the Federal Reserve and OCC will likely continue to be challenged by the need to ensure that their examiners possess sufficient expertise to assess the risk of increasingly complex organizations. This is particularly important because a risk-focused approach requires that examiners make judgments that may result in some bank operations receiving minimal scrutiny. Because a risk-focused examination is intended to focus examiner resources on the greatest risks facing a bank, its success is dependent on the examination staff’s ability to accurately identify and measure the risks posed by a bank’s operations. Federal Reserve and OCC examiners attempt to identify, review, and understand all sources of information on the risk posed by bank operations. However, under the best of circumstances, examiners cannot know all information relevant to the risk posed by a particular line of business. For example, examiners cannot anticipate unexpected future events that could cause major disruptions in a particular sector of the economy. They also cannot know information about counterparties that was not provided to the bank and is not available from other sources to which examiners have access. Although this was true prior to the adoption of risk-focused examinations, its importance is enhanced because risk-focused examinations attempt to focus resources on the areas of bank operations that pose the greatest risk. Because of this uncertainty with regard to future events and other information, examiners may make incorrect initial assessments of the risks posed by particular lines of business. This could result in those areas not receiving the appropriate level of examiner scrutiny. Recent events have highlighted the limitations in examiners’ abilities to identify all risks threatening a bank. As discussed below, examiners did not fully evaluate the risks posed by Long-Term Capital Management (LTCM) because they were not fully aware of the risks posed by the large hedge fund, and they presumed that the fund’s creditors had employed appropriate risk-management practices. Recent events have also illustrated the limitations of bank examinations in uncovering carefully conceived and executed cases of fraud at banks. Both OCC and Federal Reserve officials said that, although they would pursue any indication of fraud detected during a bank examination, bank examinations are based on an assumption of honesty on the part of bank staff, records, and financial statements and are not designed to uncover fraud. While these concerns have always existed with bank examinations, they are highlighted in risk-focused examinations because of examiners’ efforts to focus primarily on operations that pose the greatest risks while leaving other operations to the bank’s own internal audit and review processes. Examiners are challenged to avoid being overly influenced by banks’ risk- management systems while relying on those systems and other data furnished by the bank to make their assessments. Under risk-focused supervision, examiners assess a bank’s risk-management and internal controls. To do so, they must rely on the bank’s information systems and risk models in hopes of validating the bank’s risk-management processes. A key challenge is that assessments based on the different risk- management systems at different banks yield sufficiently comparable information to ensure that banks with similar risk profiles receive similar treatment. Making independent assessments of banks’ risk models is complicated by the fact that banks use models that may reflect their unique risk characteristics, including the particular risk factors the bank faces. Thus, even when supervisors attempt to apply objective criteria or specify the use of common procedures for developing internal models, banks’ models differ because each firm designs its model to measure what it sees as its own risk profile. Because a bank’s model is designed for use with a specific risk profile, another bank’s model applied to the same profile might produce a different risk estimate. This difference in how the banks assess their own risk makes it difficult for the regulators, who rely on the bank assessments, to treat similar risks in a similar manner. Moreover, both the consistency and the accuracy of these models depend on the quality of the raw data used. Examiners are challenged to make an objective assessment of processes that are often unique to the institution. For example, differences between supervisors’ and banks’ estimates of the risks that the banks have and how this affects the level of capital that the banks should hold provide an illustration of this. As we noted in a 1998 report, while both financial services firms, including banks, and regulators agree that capital serves as a buffer against unexpected losses, regulators set minimum capital requirements to serve the public interest while the firms set capital levels to maximize their market value. Some firms noted that, with increasingly sophisticated models, they see a divergence between their internal estimates of risk and the capital needed to support certain activities and the regulatory capital requirements for those activities. Although they may hold more total capital than the regulatory minimums, some of the firms said that the regulatory requirements for some activities are higher than levels they believe to be appropriate. Regulators, however, noted that these models had not been tested over sufficient time to assess their reliability in periods of extreme stress— precisely when losses may be unexpectedly high. OCC and the Federal Reserve do not formally aggregate examination findings for the purpose of identifying industrywide risk issues. OCC and the Federal Reserve try to ensure that their examiners are aware of larger issues affecting the banking industry so those examiners are aware of what type of problems could arise with banks they are examining. However, their examinations are intended to assess the safety and soundness of individual institutions; and they do not attempt to assess risk on an industrywide basis. One area in which some information is shared is the interagency Shared National Credit program, which is designed to assess the risk posed by large syndicated loans. However, the program does not evaluate other risks, and it is an activity done primarily to assist examiners in assessing asset quality at banks that participate in large syndicated loans rather than to identify industrywide trends in asset quality. The agencies have several initiatives to improve the scope and quality of information that is provided to examiners to help them understand banking activities and the risks that banks undertake. These initiatives, some formal and others informal, are intended to facilitate comparative assessments across banks, provide a framework for identifying industry trends, foster more consistent supervision of institutions with similar businesses and risk profiles, and promote the sharing of best supervisory practices within the supervisory community. For example, both agencies have encouraged communication of industry issues among examiners with similar disciplines. Sometimes this is done formally, through regularly scheduled meetings in which examiners can exchange information on the types of problems that they are seeing in the banks they examine. In addition, both OCC and the Federal Reserve staff participate in annual conferences held within those agencies that are also used to communicate industrywide risks. To identify emerging trends among large banks, both the Federal Reserve and OCC sometimes conduct reviews of specific issues across these large banks to assess the risk associated with a specific business line, activity, or functional area. This is done both formally and informally. Federal Reserve officials said that the Federal Reserve also evaluates information that it regularly compiles across banks to identify emerging trends. OCC and the Federal Reserve occasionally issue regulatory guidance to examiners, alerting them to emerging issues in the financial services industry. For example, both the Federal Reserve and OCC issued guidance on lending to highly leveraged institutions in response to problems observed in the aftermath of the near collapse of LTCM. They also issued warnings when it appeared that underwriting standards were slipping due to increased competition along with the recent continued economic prosperity. This guidance sometimes results from the reviews of issues across banks described earlier. The Federal Reserve and OCC both also have research staffs who work to identify and communicate industry risk trends to examiners. For example, the Federal Reserve said it regularly does peer group analyses on the top 50 banking organizations. However, efforts by the Federal Reserve and OCC to communicate industrywide risk trends are only intended to assist examiners in identifying risks at institutions. Neither the Federal Reserve nor OCC have procedures to aggregate the risks that examiners have identified during examinations. Such aggregation might have proven useful in the case of LTCM, where regulators identified individual credit exposures to the large hedge fund but did not identify the threat posed by LTCM, primarily because they looked for problems involving the largest credit exposures of the individual banks. LTCM was not among the largest exposures of any of these banks and the overall industry exposure to LTCM and the potential for market disruption was not realized until after its near collapse. Both OCC and the Federal Reserve have attempted to develop management information systems designed to store, and make readily available, industrywide risk information. The Supervisory Monitoring System (SMS) is OCC’s primary internal source of information about the condition of individual national banks. OCC uses the system to record the current condition, strategy, and supervisory concerns for each bank. Examiners are also to use the system to document follow-up actions, board meeting discussions, commitments for corrective action, progress in correcting identified problems, and subsequent events. Other bank regulators also have access to SMS as well. However, OCC large bank examination staff in both headquarters and in the banks we visited said that the SMS system does not fit their needs and that they generally do not use it. OCC has initiatives under way to develop a system more suited to large banks, however, these efforts are in their early stages. The Federal Reserve is developing the Banking Organization National Desktop (BOND), to provide examiners with the information-sharing and ongoing collaboration it believes is necessary to support the risk-focused supervision of the largest, most complex banking organizations. BOND is intended to expand the capabilities of the National Examination Database, an automated platform for sharing supervisory information that has been in existence for a number of years. When implemented, BOND is expected to provide immediate, user-friendly access to a full range of information and to foster collaboration among Federal Reserve staff and other bank supervisors. However, BOND’s implementation has been delayed until April 2000. A decentralized management structure can impede the examination of a large, complex bank. The risk-focused examination approach for both the Federal Reserve and OCC is based on the expectation that large banks generally align their risk-management processes in a centralized manner along lines of business rather than legal charters. The agencies’ examination processes strive to assess the risk profile of a bank using information provided by the bank’s management and management information systems. Therefore, a bank with centralized bank management and management information systems lends itself to a more efficient examination process. However, when a banking organization has its information systems and key personnel disbursed throughout the organization, it is more difficult for the Federal Reserve and OCC to identify the risks and to appropriately plan an examination strategy for that decentralized bank structure. In such instances, an examination approach focusing on the risk-management of the consolidated organization rather than on the operations of the legal charters that make up an organization faces inherent limitations. Many large, complex banking organizations have centralized their operations, including either reducing the number of legal banking charters for their subsidiaries or ignoring those charters in the management of the consolidated banking organization. In such structures, the banks maintain and make available consolidated information on their risk profile to their principal decision makers. It is also likely that there are relatively few key decision makers that oversee the bank’s operations in a few physical locations. In such circumstances, examiners can assess the risk posed by various bank operations by reviewing consolidated management reports and contacting a small number of bank personnel. Some large banks, however, have business strategies that rely on substantially more decentralized risk-management. Federal Reserve and OCC examination staff said that taking a risk-based examination approach is more difficult when large banks have decentralized risk-management structures and information systems because they require more examiner resources. When key risk-management information is not centrally maintained, examiners must review information from a larger variety of sources in order to assess the entire organization’s risk profile. They said when key decision making processes involve more bank staff, more examination resources are required to maintain contact with them. Some banks maintain geographically dispersed subsidiaries that operate under numerous bank charters. They said in these cases, more examiners have been needed to conduct examination activities because it was necessary to travel to those locations to gain access to the appropriate staff and information. Examiners said that they are challenged by such management structures but said that it is not their role to insist on particular management approaches. They said that while they can and do comment on any management issue at the bank that may cause supervisory concern, they do not attempt to influence banks’ business strategies. In addition, banks should not be expected to structure their management systems for the convenience of examiners. In some cases, a decentralized management structure may represent a business strategy rather than a management quality issue. The continued consolidation of the banking industry, in the form of mergers and acquisitions, has had the effect of limiting the level of targeted examination activity at large, complex banks while those banks continue to take on and manage risk. As described earlier in this report, the banking industry has undergone major consolidation in recent years through mergers and acquisitions. This trend is expected to continue. When two banks are merged, or in the event of a major acquisition, it is necessary for the management of the resulting institution to determine how it will manage various lines of business. This determination can include deciding the physical location of certain management activities when the merger involves geographically dispersed institutions. During periods when those decisions are being made or implemented, planned examination activities may be put on hold, awaiting an opportunity to examine the new bank structure and management systems. A major consideration for the management of the post-merger bank is the information system to be used in tracking the bank’s operations. Both banks involved in a merger will have separate information systems in place for tracking their operations. A merger generally requires that these systems be combined or that one is chosen over the other. Examiners we interviewed said that they must wait for such decisions to be made before they can adequately plan their examination activities. In the meantime, they are primarily faced with monitoring the merger while engaging in fewer targeted examinations. The management of merging banks must make several other decisions regarding the resulting bank, including the internal audit approach, internal loan rating systems, risk appetites, and a host of others. Making these decisions can take time. In a merger of equals, elements of both merging banks may be incorporated into the management structure of the resulting bank. In these situations, regulators are challenged to find a balance between supervising existing bank activities and monitoring the development of new ones. After a bank merger or acquisition, examiners may interrupt or postpone planned examination activities to shift resources to monitor the consolidation or reorganization of the resulting bank rather than to examine activities that may soon be discontinued or reorganized. Examination staff said that monitoring the consolidation is necessary to understand the operating structure of the bank that will result from the merger. They said that it also makes sense because the agencies do not want to expend scarce examination resources gaining familiarity with something that will not continue. Finally, some mergers involve banks with significantly different management philosophies. For example, as discussed earlier, some banks manage themselves in a centralized manner, with all major management decisions originating from a single office. Other banks prefer a less centralized structure with important decisions being made locally out of smaller offices. Because both the Federal Reserve and OCC attempt to tailor their examination staffs and approaches to the management structure and style of the bank, such differences among merging institutions can significantly complicate their efforts to adapt the examination to the bank. This is because, during the consolidation of the two merging entities, there may be internal inconsistencies in how different parts of the bank are managed. As banking activities have become more varied and complex, bank examinations have required examiners who possess increasingly varied technical skills, knowledge, and expertise to make the judgments necessary in a risk-focused examination approach. To meet this requirement, both the Federal Reserve and OCC have sought to build and maintain the expertise needed for supervising complex banking organizations and the activities in which they engage. Federal Reserve and OCC officials said they currently employ specialists, such as economists with technical expertise in the quantitative methods and economic models underlying bank’s risk-management systems as well as specialists in electronic banking, bank information systems, capital markets, fiduciary activities, asset management, mortgage banking, and capital markets. Both Federal Reserve and OCC officials said they shift examiners with specific skills, knowledge, or expertise among large banks to complete specific segments of the examinations of those institutions. Further, the agencies have a number of initiatives to improve the scope and quality of information that is provided to examiners to help them understand banking activities and the risks that banks undertake. Federal Reserve staff acknowledge the challenge presented by the increasing complexity of large bank operations. Federal Reserve staff said that one way they respond to the challenge is to assign their best, most seasoned, examiners to large, complex banks. For particularly technical examination segments, examiners with specific expertise or skill sets are assigned. In some cases, examiners from one Federal Reserve district have been assigned to examinations being done by another in recognition that some Reserve Banks possess specific expertise in certain areas. This task is complicated for the Federal Reserve System due to the nature of the system, with its 12 independent Reserve Banks. Federal Reserve Board staff said that a major challenge for the system is to build a national pool of large bank examiners from a group of independent organizations with defined geographic jurisdictions where skills and demands for skills based on banks are not aligned. In October 1999, a work group comprising Federal Reserve Board Governors and Reserve Bank presidents initiated a series of initiatives designed to ensure that the Federal Reserve System will have the necessary supervisory skills to keep pace with present and projected changes in the financial services industry. The first of these initiatives involves better utilizing supervisory resources systemwide to ensure an efficient allocation and deployment of expert resources across the Federal Reserve System. As discussed in Chapter 3, this effort includes the establishment of a new senior staff level position to coordinate these efforts. A second initiative focuses on enhancing expertise and skill levels through the establishment of a continuing professional development program and the development of job rotation and systemwide employment programs. Another initiative involves the use of consultants from nonsupervisory areas of the Federal Reserve and the possible use of external consultants to expand the Federal Reserve’s supervisory resource base. Federal Reserve officials said that the Reserve Banks have taken initiatives to train existing staff and hire new staff. The Reserve Banks said they are trying to keep their staffs’ skills current, but it is difficult in the present employment market because they often cannot match the pay offered by firms competing for skills possessed by top examiners. Therefore, staff attrition remains a concern. Federal Reserve staff have said their most critical losses are among experienced examiners whose skills and expertise are of even greater value under a program of risk-focused supervision. OCC officials said they also count the maintenance of adequate examiner resources as one of the most important challenges facing the agency. Like the Federal Reserve, OCC officials said they assign the most experienced examiners to the large bank program. To maintain sufficient expertise, OCC encourages all of its examiners to carry outside certifications, such as a Certified Public Accountant, Chartered Financial Analyst, and Certified Information Systems Auditor. In addition, OCC officials said they have recently developed their Examiner Development Initiative to ensure that OCC has sufficient numbers of examiners with requisite expertise in several specific disciplines. Under the initiative, OCC manages the work assignments of examiners to provide them with the on-the-job training necessary to develop skills and expertise in specific areas. As described in chapter 3, OCC developed the concept of geographically based teams of examiners who can be rotated among banks in specific regions of the country for the purpose of maintaining adequate staffing, not only in terms of numbers, but also expertise. OCC officials said that this is also done to ensure examiner independence. This process can enhance the availability of examiner expertise for examinations by making certain skill sets available to resident examiner staffs at banks that might not otherwise possess them. Although the availability of adequate staff has always been important, its importance has been enhanced with the increased need presented by large, complex banks for examiners with adequate experience and expertise. OCC officials explained that because OCC does not possess the requisite number of expert staff to provide all competencies to all resident staffs, it uses these teams to provide them when needed. OCC has begun to supplement its staff for some examinations through the use of contract employees. OCC officials said such employees are usually retired national bank examiners who possess skills that may be difficult for OCC to obtain in sufficient numbers in its current staff. Candidates for contracts were evaluated by OCC for past performance and experience in the areas of general examination skills, capital markets, market risks, credit risks, accounting, shared national credits, bank information systems, Community Reinvestment Act/consumer, fiduciary activities, and bank examination instruction. In addition to this evaluation, contractors were subject to a security investigation, reviews by OCC’s ethics official for potential conflict of interest situations, and the execution of a confidentiality statement to the effect that no privileged information or data will be disclosed except as authorized by OCC. Senior OCC officials said that this practice represents an opportunity to tap a valuable source of talented examiners that could be more extensively employed. | Pursuant to a congressional request, GAO provided information on the risk-focused approaches used by the Federal Reserve and Office of the Comptroller of the Currency (OCC), focusing on: (1) the general characteristics of the regulators' risk-focused approach to examinations of large, complex banks, explaining how they differ from past examination practices; (2) comparing the implementation of the Federal Reserve's and OCC's risk-focused examination approaches; and (3) the challenges faced by both agencies as they continue to implement their examination programs for large, complex banks. GAO noted that: (1) the Federal Reserve and OCC's risk-focused approaches to supervising large, complex banking organizations are evolving with changes intended to strengthen oversight of these entities; (2) their effectiveness will depend on the expertise and independence of examiners, and the regulators' ability to maintain an awareness of industrywide risk in an institution-specific examination program; (3) transaction review and testing under the risk-focused approach is intended to validate the use and effectiveness of internal control and other risk-management systems; (4) examination activities now focus on risk assessments along business lines, which often cross bank charters, and the processes used to manage and control the attendant risks; (5) under a risk-focused approach, activities judged to pose the highest risk to an institution receive the most scrutiny by examiners; (6) this approach relies on examiner judgment and results in certain bank operations receiving less scrutiny than others; (7) examiners monitor and assess a bank's financial condition and risk-management systems through the review of a variety of management reports and meetings with key bank officials, documenting the areas they select for review and including their rationale for selecting those areas; (8) examiners conduct examinations to assess a bank's internal control and risk-management systems; (9) the Federal Reserve and the OCC differ in how they implement their risk-focused examinations programs for large, complex banks; (10) OCC's large bank supervision program is centrally managed from its headquarters and has achieved a degree of uniformity in its use of examiners who are located at the bank throughout the year and conduct ongoing monitoring and examinations, and report to one of three deputy comptrollers located in Washington D.C.; (11) the Federal Reserve's program is implemented through a less centralized system of Reserve Banks and has less uniformity in its ongoing monitoring and examinations, with sometimes differing staffing arrangements in place for each bank; and (12) regulators face a number of challenges in implementing examination programs for large, complex banks, including: (a) identifying the aspects of bank operations where examiner's attention should be concentrated; (b) maintaining an awareness of industrywide risk in an institution-specific examination program; (c) ensuring risk assessments are not overly influenced by the bank's risk-management systems on which they must rely; and (d) maintaining sufficient staffing numbers and expertise. |
The Aviation and Transportation Security Act established TSA as the federal agency with primary responsibility for securing the nation’s civil aviation system, which includes the screening of all passenger and property transported by commercial passenger aircraft. At the 463 TSA- regulated airports in the U.S., prior to boarding an aircraft, all passengers, their accessible property, and their checked baggage are screened pursuant to TSA-established procedures, which include passengers passing through security checkpoints where they and their identification documents are checked by transportation security officers (TSO) and other TSA employees or by private sector screeners under TSA’s Screening Partnership Program. Airport operators, however, are directly responsible for implementing TSA security requirements, such as those relating to perimeter security and access controls, in accordance with their approved security programs and other TSA direction. TSA relies upon multiple layers of security to deter, detect, and disrupt persons posing a potential risk to aviation security. These layers include behavior detection officers (BDOs), who examine passenger behaviors and appearances to identify passengers who might pose a potential security risk at TSA-regulated airports; travel document checkers, who examine tickets, passports, and other forms of identification; TSOs responsible for screening passengers and their carry-on baggage at passenger checkpoints, using x-ray equipment, magnetometers, Advanced Imaging Technology, and other devices; random employee screening; and checked baggage screening systems. Other security layers cited by TSA include, among others; intelligence gathering and analysis; passenger prescreening against terrorist watchlists; random canine team searches at airports; federal air marshals, who provide federal law enforcement presence on selected flights operated by U.S. air carriers; Visible Intermodal Protection Response (VIPR) teams; reinforced cockpit doors; the passengers themselves; as well as other measures both visible and invisible to the public. Figure 1 shows TSA’s layers of aviation security. TSA has also implemented a variety of programs and protective actions to strengthen airport perimeters and access to sensitive areas of the airport, including conducting additional employee background checks and assessing different biometric-identification technologies. Airport perimeter and access control security is intended to prevent unauthorized access into secure areas of an airport—either from outside or within the airport complex. According to TSA, each one of these layers alone is capable of stopping a terrorist attack. TSA states that the security layers in combination multiply their value, creating a much stronger system, and that a terrorist who has to overcome multiple security layers to carry out an attack is more likely to be preempted, deterred, or to fail during the attempt. TSA has taken actions to validate the science underlying its behavior detection program, but more work remains. We reported in May 2010 that TSA deployed SPOT nationwide before first determining whether there was a scientifically valid basis for using behavior and appearance indicators as a means for reliably identifying passengers who may pose a risk to the U.S. aviation system. DHS’s Science and Technology Directorate completed a validation study in April 2011 to determine the extent to which SPOT was more effective than random screening at identifying security threats and how the program’s behaviors correlate to identifying high-risk travelers. However, as noted in the study, the assessment was an initial validation step, but was not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. According to DHS, further research will be needed to comprehensively validate the program. According to TSA, SPOT was deployed before a scientific validation of the program was completed to help address potential threats to the aviation system, such as those posed by suicide bombers. TSA also stated that the program was based upon scientific research available at the time regarding human behaviors. We reported in May 2010 that approximately 14,000 passengers were referred to law enforcement officers under SPOT from May 2004 through August 2008. Of these passengers, 1,083 were arrested for various reasons, including being illegal aliens (39 percent), having outstanding warrants (19 percent), and possessing fraudulent documents (15 percent). The remaining 27 percent were related to other reasons for arrest. As noted in our May 2010 report, SPOT officials told us that it is not known if the SPOT program has ever resulted in the arrest of anyone who is a terrorist, or who was planning to engage in terrorist-related activity. According to TSA, SPOT referred about 50,000 passengers for additional screening in fiscal year 2010 resulting in about 3,600 referrals to law enforcement officers. These referrals yielded approximately 300 arrests. Of these 300 arrests, TSA stated that 27 percent were illegal aliens, 17 percent were drug-related, 14 percent were related to fraudulent documents, 12 percent were related to outstanding warrants, and 30 percent were related to other offenses. DHS has requested about $254 million in fiscal year 2012 for the SPOT program, which would support an additional 350 (or 175 full-time equivalent) BDOs. If TSA receives its requested appropriation, TSA will be in a position to have invested about $1 billion in the SPOT program since fiscal year 2007. A 2008 report issued by the National Research Council of the National Academy of Sciences stated that the scientific evidence for behavioral monitoring is preliminary in nature. The report also noted that an information-based program, such as a behavior detection program, should first determine if a scientific foundation exists and use scientifically valid criteria to evaluate its effectiveness before deployment. The report added that such programs should have a sound experimental basis and that the documentation on the program’s effectiveness should be reviewed by an independent entity capable of evaluating the supporting scientific evidence. As we reported in May 2010, an independent panel of experts could help DHS develop a comprehensive methodology to determine if the SPOT program is based on valid scientific principles that can be effectively applied in an airport environment for counterterrorism purposes. Thus, we recommended that the Secretary of Homeland Security convene an independent panel of experts to review the methodology of the validation study on the SPOT program being conducted to determine whether the study’s methodology is sufficiently comprehensive to validate the SPOT program. We also recommended that this assessment include appropriate input from other federal agencies with expertise in behavior detection and relevant subject matter experts. DHS concurred and stated that its validation study, completed in April 2011, included an independent review of the study with input from a broad range of federal agencies and relevant experts, including those from academia. DHS’s validation study found that SPOT was more effective than random screening to varying degrees. For example, the study found that SPOT was more effective than random screening at identifying individuals who possessed fraudulent documents and identifying individuals who law enforcement officers ultimately arrested. According to DHS’s study, no other counterterrorism or screening program incorporating behavior- and appearance-based indicators is known to have been subjected to such a rigorous, systematic evaluation of its screening accuracy. However, DHS noted that the identification of such high-risk passengers was rare in both the SPOT and random tests. In addition, DHS determined that the base rate, or frequency, of SPOT behavioral indicators observed by TSA to detect suspicious passengers was very low and that these observed indicators were highly varied across the traveling public. Although details about DHS’s findings related to these indicators are sensitive security information, the low base rate and high variability of traveler behaviors highlights the challenge that TSA faces in effectively implementing a standardized list of SPOT behavioral indicators. In addition, DHS outlined several limitations to the study. For example, the study noted that BDOs were aware of whether individuals they were screening were referred to them as the result of identified SPOT indicators or random selection. DHS stated that this had the potential to introduce bias into the assessment. DHS also noted that SPOT data from January 2006 through October 2010 were used in its analysis of behavioral indicators even though questions about the reliability of the data exist. In May 2010, we reported weaknesses in TSA’s process for maintaining operational data from the SPOT program database. Specifically, the SPOT database did not have computerized edit checks built into the system to review the format, existence, and reasonableness of data. Because of these data-related issues, we reported that meaningful analyses could not be conducted to determine if there is an association between certain behaviors and the likelihood that a person displaying certain behaviors would be referred to a law enforcement officer or whether any behavior or combination of behaviors could be used to distinguish deceptive from nondeceptive individuals. In our May 2010 report, we recommended that TSA establish controls for this SPOT data. DHS agreed and TSA has established additional data controls as part of its database upgrade. However, some of DHS’s analysis used SPOT data recorded prior to these additional controls. The study also noted that it was not designed to comprehensively validate whether SPOT can be used to reliably identify individuals in an airport environment who pose a security risk. The DHS study made recommendations related to strengthening the program and conducting a more comprehensive validation of whether the science can be used for counterterrorism purposes in the aviation environment. Some of these recommendations, such as the need for a comprehensive program evaluation including a cost-benefit analysis, reiterate recommendations made in our prior work. As we reported in March 2011, Congress may wish to consider the study’s results in making future funding decisions regarding the program. TSA is currently reviewing the study’s findings and assessing the steps needed to address DHS’s recommendations. If TSA decides to implement the recommendations in the April 2011 DHS validation study, DHS may be years away from knowing whether there is a scientifically valid basis for using behavior detection techniques to help secure the aviation system against terrorist threats given that the initial study took about 4 years to complete. TSA has taken actions to strengthen airport perimeter and access controls security, but has not conducted a comprehensive risk assessment or developed a national strategy for airport security. We reported in September 2009 that TSA has implemented a variety of programs and actions since 2004 to improve and strengthen airport perimeter and access controls security, including strengthening worker screening and improving access control technology. For example, to better address the risks posed by airport workers, in 2007 TSA implemented a random worker screening program that has been used to enforce access procedures, such as ensuring workers display appropriate credentials and do not possess unauthorized items when entering secure areas. According to TSA officials, this program was developed to help counteract the potential vulnerability of airports to an insider attack—an attack from an airport worker with authorized access to secure areas. TSA has also expanded its requirements for conducting worker background checks and the population of individuals who are subject to these checks. For example, in 2007 TSA expanded requirements for name-based checks to all individuals seeking or holding airport-issued identification badges and in 2009 began requiring airports to renew all airport-identification media every 2 years. TSA also reported taking actions to identify and assess technologies to strengthen airport perimeter and access controls security, such as assisting the aviation industry and a federal aviation advisory committee in developing security standards for biometric access controls. However, we reported in September 2009 that while TSA has taken actions to assess risk with respect to airport perimeter and access controls security, it had not conducted a comprehensive risk assessment based on assessments of threats, vulnerabilities, and consequences, as required by DHS’s National Infrastructure Protection Plan (NIPP). We further reported that without a full depiction of threats, vulnerabilities, and consequences, an organization’s ability to establish priorities and make cost-effective security decisions is limited. We recommended that TSA develop a comprehensive risk assessment, along with milestones for completing the assessment. DHS concurred with our recommendation and said it would include an assessment of airport perimeter and access control security risks as part of a comprehensive assessment for the transportation sector—the Transportation Sector Security Risk Assessment (TSSRA). The TSSRA, published in July 2010, included an assessment of various risk-based scenarios related to airport perimeter security but did not consider the potential vulnerabilities of airports to an insider attack—the insider threat—which it recognized as a significant issue. In July 2011, TSA officials told us that the agency is developing a framework for insider risk that is to be included in the next iteration of the assessment, which TSA expected to be released at the end of calendar year 2011. Such action, if taken, would meet the intent of our recommendation. We also recommended that, as part of a comprehensive risk assessment of airport perimeter and access controls security, TSA evaluate the need to conduct an assessment of security vulnerabilities at airports nationwide. At the time of our review, TSA told us its primary measures for assessing the vulnerability of airports to attack were professional judgment and the collective results of joint vulnerability assessments (JVA) it conducts with the Federal Bureau of Investigation (FBI) for select—usually high-risk—airports. Our analysis of TSA data showed that from fiscal years 2004 through 2008, TSA conducted JVAs at about 13 percent of the approximately 450 TSA-regulated airports that existed at that time, thus leaving about 87 percent of airports unassessed. TSA has characterized U.S. airports as an interdependent system in which the security of all is affected or disrupted by the security of the weakest link. However, we reported that TSA officials could not explain to what extent the collective JVAs of specific airports constituted a reasonable systems- based assessment of vulnerability across airports nationwide. Moreover, TSA officials said that they did not know to what extent the 87 percent of commercial airports that had not received a JVA as of September 2009— most of which were smaller airports—were vulnerable to an intentional security breach. DHS concurred with our recommendation to assess the need for a vulnerability assessment of airports nationwide. TSA officials also stated that based on our review they intended to increase the number of JVAs conducted at Category II, III, and IV airports and that the resulting data would assist TSA in prioritizing the allocation of limited resources. Our analysis of TSA data showed that from fiscal year 2004 through July 1, 2011, TSA conducted JVAs at about 17 percent of the TSA-regulated airports that existed at that time, thus leaving about 83 percent of airports unassessed. Since we issued our report in September 2009, TSA had not conducted JVAs at Category III and IV airports. Further, TSA could not tell us to what extent it has studied the need to conduct JVAs of security vulnerabilities at airports nationwide. We also reported in September 2009 that TSA’s efforts to enhance the security of the nation’s airports have not been guided by a national strategy that identifies key elements, such as goals, priorities, performance measures, and required resources. To better ensure that airport stakeholders take a unified approach to airport security, we recommended that TSA develop a national strategy for airport security that incorporates key characteristics of effective security strategies, such as measurable goals and priorities. DHS concurred with this recommendation and stated that TSA would implement it by updating the Transportation Systems-Sector Specific Plan (TS-SSP), to be released in the summer of 2010. In July 2011 TSA officials told us that a pre- publication version of the TS-SSP had been sent to Congress on June 29, 2011, and that DHS was in the process of finalizing the TS-SSP for publication, but a specific date had not been set for public release. TSA has revised explosives detection requirements for checked baggage screening systems but faces challenges in deploying equipment that meet the requirements. Explosives represent a continuing threat to the checked baggage component of aviation security. TSA deploys EDS and explosives trace detection (ETD) machines to screen all checked baggage transported by U.S. and foreign air carriers departing from TSA- regulated airports in the United States. An EDS uses a computed tomography X-ray source that rotates around a bag, obtaining a large number of cross-sectional images that are integrated by a computer that automatically triggers an alarm when objects with the characteristic of explosives are detected. An ETD machine is used to chemically analyze trace materials after a human operator swabs checked baggage to identify any traces of explosive material. TSA seeks to ensure that checked baggage screening technology is capable of detecting explosives through its Electronic Baggage Screening Program, one of the largest acquisition programs within DHS. Under the program, TSA certifies and acquires systems used to screen checked baggage at 463 TSA-regulated airports throughout the United States. TSA certifies explosives detection-screening technologies to ensure they meet explosives detection requirements developed in conjunction with the DHS Science and Technology Directorate along with input from other agencies, such as the FBI and Department of Defense. Our July 2011 report addressed TSA’s efforts to enhance explosives detection requirements for checked-baggage screening technologies as well as TSA’s efforts to ensure that currently deployed and newly acquired explosives detection technologies meet the enhanced requirements. As highlighted in our July 2011 report, requirements for EDSs were established in 1998 and subsequently revised in 2005 and 2010 to better address the threats. Currently, checked baggage screening systems are not operating under the 2010 requirements. As of January 2011, some of the EDS in TSA’s fleet are detecting explosives at the level established by the 2005 requirements. Meanwhile, other EDS are configured to meet older requirements established in 1998, but include software to meet 2005 requirements. The remaining EDS are configured to meet 1998 requirements but lack the software or both the hardware and software that would enable them to detect at the levels established by the 2005 requirements. TSA plans to implement the revised requirements in a phased approach spanning several years. The first phase, which includes implementation of the 2005 requirements, is scheduled to take years to fully implement and deploying EDS that meet 2010 requirements could prove difficult given that TSA did not begin deployment of EDS meeting 2005 requirements until 2009—4 years later. We found that TSA did not have a plan to deploy and operate EDS to meet the most recent requirements and recommended, among other things, that TSA develop a plan to deploy EDS that meet the current EDS explosives detection requirements and ensure that new EDS, as well as those already deployed in airports, be operated at the levels established in those requirements. In addition, TSA has faced challenges in procuring the first 260 EDS to meet 2010 requirements. For example, due to the danger associated with certain explosives, TSA and DHS encountered challenges safely developing simulants and collecting data on the explosives’ physical and chemical properties needed by vendors and agencies to develop detection software and test EDS prior to the current acquisition. Also, TSA’s decision to pursue EDS procurement complicated both the data collection and procurement efforts, which resulted in a delay of over 7 months for the current acquisition. We recommended that TSA complete data collection for each phase of the 2010 EDS requirements prior to pursuing EDS procurements that meet those requirements to help TSA avoid additional schedule delays. Our report also examined other key issues such as the extent to which TSA’s approach to its current EDS acquisition meets best practices for schedules and cost estimates and included a review of TSA’s plans for potential upgrades of deployed EDSs. The report contained six recommendations to TSA, including that the agency develop a plan to ensure that new EDSs, as well as those EDSs currently deployed in airports, operate at levels that meet revised requirements. DHS concurred with all of the recommendations and has subsequently outlined actions to implement them. Chairman Chaffetz, Ranking Member Tierney, and Members of the Subcommittee, this concludes my statement. I look forward to answering any questions that you may have at this time. For questions about this statement, please contact Stephen M. Lord at (202) 512-8777 or lords@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony are David M. Bruno, Glenn Davis, and Steve Morris, Assistant Directors; Scott Behen; Ryan Consaul; Barbara Guffy; Tom Lombardi; Lara Miklozek; and Doug Sloane. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The attempted bombing of Northwest flight 253 in December 2009 underscores the need for effective aviation security programs. Aviation security remains a daunting challenge with hundreds of airports, thousands of aircraft, and thousands of flights daily carrying millions of passengers and pieces of checked baggage. The Department of Homeland Security's (DHS) Transportation Security Administration (TSA) has spent billions of dollars and implemented a wide range of aviation security initiatives. Three key layers of aviation security are (1) TSA's Screening of Passengers by Observation Techniques (SPOT) program designed to identify persons who may pose a security risk; (2) airport perimeter and access controls security; and (3) checked baggage screening systems. This testimony provides information on the extent to which TSA has taken actions to validate the scientific basis of SPOT, strengthen airport perimeter security and access controls, and deploy more effective checked baggage screening systems. This statement is based on prior reports GAO issued from September 2009 through July 2011 and selected updates in June and July 2011. GAO analyzed documents on TSA's progress in strengthening aviation security, among other things. DHS has completed an initial study to validate the scientific basis of the SPOT program; however, additional work remains to fully validate the program. GAO reported in May 2010 that TSA deployed this program, which uses behavior observation and analysis techniques to identify potentially high-risk passengers, before determining whether there was a scientifically valid basis for using behavior and appearance indicators as a means for reliably identifying passengers who may pose a risk to the U.S. aviation system. TSA officials said that SPOT was deployed in response to potential threats, such as suicide bombers, and was based on scientific research available at the time. GAO recommended in May 2010 that DHS, as part of its study, assess the methodology to help ensure the validity of the SPOT program. DHS concurred and its April 2011 validation study found that SPOT was more effective than random screening to varying degrees. For example, the study found that SPOT was more effective than random screening at identifying individuals who possessed fraudulent documents and individuals who were subsequently arrested. However, DHS's study was not designed to fully validate whether behavior detection can be used to reliably identify individuals in an airport environment who pose a security risk. The study noted that additional work is needed to comprehensively validate the program. TSA officials are assessing the actions needed to address the study's recommendations. In September 2009, GAO reported that since 2004 TSA has taken actions to strengthen airport perimeter and access controls security by, among other things, deploying a random worker screening program; however, TSA has not conducted a comprehensive risk assessment or developed a national strategy. Specifically, TSA had not conducted vulnerability assessments for 87 percent of the approximately 450 U.S. airports regulated by TSA at that time. GAO recommended that TSA develop (1) a comprehensive risk assessment and evaluate the need to assess airport vulnerabilities nationwide and (2) a national strategy to guide efforts to strengthen airport security. DHS concurred and said TSA is developing the assessment and strategy, but has not yet evaluated the need to assess airport vulnerabilities nationwide. GAO reported in July 2011 that TSA revised explosives detection requirements for its explosives detection systems (EDS) used to screen checked baggage in January 2010, but faces challenges in deploying EDS that meet these requirements. Deploying systems that meet the 2010 EDS requirements could be difficult given that TSA did not begin deployment of systems meeting the previous 2005 requirements until 2009. As of January 2011 some of the EDS in TSA's fleet detect explosives at the level established in 2005 while the remaining EDS detect explosives at levels established in 1998. Further, TSA does not have a plan to deploy and operate systems to meet the current requirements and has faced challenges in procuring the first 260 systems to meet these requirements. GAO recommended that TSA, among other things, develop a plan to ensure that EDS are operated at the levels in established requirements. DHS agreed and has outlined actions to do so. GAO has made recommendations in prior work to strengthen TSA's SPOT program, airport security efforts, checked baggage screening efforts. DHS and TSA generally concurred with the recommendations and have actions under way to address them. |
While TRIA has improved the availability of terrorism insurance, particularly for high-risk properties in major metropolitan areas, most commercial policyholders are not buying the coverage. Limited industry data suggest that 10 - 30 percent of commercial policyholders are purchasing terrorism insurance, perhaps because most policyholders perceive themselves at relatively low risk for a terrorist event. Some industry experts are concerned that those most at risk from terrorism are generally the ones buying terrorism insurance. In combination with low purchase rates, these conditions could result in uninsured losses for those businesses without terrorism coverage or cause financial problems for insurers, should a terrorist event occur. Moreover, even policyholders who have purchased terrorism insurance may remain uninsured for significant risks arising from certified terrorist events—that is, those meeting statutory criteria for reimbursement under TRIA—such as those involving NBC agents or radioactive contamination. Finally, although insurers and some reinsurers have cautiously reentered the terrorism risk market, insurance industry participants have made little progress toward developing a mechanism that could permit the commercial insurance market to resume providing terrorism coverage without a government backstop. TRIA has improved the availability of terrorism insurance, especially for some high-risk policyholders. According to insurance and risk management experts, these were the policyholders who had difficulty finding coverage before TRIA. TRIA requires that insurers “make available” coverage for terrorism on terms not differing materially from other coverage. Largely because of this requirement, terrorism insurance has been widely available, even for development projects in high-risk areas of the country. Although industry data on policyholder characteristics are limited and cannot be generalized to all policyholders in the United States, risk management and real estate representatives generally agree that after TRIA was passed, policyholders—including borrowers obtaining mortgages for “trophy” properties, owners and developers of high-risk properties in major city centers, and those in or near “trophy” properties— were able to purchase terrorism insurance. Additionally, TRIA contributed to better credit ratings for some commercial mortgage-backed securities. For example, prior to TRIA’s passage, the credit ratings of certain mortgage-backed securities, in which the underlying collateral consisted of a single high-risk commercial property, were downgraded because the property lacked or had inadequate terrorism insurance. The credit ratings for other types of mortgage-backed securities, in which the underlying assets were pools of many types of commercial properties, were also downgraded but not to the same extent because the number and variety of properties in the pool diversified their risk of terrorism. Because TRIA made terrorism insurance available for the underlying assets, thus reducing the risk of losses from terrorist events, it improved the overall credit ratings of mortgage-backed securities, particularly single-asset mortgage-backed securities. Credit ratings affect investment decisions that revolve around factors such as interest rates because higher credit ratings result in lower costs of capital. According to an industry expert, investors use credit ratings as guidance when evaluating the risk of mortgage-backed securities for investment purposes. Higher credit ratings reflect lower credit risks. The typical investor response to lower credit risks is to accept lower returns, thereby reducing the cost of capital, which translates into lower interest rates for the borrower. To the extent that the widespread availability of terrorism insurance is a result of TRIA’s “make available” requirement, Treasury’s decision on whether to extend the requirement to year three of the program is vitally important. While TRIA has ensured the availability of terrorism insurance, we have little quantitative information on the prices charged for this insurance. Treasury is engaged in gathering data through surveys that should provide useful information about terrorism insurance prices. TRIA requires that they make the information available to Congress upon request. In addition, TRIA also requires Treasury to assess the effectiveness of the act and evaluate the capacity of the industry to offer terrorism insurance after its expiration. This report is to be delivered to Congress no later than June 30, 2005. Although TRIA improved the availability of terrorism insurance, relatively few policyholders have purchased terrorism coverage. We testified previously that prior to September 11, 2001, policyholders enjoyed “free” coverage for terrorism risks because insurers believed that this risk was so low that they provided the coverage without additional premiums as part of the policyholder’s general property insurance policy. After September 11, prices for coverage increased rapidly and, in some cases, insurance became very difficult to find at any price. Although a purpose of TRIA is to make terrorism insurance available and affordable, the act does not specify a price structure. However, experts in the insurance industry generally agree that after the passage of TRIA, low-risk policyholders (for example, those not in major urban centers) received relatively low-priced offers for terrorism insurance compared to high-risk policyholders, and some policyholders received terrorism coverage without additional premium charges. Yet according to insurance experts, despite low premiums, many businesses (especially those not in “target” localities or industries) did not buy terrorism insurance. Some simply may not have perceived themselves at risk from terrorist events and considered terrorism insurance, even at low premiums (relative to high-risk areas), a bad investment. According to insurance sources, other policyholders may have deferred their decision to buy terrorism insurance until their policy renewal date. Some industry experts have voiced concerns that low purchase rates may indicate adverse selection—where those at the most risk from terrorism are generally the only ones buying terrorism insurance. Although industry surveys are limited in their scope and not appropriate for market-wide projections, the surveys are consistent with each other in finding low “take-up” rates, the percentage of policyholders buying terrorism insurance, ranging from 10 to 30 percent. According to one industry survey, the highest take-up rates have occurred in the Northeast, where premiums were generally higher than the rest of the country. The combination of low take-up rates and high concentration of purchases in an area thought to be most at risk raises concerns that, depending on its location, a terrorist event could have additional negative effects. If a terrorist event took place in a location not thought to be a terrorist “target,” where most businesses had chosen not to purchase terrorism insurance, then businesses would receive little funding from insurance claims for business recovery efforts, with consequent negative effects on owners, employers, suppliers, and customers. Alternatively, if the terrorist event took place in a location deemed to be a “target,” where most businesses had purchased terrorism insurance, then adverse selection could result in significant financial problems for insurers. A small customer base of geographically concentrated, high-risk policyholders could leave insurers unable to cover potential losses facing possible insolvency. If, however, a higher percentage of business owners had chosen to buy the coverage, the increased number of policyholders would have reduced the chance that losses in any one geographic location would create a significant financial problem for an insurer. Since September 11, 2001, the insurance industry has moved to tighten long-standing exclusions from coverage for losses resulting from NBC attacks and radiation contamination. As a result of these exclusions and the actions of a growing number of state legislatures to exclude losses from fire following a terrorist attack, even those policyholders who choose to buy terrorism insurance may be exposed to potentially significant losses. Although NBC coverage was generally not available before September 11, after that event insurers and reinsurers recognized the enormity of potential losses from terrorist events and introduced new practices and tightened treaty language to further limit as much of their loss exposures as possible. (We discuss some of these practices and exclusions in more detail in the next section.) State regulators and legislatures have approved these exclusions, allowing insurers to restrict the terms and conditions of coverage for these perils. Moreover, because TRIA’s “make available” requirements state that terms for terrorism coverage be similar to those offered for other types of policies, insurers may choose to exclude the perils from terrorism coverage just as they have in other types of coverage. According to Treasury officials, TRIA does not preclude Treasury from providing reimbursement for NBC events, if insurers offered this coverage. However, policyholder losses from perils excluded from coverage, such as NBCs, would not be “insured losses” as defined by TRIA and would not be covered even in the event of a certified terrorist attack. In an increasing number of states, policyholders may not be able to recover losses from fire following a terrorist event if the coverage in those states is not purchased as part of the offered terrorism coverage. We have previously reported that approximately 30 states had laws requiring coverage for “fire-following” an event—known as the standard fire policy (SFP)—irrespective of the fire’s cause. Therefore, in SFP states fire following a terrorist event is covered whether there is insurance coverage for terrorism or not. After the terrorist attacks of September 11, 2001, some legislatures in SFP states amended their laws to allow the exclusion of fire following a terrorist event from coverage. As of March 1, 2004, 7 of the 30 SFP states had amended their laws to allow for the exclusion of acts of terrorism from statutory coverage requirements. However as discussed previously, the “make available” provision requires coverage terms offered for terrorist events to be similar to coverage for other events. Treasury officials explained that in all non-SFP states, and the 7 states with modified SFPs, insurers must include in their offer of terrorism insurance coverage for fire following a certified terrorist event because coverage for fire is part of the property coverage for all other risks. Thus, policyholders who have accepted the offer would be covered for fire following a terrorist event, even though their state allows exclusion of the coverage. However, policyholders who have rejected their offer of coverage for terrorism insurance would not be covered for fire following a terrorist event. According to insurance experts, losses from fire damage can be a relatively large proportion of the total property loss. As a result, excluding terrorist events from SFP requirements could result in potentially large losses that cannot be recovered if the policyholder did not purchase terrorism coverage. For example, following the 1994 Northridge earthquake in California, total insured losses for the earthquake were $15 billion—$12.5 billion of which were for fire damage. According to an insurance expert, policyholders were able to recover losses from fire damage because California is an SFP state, even though most policies had excluded coverage for earthquakes. Under TRIA, reinsurers are offering a limited amount of coverage for terrorist events for insurers’ remaining exposures, but insurers have not been buying much of this reinsurance. According to insurance industry sources, TRIA’s ceiling on potential losses has enabled reinsurers to return cautiously to the market. That is, reinsurers generally are not offering coverage for terrorism risk beyond the limits of the insurer deductibles and the 10 percent share that insurers would pay under TRIA. In spite of reinsurers’ willingness to offer this coverage, company representatives have said that many insurers have not purchased reinsurance. Insurance experts suggested that the low demand for the reinsurance might reflect, in part, commercial policyholders’ generally low take-up rates for terrorism insurance. Moreover, insurance experts also have suggested that insurers may believe that the price of reinsurance is too high relative to the premiums they are earning from policyholders for terrorism insurance. The relatively high prices charged for the limited amounts of terrorism reinsurance available are probably the result of interrelated factors. First, even before September 11 both insurance and reinsurance markets were beginning to harden; that is, prices were beginning to increase after several years of lower prices. Reinsurance losses resulting from September 11 also depressed reinsurance capacity and accelerated the rise in prices. The resulting hard market for property-casualty insurance affected the price of most lines of insurance and reinsurance. A notable example has been the market for medical malpractice insurance. The hard market is only now showing signs of coming to an end, with a resulting stabilization of prices for most lines of insurance. In addition to the effects of the hard market, reinsurer awareness of the adverse selection that may be occurring in the commercial insurance market could be another factor contributing to higher reinsurance prices. Adverse selection usually represents a larger-than-expected exposure to loss. Reinsurers are likely to react by increasing prices for the terrorism coverage that they do sell. In spite of the reentry of reinsurers into the terrorism market, insurance experts said that without TRIA caps on potential losses, both insurers and reinsurers likely still would be unwilling to sell terrorism coverage because they have not found a reliable way to price their exposure to terrorist losses. According to industry representatives, neither insurers nor reinsurers can estimate potential losses from terrorism or determine prices for terrorism insurance without a pricing model that can estimate both the frequency and the severity of terrorist events. Reinsurance experts said that current models of risks for terrorist events do not have enough historical data to dependably estimate the frequency or severity of terrorist events, and therefore cannot be relied upon for pricing terrorism insurance. According to the experts, the models can predict a likely range of insured losses resulting from the damage if specific event parameters such as type and size of weapon and location are specified. However, the models are unable to predict the probability of such an attack. Even as they are charging high prices, reinsurers are covering less. In response to the losses of September 11, industry sources have said that reinsurers have changed some practices to limit their exposures to acts of terrorism. For example, reinsurers have begun monitoring their exposures by geographic area, requiring more detailed information from insurers, introducing annual aggregate and event limits, excluding large insurable values, and requiring stricter measures to safeguard assets and lives where risks are high. And as discussed previously, almost immediately after September 11 reinsurers began broadening NBC exclusions beyond scenarios involving industrial accidents, such as nuclear plant accidents and chemical spills, to encompass intentional destruction from terrorists. For example, post-September 11 exclusions for nuclear risks include losses from radioactive contamination to property and radiation sickness from dirty bombs. As of March 1, 2004, industry sources indicated that there has been little development or movement among insurers or reinsurers toward developing a private-sector mechanism that could provide capacity, without government involvement, to absorb losses from terrorist events. Industry officials have said that their level of willingness to participate more fully in the terrorism insurance market in the future will be determined, in part, by whether any more events occur. Industry sources could not predict if reinsurers would return to the terrorism insurance market after TRIA expires, even after several years and the absence of further major terrorist attacks in the United States. They explained that reinsurers are still recovering from the enormous losses of September 11 and still cannot price terrorism coverage. In the long term and without another major terrorist attack, insurance and reinsurance companies might eventually return. However, should another major terrorist attack take place, reinsurers told us that they would not return to this market— with or without TRIA. Congress had two major objectives in establishing TRIA. The first was to ensure that business activity did not suffer from the lack of insurance by requiring insurers to continue to provide protection from the financial consequences of another terrorist attack. Since TRIA was enacted in November 2002, terrorism insurance generally has been widely available even for development projects in high-risk areas of the country, in large part because of TRIA’s “make available” requirement. Although most businesses are not buying coverage, there is little evidence that development has suffered to a great extent—even in lower-risk areas of the county, where purchases of coverage may be lowest. Further, although quantifiable evidence is lacking on whether the availability of terrorism coverage under TRIA has contributed to the economy, the current revival of economic activity suggests that the decision of most commercial policyholders to decline terrorism coverage has not resulted in widespread, negative economic effects. As a result, the first objective of TRIA appears largely to have been achieved. Congress’s second objective was to give the insurance industry a transitional period during which it could begin pricing terrorism risks and developing ways to provide such insurance after TRIA expires. The insurance industry has not yet achieved this goal. We observed after September 11 the crucial importance of reinsurers for the survival of the terrorism insurance market and reported that reinsurers’ inability to price terrorism risks was a major factor in their departure from the market. Additionally, most industry experts are tentative about predictions of the level of reinsurer and insurer participation in the terrorism insurance market after TRIA expires. Unfortunately, insurers and reinsurers still have not found a reliable method for pricing terrorism insurance, and although TRIA has provided reinsurers the opportunity to reenter the market to a limited extent, industry participants have not developed a mechanism to replace TRIA. As a result, reinsurer and consequently, insurer, participation in the terrorism insurance market likely will decline significantly after TRIA expires. Not only has no private-sector mechanism emerged for supplying terrorism insurance after TRIA expires, but to date there also has been little discussion of possible alternatives for ensuring the availability and affordability of terrorism coverage after TRIA expires. Congress may benefit from an informed assessment of possible alternatives—including both wholly private alternatives and alternatives that could involve some government participation or action. Such an assessment could be a part of Treasury’s TRIA-mandated study to “assess…the likely capacity of the property and casualty insurance industry to offer insurance for terrorism risk after termination of the Program.” As part of the response to the TRIA-mandated study that requires Treasury to assess the effectiveness of TRIA and evaluate the capacity of the industry to offer terrorism insurance after TRIA expires, we recommend that the Secretary of the Treasury, after consulting with the insurance industry and other interested parties, identify for Congress an array of alternatives that may exist for expanding the availability and affordability of terrorism insurance after TRIA expires. These alternatives could assist Congress during its deliberations on how best to ensure the availability and affordability of terrorism insurance after December 2005. Mr. Chairman, Madam Chairwoman, this concludes my statement. I would be pleased to respond to any questions that you or other members of the Subcommittees may have. For further information regarding this testimony please contact Richard J. Hillman or Davi M. D’Agostino, Directors, or Lawrence D. Cluff or Wesley M. Phillips, Assistant Directors, Financial Markets and Community Investment, (202) 512-8678. Individuals making key contributions to this testimony include Sonja Bensen, Rachel DeMarcus, Tom Givens III, Jill Johnson, Barry Kirby, Caitlyn Lam, Tarek Mahmassani, Angela Pun, and Barbara Roesmann. Under TRIA, Treasury is responsible for reimbursing insurers for a portion of terrorism losses under certain conditions. Payments are triggered when (1) the Secretary of the Treasury certifies that terrorists acting on behalf of foreign interests have carried out an act of terrorism and (2) aggregate insured losses for commercial property and casualty damages exceed $5,000,000 for a single event. TRIA specifies that an insurer is responsible (that is, will not be reimbursed) for the first dollars of its insured losses— its deductible amount. TRIA sets the deductible amount for each insurer equal to a percentage of its direct earned premiums for the previous year. Beyond the deductible, insurers also are responsible for paying a percentage of insured losses. Specifically, TRIA structures pay-out provisions so that the federal government shares the payment of insured losses with insurers at a 9:1 ratio—the federal government pays 90 percent of insured losses and insurers pay 10 percent—until aggregate insured losses from all insurers reach $100 billion in a calendar year (see fig. 1). Thus, under TRIA’s formula for sharing losses, insurers are reimbursed for portions of the claims they have paid to policyholders. Furthermore, TRIA then releases insurers who have paid their deductibles from any further liability for losses that exceed aggregate insured losses of $100 billion in any one year. Congress is charged with determining how losses in excess of $100 billion will be paid. TRIA also contains provisions and a formula requiring Treasury to recoup part of the federal share if the aggregate sum of all insurers’ deductibles and 10 percent share is less than the amount prescribed in the act—the “insurance marketplace aggregate retention amount.” TRIA also gives the Secretary of the Treasury discretion to recoup more of the federal payment if deemed appropriate. Commercial property-casualty policyholders would pay for the recoupment through a surcharge on premiums for all the property-casualty policies in force after Treasury established the surcharge amount; the insurers would collect the surcharge. TRIA limits the surcharge to a maximum of 3 percent of annual premiums, to be assessed for as many years as necessary to recoup the mandatory amount. TRIA also gives the Secretary of the Treasury discretion to reduce the annual surcharge in consideration of various factors such as the economic impact on urban centers. However, if Treasury makes such adjustments, it has to extend the surcharges for additional years to collect the remainder of the recoupment. Treasury is funding the Terrorism Risk Insurance Program (TRIP) office operations—through which it administers TRIA provisions and would pay claims—with “no-year money” under a TRIA provision that gives Treasury authority to utilize funds necessary to set up and run the program. The TRIP office had a budget of $8.97 million for fiscal year 2003 (of which TRIP spent $4 million), $9 million for fiscal year 2004, and a projected budget of $10.56 million for fiscal year 2005—a total of $28.53 million over 3 years. The funding levels incorporate the estimated costs of running a claims-processing operation in the aftermath of a terrorist event: $5 million in fiscal years 2003 and 2004 and $6.5 million in fiscal year 2005, representing about 55 - 60 percent of the budget for each fiscal year. If no certified terrorist event occurred, the claims-processing function would be maintained at a standby level, reducing the projected costs to $1.2 million annually, or about 23 percent of the office’s budget in each fiscal year. Any funds ultimately used to pay the federal share after a certified terrorist event would be in addition to these budgeted amounts. Terrorist attacks and natural catastrophes—-such as hurricanes and earthquakes—-pose unique challenges to insurers. Forecasting the timing and severity of such events is difficult and the large losses associated with catastrophes can threaten insurer safety and soundness. Insurers also frequently respond to catastrophic events by cutting back coverage significantly or substantially increasing premiums for policyholders. Over the years, several approaches have been suggested to expand the capacity of the insurance industry to cover catastrophic events. These approaches include securitization of catastrophe risk, changing tax and accounting treatment of catastrophe risk, and permitting risk-retention groups to cover property as well as liability exposures. At the request of the Chairman of the House Financial Services Committee and others, we have completed reports that address some of these issues or have work ongoing in these areas. Our work may assist the Committee in its oversight of the insurance industry and consideration of the industry’s ability to both insure against and respond to catastrophic events. Given the enormous financial losses associated with catastrophic events and questions about insurers’ ability to cover such losses, interest has been generated in transferring some of these risks to the capital markets, which had total value of about $29 trillion as of the first quarter of 2003. Since the mid-1990s, some insurance companies, reinsurance companies, and capital market participants have developed various financial instruments, the most prevalent of which are catastrophe bonds. These bonds offer a relatively high rate of return to investors that are willing to accept some of the substantial risks associated with catastrophes. In two previous reports, we assessed the development of the catastrophe bond market. We found that some insurance companies view catastrophe bonds as an important component of their overall strategy for managing natural catastrophe financial risks. In addition, representatives from some institutional investors we contacted expressed positive views about catastrophe bonds because they offer attractive yields compared to traditional investments and help diversify investment risks. However, other insurers and investors are not willing to issue or purchase catastrophe bonds because they are more costly than traditional reinsurance, too risky, or illiquid. We also reported that developing catastrophe bonds to cover terrorism risks in the United States is considered challenging for many reasons, including the difficulties associated with developing computer models to predict the frequency and severity of terrorist attacks. Sophisticated models have been developed to predict the frequency and severity of natural catastrophes—particularly hurricanes—that have facilitated the development of catastrophe bonds covering such risks. We are currently conducting follow-up work on potential tax and accounting issues raised in our previous reports that might affect the use of catastrophe bonds. As we reported in September 2002, most catastrophe bonds are issued offshore—for example, in Bermuda—rather than in the United States due to favorable tax considerations. Some insurance industry groups have argued for changes in U.S. tax laws to encourage insurers to issue catastrophe bonds onshore to lessen transaction costs and afford regulators greater scrutiny over these activities. As part of our ongoing work, we are reviewing the tax treatment of catastrophe risk coverage in selected European countries. Furthermore, in 2003 we reported that the Financial Accounting Standards Board had issued guidance that may require insurers or investors to list catastrophe bond assets and liabilities on their balance sheets. We reported that this guidance had the potential to limit the appeal of issuing catastrophe bonds but that insurers and financial market participants were not certain of the impact of this guidance. We are continuing to investigate developments on these tax and accounting issues and will discuss them in an upcoming report. Some believe removing accounting and tax barriers that prevent U.S. insurance companies from establishing tax-deductible reserves to cover the financial risks associated with potential natural catastrophes and terrorist attacks would supplement private-sector capacity. Under current U.S. accounting standards and tax law, insurers must build any reserves for events that have not yet occurred from after-tax income (retained earnings). As a result, insurers do not usually establish reserves in anticipation of catastrophic events, such as hurricanes. Therefore, insurers attempt to limit their exposure to catastrophic risks through the underwriting process, the purchase of reinsurance, or issuance of catastrophe bonds, among other alternatives. There is considerable disagreement about the appropriateness and effectiveness of tax-deductible reserving. Advocates believe that allowing insurers to establish such reserves would provide increased capacity at lower cost. On the other hand, critics of tax-deductible reserving have argued that, in addition to lowering federal tax receipts, there is no assurance that insurers would actually increase their catastrophe insurance capacity, but rather either shield existing capital from taxes or substitute tax-deductible reserves for reinsurance. At the Chairman’s request, we are currently reviewing the tax treatment of catastrophe risk reserves in selected European countries—-France, Spain, Germany, Switzerland, and Italy. We continue to review these practices and will comment on them in a forthcoming report. In addition to discussing reserving practices, we are gathering information on general approaches to insuring against catastrophic risks in these countries. Congress enacted the Liability Risk Retention Act of 1986 (Act) to facilitate the formation of risk-retention groups (RRGs) and risk- purchasing groups (RPGs), insurance entities initially established to increase the availability and affordability of liability insurance during the 1980s. As authorized by the Act, these groups may only provide commercial liability insurance. An RRG is simply a group of businesses with similar risks that join to create an insurance company to self-insure their risks. An RPG, on the other hand, is a group formed to purchase insurance as a single entity from a traditional insurer. The majority of our ongoing work focuses on RRGs because, as insurers, they have the potential to provide new insurance capacity. A wide variety of groups, such as professional groups (doctors, attorneys), institutions (universities, hospitals), and businesses (trucking firms, homebuilders) have created RRGs. As of mid-April 2004, about 150 RRGs were operational and approximately 72 were formed in the last year and half. In contrast to most other insurers, an RRG can sell insurance in as many states as it chooses but is to be regulated by only one state—the state in which it is chartered. Our ongoing work focuses on assessing the extent to which RRGs have met the Act’s intent that they increase the availability and affordability of liability insurance. We will also assess how the unique regulatory structure of RRGs—where only one state serves as regulator—has promoted the establishment of RRGs and if this structure has resulted in uneven or ineffective regulation. The recent failure of four RRGs has resulted in some regulators questioning the efficacy of having a single-state regulator and the standards used by some states to charter and regulate RRGs. If we identify any problems as part of our work, we will evaluate what legislative or regulatory changes might be needed. These changes, if needed, could be important whether or not, as some advocates have suggested, the Act is expanded to include commercial property insurance. Finally, in the event the Act were expanded to include property insurance, we also are exploring the potential of RRGs to provide additional capacity for terrorism insurance. U.S. General Accounting Office, Terrorism Insurance: Implementation of the Terrorism Risk Insurance Act of 2002, GAO-04-307 (Washington, D.C.: Apr. 23, 2004). U.S. General Accounting Office, Catastrophe Insurance Risks: Status of Efforts to Securitize Natural Catastrophe and Terrorism Risk, GAO-03- 1033 (Washington, D.C.: Sep. 24, 2003). U.S. General Accounting Office, Catastrophe Insurance Risks: The Role of Risk-Linked Securities, GAO-03-195T (Washington, D.C.: Oct. 8, 2002). U.S. General Accounting Office, Catastrophe Insurance Risks: The Role of Risk-Linked Securities and Factors Affecting Their Use, GAO-02-941 (Washington, D.C.: Sep. 24, 2002). U.S. General Accounting Office, Terrorism Insurance: Rising Uninsured Exposure to Attacks Heightens Potential Economic Vulnerabilities, GAO- 02-472T (Washington, D.C.: Feb. 27, 2002). U. S. General Accounting Office, Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers, GAO-02-199T (Washington, D.C.: Oct. 24, 2001). U.S. General Accounting Office, Terrorism Insurance: Alternative Programs for Protecting Insurance Consumers, GAO-02-175T (Washington, D.C.: Oct. 24, 2001). U.S. General Accounting Office, Insurers’ Ability to Pay Catastrophe Claims, GAO/GGD-00-57R (Washington, D.C.: Feb. 8, 2000). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | After the terrorist attacks of September 11, 2001, insurance coverage for terrorism largely disappeared. Congress passed the Terrorism Risk Insurance Act (TRIA) in 2002 to help commercial property-casualty policyholders obtain terrorism insurance and give the insurance industry time to develop mechanisms to provide such insurance after the act expires on December 31, 2005. Under TRIA, the Department of Treasury (Treasury) caps insurer liability and would process claims and reimburse insurers for a large share of losses from terrorist acts that Treasury certified as meeting certain criteria. As Treasury and industry participants have operated under TRIA for more than a year, GAO was asked to describe how TRIA affected the terrorism insurance market. TRIA has enhanced the availability of terrorism insurance for commercial policyholders, largely fulfilling a principal objective of the program. In particular, TRIA has benefited commercial policyholders in major metropolitan areas perceived to be at greater risk for a terrorist attack. Prior to TRIA, we reported concern that some development projects had already been delayed or cancelled because of the unavailability of insurance and continued fears that other projects also would be adversely impacted. We also conveyed the widespread concern that general economic growth and development could be slowed by a lack of available terrorism insurance. Since TRIA's enactment, terrorism insurance generally has been widely available, even for development projects in perceived high-risk areas, largely because of the requirement in TRIA that insurers "make available" coverage for terrorism on terms not differing materially from other coverage. Although the purpose of TRIA is to make terrorism insurance available, it does not directly address prices. As part of its assessment of TRIA's effectiveness, Treasury is engaged in gathering data through surveys that should provide useful information about terrorism insurance prices in the marketplace. Despite increased availability of coverage, limited industry data suggest that most commercial policyholders are not buying terrorism insurance, perhaps because they perceive their risk of losses from a terrorist act as being relatively low. The potential negative effects of low purchase rates, in combination with the probability that those most likely to be the targets of terrorist attacks may also be the ones most likely to have purchased coverage, would become evident only in the aftermath of a terrorist attack and could include more difficult economic recovery for businesses without terrorism coverage or potentially significant financial problems for insurers. Moreover, those that have purchased terrorism insurance may still be exposed to significant risks that have been excluded by insurance companies, such as nuclear, biological, or chemical contamination. Meanwhile, although insurers and some reinsurers have cautiously reentered the terrorism risk market to cover insurers' remaining exposures, little progress has been observed within the private sector toward either finding a reliable method for pricing terrorism insurance or developing any viable reinsurance alternatives to TRIA once it expires. |
In almost every year an influenza virus causes acute respiratory disease in epidemic proportions somewhere in the world. Influenza is more severe than some of the other viral respiratory infections, such as the common cold. Most people who get the flu recover completely in 1 to 2 weeks, but some develop serious and potentially life-threatening medical complications, such as pneumonia. People who are aged 65 and older, people of any age with chronic medical conditions, children younger than 2 years, and pregnant women are more likely to get severe complications from influenza than other people. Influenza and pneumonia rank as the fifth leading cause of death among persons aged 65 and older. For the 2004-05 flu season, CDC is recommending that about 185 million Americans in these at-risk populations and other target groups receive the vaccine, which is the primary method for preventing influenza. Flu vaccine is generally widely available in a variety of settings, ranging from the usual physicians’ offices, clinics, and hospitals to retail outlets such as drugstores and grocery stores, workplaces, and other convenience locations. Millions of individuals receive flu vaccinations through mass immunization campaigns in nonmedical settings, where organizations such as visiting nurse agencies under contract administer the vaccine. It takes about 2 weeks after vaccination for antibodies to develop in the body and provide protection against influenza virus infection. CDC recommends October through November as the best time to get vaccinated because the flu season often starts in late November to December and peaks between late December and early March. However, if influenza activity peaks late, vaccination in December or later can still be beneficial. Producing the influenza vaccine is a complex process that involves growing viruses in millions of fertilized chicken eggs. This process, which requires several steps, generally takes at least 6 to 8 months from January through August each year, so vaccine manufacturers must predict demand and decide on the number of doses to produce well before the onset of the flu season. Each year’s vaccine is made up of three different strains of influenza viruses, and, typically, each year one or two of the strains is changed to better protect against the strains that are likely to be circulating during the coming flu season. The Food and Drug Administration (FDA) and its advisory committee decide which strains to include based on CDC surveillance data, and FDA also licenses and regulates the manufacturers that produce the vaccine. In a typical year, manufacturers make flu vaccine available before the optimal fall season for administering flu vaccine. Currently, two manufacturers—one in the United States and one in the United Kingdom— produce over 95 percent of the vaccine used in the United States. According to CDC officials, for the 2002-03 flu season, manufacturers produced about 95 million doses of vaccine, of which about 83 million doses were used and 12 million doses went unused. Production for the 2003-04 flu season was based on the previous year’s demand and was about 87 million doses. For the 2004-05 season, CDC estimates that about 100 million doses will be available. Currently, flu vaccine production and distribution are largely private- sector responsibilities. Like other pharmaceutical products, flu vaccine is sold to thousands of purchasers by manufacturers, numerous medical supply distributors, and other resellers such as pharmacies. These purchasers provide flu vaccinations at physicians’ offices, public health clinics, nursing homes, and less traditional locations such as workplaces and various retail outlets. Most influenza vaccine distribution and administration are accomplished within the private sector, with relatively small amounts of vaccine purchased and distributed by CDC or by state and local health departments. HHS also has a role in planning to prepare for and respond to an influenza pandemic. Planning is key to being prepared for and mitigating the negative effects of the next influenza pandemic, including major illness, death, economic loss, and social disruption. A national pandemic influenza plan was first developed in 1978 and was revised in 1983. In 1993, efforts to revise the national plan were initiated, and these efforts picked up momentum in the late 1990s. In August 2004, HHS released a draft plan for comment entitled, “Pandemic Influenza Preparedness and Response Plan.” To foster state and local pandemic planning and preparedness, CDC first issued draft interim planning guidance to states in 1997 and posted guidance on its Web site for state and local health departments in 2001. Since that time, states have been preparing pandemic response plans, and many are integrating these plans with existing state plans to respond to public health emergencies such as natural disasters and bioterrorist attacks. Ensuring an adequate and timely supply of vaccine is a difficult task. It has become even more difficult because there are few manufacturers. Problems at one or more manufacturers can significantly upset the traditional fall delivery of influenza vaccine. These problems, in turn, can create variability in who has ready access to the vaccine. Matching flu vaccine supply and demand is a challenge because the available supply and demand for vaccine can vary from month to month and year to year. For example, In 2000-01, when a substantial proportion of flu vaccine was distributed much later than usual due to manufacturing difficulties, temporary shortages in the prime period for vaccinations were followed by decreased demand as additional vaccine became available later in the year. Despite efforts by CDC and others to encourage people to seek flu vaccinations later in the season, providers still reported a drop in demand in December. The light flu season in 2000-01, which had relatively low influenza mortality, probably also contributed to the lack of interest. As a result of the waning demand that year, manufacturers and distributors reported having more vaccine than they could sell. In addition, some physicians’ offices, employee health clinics, and other organizations that administered flu shots reported having unused doses in December and later. For the 2003-04 flu season, shortages of vaccine have been attributed to an earlier than expected and more severe flu season and to higher than normal demand, likely resulting from media coverage of pediatric deaths associated with influenza. According to CDC officials, this increased demand occurred in a year in which manufacturers had produced about the same number of doses as in the previous season and that supply was not adequate to meet the demand. If production problems delay the availability of vaccine in a given year, the timing for an individual provider to obtain flu vaccine may depend on which manufacturer’s vaccine it ordered. This happened in the 2000-01 season, and it could happen again. This year, one of the two major manufacturers recently announced a delay in its shipments of vaccine. On August 26, 2004, one manufacturer announced that release of its flu vaccine would be delayed because of production problems related to sterility of a small number of doses at its manufacturing facility. The company stated that it expected to deliver between 46 million and 48 million doses to the U.S. market beginning in October, and CDC issued a notice on September 24, 2004, stating that some delays might occur for customers receiving this manufacturer’s vaccine. Those customers may receive their vaccine later than those who ordered from the other manufacturer, which reported sending its vaccine on schedule beginning in August and September. As a result, one provider could hold vaccination clinics in early October that would be available to anyone who wants a flu shot, while another provider would not yet have any vaccine for its high- risk patients. Shortages of flu vaccine can result in temporary spikes in the price of vaccine. When vaccine supply is limited relative to public demand for flu shots, distributors and others who have supplies of the vaccine have the ability—and the economic incentive—to sell their supplies to the highest bidders rather than filling lower-priced orders they had already received. When there was a delay and temporary shortage of vaccine in 2000, those who purchased vaccine that fall—because their earlier orders had been cancelled, reduced, or delayed, or because they simply ordered later— found themselves paying much higher prices. For example, one physician’s practice ordered flu vaccine from a supplier in April 2000 at $2.87 per dose. When none of that vaccine had arrived by November 1, the practice placed three smaller orders in November with a different supplier at the escalating prices of $8.80, $10.80, and $12.80 per dose. On December 1, the practice ordered more vaccine from a third supplier at $10.80 per dose. The four more expensive orders were delivered immediately, before any vaccine had been received from the original April order. Our work has also found that there is no mechanism in place to ensure distribution of flu vaccine to high-risk individuals before others when the vaccine is in short supply. When the supply was not sufficient in the fall of 2000, focusing distribution on high-risk individuals was difficult because all types of providers served at least some high-risk individuals. Some physicians and public health officials were upset when their local grocery stores, for example, were offering flu shots to everyone when they, the health care providers, were unable to obtain vaccine for their high-risk patients. Many physicians reported that they felt they did not receive priority for vaccine delivery, even though about two-thirds of seniors—one of the largest high-risk groups—generally get their flu shots in medical offices. In our follow-up work, we found no indication that the situation would be different if there was a shortage today. This raises the question of what more can be done to better prepare for possible vaccine delays and shortages in the future. Because flu vaccine production and distribution largely are private-sector responsibilities, options are somewhat limited. While CDC can recommend and encourage providers to immunize high-risk patients first, it does not have control over the distribution of vaccine, other than the small amount that is distributed through public health departments. Although HHS has limited authority to directly control flu vaccine production and distribution, it undertook several initiatives following the 2000-01 flu season. More specifically, CDC has taken actions that may encourage manufacturers to supply more vaccine because the action could lead to increased or more stable demand for flu vaccines. Actions taken by CDC and its advisory committee include the following: Extending the optimal period for getting a flu vaccination until the end of November, to encourage more people to get vaccinations later in the season. Expanding the target population to include children aged 6 through 23 months and all persons who take care of children aged 0 to 23 months. Including the flu vaccine in the Vaccines for Children (VFC) stockpile to help improve flu vaccine supply. For 2004, CDC has contracted for a stockpile of approximately 4.5 million doses of flu vaccine through its VFC authority. Beginning an annual assessment of the projected vaccine supply, and making a determination if vaccination should proceed for all persons or if a tiered approach should be used, targeting limited vaccine supplies to seniors and other high-risk individuals first. For both last season and the upcoming flu season, CDC announced that it did not envision any need for a tiered approach. For the 2004-05 flu season, CDC issued a notice on September 24 recommending that vaccination proceed for all recommended persons as soon as vaccine is available. HHS’s draft pandemic influenza plan describes federal roles and responsibilities in responding to an influenza pandemic and provides planning guidance to state and local health departments and the health care system. Although the draft plan is comprehensive in scope, it leaves some important decisions about the purchase, distribution, and administration of vaccines unresolved. In addition, the draft plan does not make recommendations for how population groups should be prioritized to receive vaccines in a pandemic. Consequently, states are left to make their own decisions, potentially compromising the timing and adequacy of a response to an influenza pandemic. HHS’s draft pandemic influenza plan describes HHS’s role in coordinating a national response to an influenza pandemic and provides guidance and tools to promote pandemic preparedness planning and coordination at federal, state, and local levels, including both the public and the private sectors. Pandemic influenza response activities are outlined by the different phases of a pandemic. The draft plan also provides technical background information on preparedness and response activities such as vaccine development and production. The draft plan acknowledges that states and local areas have important roles in the national response to a pandemic. To facilitate the state and local response, the draft plan provides guidance for state and local health departments and the health care system. The draft plan states that planning for an influenza pandemic will build on HHS-supported efforts to prepare for other public health emergencies such as infectious disease outbreaks, bioterrorist events, or natural disasters, and provides important guidance on areas specific to an influenza pandemic, including disease surveillance, delivery of vaccine and other medications, and communication. According to the Council of State and Territorial Epidemiologists, currently 11 states have pandemic influenza plans. Six of these states have final plans, and five states have draft plans. According to the draft plan, federal agencies are taking steps to ensure and expand influenza vaccine production capacity; increase influenza vaccination use; stockpile influenza medications; enhance U.S. and global disease detection and surveillance infrastructures; expand influenza- related research; support public health planning and laboratory capacity; and improve health care system readiness at the community level. Although most of these activities have not been targeted specifically to pandemic planning, according to HHS officials, spending in these areas will help prepare for the next influenza pandemic. The draft plan also encourages states to allocate funding from the CDC Bioterrorism Cooperative Agreement and 2004 Immunization Continuation Grants for pandemic preparedness planning. Although HHS’s draft pandemic influenza plan is comprehensive in scope, it leaves many important decisions about the purchase, distribution, and administration of vaccines unresolved. These decisions include determining the public- versus the private-sector roles in the purchase and distribution of vaccines; the division of responsibility between the federal government and the states for vaccine distribution; and how population groups will be prioritized and targeted to receive limited supplies of vaccines. As we have stated previously, until these key decisions are made, states will find it difficult to plan, and the timeliness and adequacy of response efforts may be compromised. The draft plan does not establish a definitive federal role in the purchasing and distribution of vaccine. Instead, HHS provides options for vaccine purchase and distribution that include public-sector purchase and distribution of all pandemic influenza vaccine; a mixed public-private system where public-sector supply may be targeted to specific priority groups; and maintenance of the current largely private system. Currently, approximately 85 percent of the influenza vaccine produced for annual outbreaks is purchased by the private sector, and a majority of the annual vaccinations are also delivered by the private sector. HHS states in the draft plan that such a distribution method may not be optimal in a pandemic. Furthermore, the draft plan delegates to the states responsibility for distribution of vaccine. The lack of a clearly defined federal role in distribution complicates pandemic planning for the states. Among the current state pandemic influenza plans, there is no consistency in terms of their procurement and distribution of vaccine and the relative role of the federal government. States also approach annual vaccine procurement and distribution differently. Approximately half the states handle procurement and distribution of the influenza vaccine through the state health agency. The remainder either operate through a third-party contractor for distribution to providers or use a combination of these two approaches. In 2003 we reported that state officials were concerned that there were no national recommendations for how population groups should be prioritized to receive vaccines. Identifying priority populations from among high-risk groups and essential health care and emergency personnel is likely to be a controversial issue. The draft plan does not identify priority groups, but HHS indicates that it has separately developed an initial list of suggested priority groups and is soliciting public comment on this list. The draft pandemic plan instructs the states to prioritize the persons receiving the initial doses of vaccine and indicates that as information about the severity of the virus becomes available, recommendations will be formulated at the national level. Prioritization will be an iterative process and will be tied to vaccine availability and the progression of the pandemic. While recognizing that this is an iterative process, state officials have consistently told us that a lack of detailed guidance makes it difficult for states to plan for the use of limited supplies of vaccine. Ensuring an adequate and timely supply of vaccine to protect seniors and others from influenza and flu-related complications continues to be challenging. Only two manufacturers currently produce flu vaccine for seniors and others at high risk for flu-related complications, and manufacturing problems experienced in recent years illustrate the fragility of the current methods of production. Despite efforts by CDC and others, there remains no system to ensure that persons at high risk for complications receive flu vaccine first when vaccine is in short supply. These influenza vaccine supply and distribution problems may become especially acute in a pandemic. We acknowledge the need for flexibility in planning because many aspects of an influenza pandemic cannot be known in advance. However, the absence of more detail in HHS’s draft plan creates uncertainty for the states regarding how to plan for the use of limited supplies of vaccine. Until decisions are made about vaccine purchase, distribution, and administration, and priority populations are designated, states will not be able to develop strategies consistent with federal priorities. Officials from CDC provided technical comments that we incorporated as appropriate. Mr. Chairman, this concludes my statement. I would be happy to answer any questions you or other Members of the Committee may have. For further information about this testimony, please contact Janet Heinrich at (202) 512-7119. Gigi Barsoum, Anne Dievler, Martin Gahart, Jennifer Major, Roseanne Price, and Kim Yamane also made key contributions to this statement. SARS Outbreak: Improvements to Public Health Capacity Are Needed for Responding to Bioterrorism and Emerging Infectious Diseases. GAO-03- 769T, Washington, D.C.: May 7, 2003. Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have Improved Public Health Response Capacity, but Gaps Remain. GAO-03- 654T, Washington, D.C.: April 9, 2003. Flu Vaccine: Steps Are Needed to Better Prepare for Possible Future Shortages. GAO-01-786T, Washington, D.C.: May 30, 2001. Flu Vaccine: Supply Problems Heighten Need to Ensure Access for High- Risk People. GAO-01-624, Washington, D.C.: May 15, 2001. Influenza Pandemic: Plan Needed for Federal and State Response. GAO-01-4, Washington, D.C.: October 27, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Influenza is associated with an average of 36,000 deaths and more than 200,000 hospitalizations each year in the United States. Persons aged 65 and older are involved in more than 9 of 10 deaths and 1 of 2 hospitalizations related to influenza. The best way to prevent influenza is to be vaccinated each fall. In the 2000-01 flu season, and again in the 2003-04 flu season, this country experienced periods when the demand for flu vaccine exceeded the supply, and there is concern about the availability of vaccines for this and future flu seasons. There is also concern about the prospect of a worldwide influenza epidemic, or pandemic, which many experts believe to be inevitable. Three influenza pandemics occurred in the twentieth century. Experts estimate that the next pandemic could kill up to 207,000 people in the United States and cause major social disruption. Public health experts have raised concerns about the ability of the nation's public health system to respond to an influenza pandemic. GAO was asked to discuss issues related to supply, demand, and distribution of vaccine for a regular flu season and assess the federal plan to respond to an influenza pandemic. GAO based this testimony on products it has issued since October 2000, as well as work it conducted to update key information. Challenges persist in ensuring an adequate and timely flu vaccine supply. The number of producers remains limited, and the potential for manufacturing problems such as those experienced in recent years is still present. If a manufacturer's production is affected, those providers who ordered vaccine from that manufacturer could experience shortages, while providers who received supplies from another manufacturer might have all the vaccine they need. This potential for imbalance is what creates situations in which some providers might not have enough vaccine for persons at highest risk, while other providers might have enough supply to hold mass-immunization clinics even for persons at lower risk for flu-related complications. To help limit the potential for such situations, the Centers for Disease Control and Prevention (CDC) and others have taken such steps as adding flu vaccine to federal stockpiles and more aggressively monitoring the projected supply of vaccine. However, there is no system in place to ensure that seniors and others at high risk for complications receive flu vaccinations first when vaccine is in short supply. The Department of Health and Human Services' (HHS) draft "Pandemic Influenza Preparedness and Response Plan" provides a blueprint for the government's role but leaves some important decisions about the government's response unresolved. In addition to describing the federal role, responsibilities, and actions in collaboration with the states in responding to an influenza pandemic, the plan also provides planning guidance to state and local health departments and the health care system. The draft plan is comprehensive in scope, but it leaves decisions about the purchase, distribution, and administration of vaccines open for public comment and for the states to decide individually. In addition, the draft plan does not make recommendations for how population groups should be prioritized to receive vaccines in a pandemic. Difficulties encountered during the annual flu season in the purchase, distribution, and administration of flu vaccine highlight the importance of resolving these issues for pandemic preparedness. Officials from CDC provided technical comments on this testimony that GAO incorporated as appropriate. |
Credit card usage has grown dramatically in recent years. From 1993 to 2007, the amount charged to U.S. credit cards rose from $475 billion to more than $1.9 trillion, according to estimates from the Card Industry Directory. While more than 6,000 depository institutions issue credit cards, the majority of accounts are concentrated among a small number of large banks. As shown in table 1, at the end of 2007, the top six credit card issuers accounted for about 83 percent of the outstanding credit card loans nationwide. In 2008, issuers had more than $23 billion in nonsecuritized debt that was from 30 to 180 days delinquent, according to data from Call Reports. As seen in figure 1, credit card delinquency rates have fluctuated over time. According to Federal Reserve data, these rates averaged about 4.4 percent from 1991 to 2007, but since that time have risen sharply to about 6.6 percent in the first quarter of 2009. When consumers fall more than 180 days behind on paying their credit card bills, banks “charge off” the delinquent account. Charged-off loans are generally considered uncollectible—usually because of cardholder bankruptcy, death, or prolonged delinquency—and are removed from issuers’ portfolios. Federal Reserve data show that in the first quarter of 2008, issuers charged off $4.2 billion, which represented about 4.7 percent of their outstanding credit card debt. By contrast, in the first quarter of 2009, the amount charged off had increased to about $7.5 billion, which represented a charge-off rate of 7.6 percent. The debt collection industry comprises a variety of participants, including companies that specialize in the collection of debt, debt collection law firms, and debt buyers, which purchase delinquent debt for a fraction of its face value. These companies handle credit card debt as well as other forms of debt, including utility, health care, telecommunication, and automobile loans, as well as delinquent taxes. According to the U.S. Census Bureau, in 2006 more than 4,400 debt collection companies in the United States collectively employed approximately 143,000 people. Many of these companies were very small—43 percent employed 4 or fewer employees, while about 3 percent had 500 employees or more. The small agencies may operate within a limited geographic range, while the largest corporations may operate in every state and internationally. The debt collection industry has experienced consolidation in recent years, largely due to mergers and acquisitions. The four largest debt collection companies represented about 10 percent of total industry revenues in 1992 and 19 percent of total industry revenues in 2002, the most recent year the Census Bureau collected this statistic. Because most debt collection companies are privately held, limited data exist on the debt collection industry’s precise size and other attributes. However, several sources, including FTC and some industry participants and analysts, state that the industry has grown in recent years. Kaulkin Ginsberg, a firm that provides research and other services to the debt collection industry, estimated that in 2006, revenues were about $10 billion for third-party collection agencies and about $1.2 billion for law firms specializing in debt collection. ACA International, a credit and collection industry trade association, commissioned an industry survey that estimated that in 2007 collection agencies recovered about $58 billion in delinquent debts, although these estimates may not have been very accurate. One significant change in the debt collection business in recent years has been the growth of debt buying. Debt buyers include firms whose business model focuses on the purchase of debt, as well as collection agencies and collection law firms who collect both on debt owned by others as well as debt they purchase and own themselves. In addition, some firms are passive debt buyers—investors that buy and resell portfolios but do not engage in actual debt collection themselves. While little comprehensive data exist on the debt-buying industry, Kaulkin Ginsberg estimated that the amount of debt purchased grew from about $57 billion in 2003 to $100 billion in 2006, with credit card debt representing about 75 percent of the 2006 total. In May 2006, an industry trade journal, Collections and Credit Risk, stated that the global debt-buying market had sales of an estimated $158 billion annually and that $100 billion of credit card debt is sold annually in the United States alone. While the exact number is not known, hundreds, and possibly thousands, of entities purchase debt, according to DBA International, a trade association for debt buyers. The debt-buying industry is highly concentrated, and according to The Nilson Report—which provides news and conducts research on consumer payment systems—10 buyers were responsible for 81 percent of all of the credit card debt purchased in fiscal year 2007. Only five debt-buying firms are known to be publicly traded companies, and our review of these firms’ filings with the Securities and Exchange Commission found that four of them report purchasing credit card debt. Portfolio Recovery Associates, Inc., reported it had purchased more than $32 billion, face value, of credit card debt from 1996 to 2008, representing 82 percent of its overall debt portfolio. Asset Acceptance Capital Corp. had purchased more than $22 billion in credit card debt from 1999 to 2008, representing 64 percent of the face value of its debt portfolio. In addition, Encore Capital Group reported it purchased more than $201 million in credit card debt in 2008. A fourth company, Asta Funding, indicated it purchased credit card debt, but did not specify the amount. A variety of federal and state laws address debt collection practices, and a number of federal and state agencies play a role in overseeing the debt collection industry, conducting enforcement activities, and educating consumers about debt collection. Congress has passed several laws that govern the practices of creditors or third parties in the collection of debt, including FDCPA, the Federal Trade Commission Act (FTC Act), and the Fair Credit Reporting Act (FCRA). The primary federal law governing third-party debt collection practices is FDCPA, which Congress enacted in 1977 in response to concerns about the practices of many debt collectors. FDCPA applies to third-party debt collectors, a term that includes collection agencies that operate on a contingency basis, collection law firms, and debt buyers, but generally does not apply to original creditors collecting on their own debt. According to the Senate report accompanying FDCPA, creditors were exempted because it was believed that their incentive to protect ongoing customer relationships made them less likely to engage in abusive collection practices. FDCPA prohibits debt collectors from using abusive, deceptive, and unfair debt collection practices as well as other specific practices: Communications. The act regulates how collectors can communicate with consumers who may owe a debt and with others associated with the consumer. For example, it prohibits a collector from informing a consumer’s employer about the debt and prohibits collectors from calling before 8:00 a.m. or after 9:00 p.m. Consumers also may request that the collector cease further communication. Treatment of debtor. Debt collectors may not harass, oppress, or abuse consumers; use or threaten violence; use obscene language; or use a telephone to engage in actions intended to annoy, such as causing the telephone to ring repeatedly. False or misleading representations. Debt collectors may not misrepresent who they are, falsely represent the legal status of the debt, fail to disclose to the consumer that they are attempting to collect a debt, or imply that nonpayment is a crime. Unfair practices. The act prohibits the use of unconscionable or unfair practices, including trying to collect the wrong amount of debt; adding unauthorized fees, interest or other charges to the debt; or causing the consumer to incur collect-call telephone charges. FDCPA also dictates the process debt collectors must use during the initial communication with the consumer and the steps a consumer can take to dispute a debt. Within 5 days of a collector’s initial communication about a debt, the collector must send the consumer a written notice—a validation notice—that includes the amount of the debt, the name of the owner of the debt, and a statement informing the consumer that the debt is assumed valid unless the consumer disputes the debt in writing within 30 days. If the consumer disputes the debt within that period, the collector must cease collection efforts until the collector provides the consumer with verification of the debt. FTC has primary government enforcement authority under FDCPA— except to the extent that this enforcement authority is given to seven other federal agencies for entities under their jurisdiction. FTC has a number of enforcement options for those who violate FDCPA. FTC can seek a court order prohibiting defendants from engaging in conduct and requiring that they pay monetary relief, including restitution to consumers, disgorgement of ill-gotten gains, and civil penalties of $16,000 per violation. FDCPA also provides consumers with a private right of action—allowing them to bring civil actions and be awarded monetary damages if collectors engage in prohibited collection practices or otherwise do not adhere to the act’s requirements. The FTC Act, enacted in 1914 and amended on numerous occasions, gives FTC the authority to prohibit and take action against unfair or deceptive acts or practices. Certain practices that violate FDCPA provisions may also violate section 5 of the FTC Act, and FTC often will bring enforcement actions under both statutes in its cases against third-party debt collectors. In addition, FTC and federal depository regulators can use the FTC Act to address unfair or deceptive debt collection practices by original creditors, who are not covered by FDCPA. The FTC Act also authorizes FTC to obtain a court-ordered injunction to halt the activities of any entity that it believes is violating the laws it enforces, including FDCPA. FCRA, enacted in 1970, is designed to ensure the accuracy of information provided for “consumer reports”—reports containing information about an individual’s personal and credit characteristics used to help determine eligibility for such things as credit, insurance, and employment. Consumer reporting agencies assemble consumer reports using information provided by data furnishers that can include credit card issuers, debt collectors, and debt buyers. FCRA requires that these data furnishers provide accurate information to consumer reporting agencies and specifies that information about delinquent accounts generally cannot remain on a consumer’s credit report more than 7 years. The act also prescribes how the date of delinquency of a consumer debt is to be calculated, as well as the process that consumer reporting agencies and data furnishers must follow when consumers dispute the accuracy of information on credit reports. In July 2009, FTC and the federal depository institution regulators issued a final rule to establish guidelines for reasonably ensuring the accuracy and integrity of consumer information reported to consumer reporting agencies and adding a new process for addressing consumer disputes. Provisions in other federal statutes also affect debt collection practices. The Telephone Consumer Protection Act of 1991 regulates the use of predictive dialers—a technology on which the debt collection industry relies heavily in its collections operations. Subtitle A of title V of the Gramm-Leach-Bliley Act governs the collection, sharing, and safeguarding of consumers’ nonpublic personal information by certain financial institutions, including creditors and debt collectors, and requires that these entities implement proper safeguards to protect the security and integrity of consumer information. In addition, a number of financial regulatory statutes grant federal depository regulators the authority to examine banks’ safety and soundness, as well as compliance with applicable laws and regulations. As part of these examinations, the federal depository regulators may review credit card issuers’ internal debt collection practices and their oversight of third-party debt collectors (vendors), in connection with applicable laws, regulations, or guidance. States cannot enforce FDCPA, but according to the National Consumer Law Center, most states have fair debt collection statutes of their own. According to state officials we spoke with, many of the state laws largely mirror FDCPA but allow for local enforcement—however, some state laws are more expansive than FDCPA because they define “debt collector” more broadly or place additional requirements on debt collectors’ conduct. Examples among four states we reviewed include the following: Applicability to creditors. Some state debt collection statutes may regulate the activities of creditors collecting their own debts, unlike FDCPA, which generally applies only to third-party collectors. For example, California law expressly defines debt collector to mean “any person who, in the ordinary course of business, regularly, on behalf of himself or herself or others, engages in debt collection.” Consumer notice requirements. Some states may have consumer notice requirements additional to those in FDCPA. For example, California’s debt collection statute among other things expressly requires third-party debt collectors to provide a specific notice to a debtor describing the debtor’s rights, including notice that collectors may not harass the debtor by using threats of violence or arrest or by using obscene language. The Colorado Fair Debt Collection Practices Act expressly requires collectors to provide consumers with the Web site address of the Colorado Attorney General, which contains information on the act. Restrictions on debt collection activities. Some states may place restrictions on collection activities additional to the restrictions in FDCPA. For example, Massachusetts debt collection regulations state that it is an unfair or deceptive act or practice for a creditor or debt collector to call a consumer’s home more than twice a week per debt or call locations other than home more than twice in 30 days. Private civil enforcement. As with FDCPA, some states may allow consumers to bring civil law suits against debt collectors that violate state debt collection laws. According to one state official, such a private right of action is designed to encourage compliance with the law while minimizing the use of limited state enforcement resources. For example, Texas law expressly provides that consumers can also be granted injunctive relief that prevents a collector from continuing the unlawful harmful conduct. Debt collection also is affected by applicable state statutes of limitations, which place limits on when an issuer or debt collector can initiate legal action against a consumer for collection of a debt. According to FTC, the statute of limitations for credit card debt varies by state, but typically ranges from 3 to 10 years, and generally begins to run from the date the debt becomes delinquent. Some states may allow the statute of limitations to restart under certain circumstances—for example, in Kansas, the statute of limitations is restarted when a consumer makes a payment toward the debt or acknowledges in writing owing the debt. According to FTC, courts that have addressed the issue have found it illegal to sue or threaten to sue to recover debt that is beyond the statute of limitations, often referred to as “time-barred debt.” According to the National Consumer Law Center, courts have generally found that attempting to collect a time-barred debt without suing or threatening to sue does not violate FDCPA, except in the few states in which debts are extinguished at the end of the limitations period. A number of federal and state agencies regulate the various participants involved in debt collection and bring enforcement proceedings against violators of the law by filing and prosecuting administrative or civil actions and undertaking other consumer protection measures such as consumer and industry education. FTC has primary government enforcement responsibility to oversee the debt collection industry and, in doing so, tracks consumer complaints, takes enforcement actions, and provides consumer and industry education. FTC receives consumer complaints about debt collection and other matters online through its Complaint Assistant system or by telephone or in writing through its Consumer Response Center and enters these complaints into its Consumer Sentinel database. In addition, local Better Business Bureaus and state and local law enforcement authorities can also enter information into the Consumer Sentinel database regarding complaints they receive. Some federal depository regulators are also members of Consumer Sentinel and can access the database and review complaints related to institutions they oversee. FTC and other law enforcement authorities use the Consumer Sentinel database to target their investigations and guide their enforcement activities. FDCPA and the FTC Act provide FTC with enforcement authority to investigate debt collection agencies it believes may be violating the law. As noted earlier, if FTC’s investigation reveals violations of either act, the agency can file suit in federal court for injunctive relief to prevent further violations and seek restitution for consumers and disgorgement of ill- gotten gains by the collector. Alternatively, FTC can seek civil penalties and other monetary relief by requesting that the Department of Justice file suit against the collector on its behalf. FTC officials told us that the agency has focused its enforcement efforts on practices that result in the greatest harm to consumers or on cases that involve a particular legal issue it is trying to clarify. FTC officials said that to maximize the deterrent effect of its enforcement actions, they recently have been demanding greater monetary penalties and naming as defendants individual corporate officers and managers, rather than simply the company as a whole. FTC also undertakes consumer education efforts to inform consumers of their rights and the restrictions placed on debt collectors by FDCPA. In 2008, FTC distributed more than 110,000 English- and Spanish-language copies of the brochure “Fair Debt Collection,” which seeks to describe FDCPA in plain, easily understood language. FTC also issues consumer alerts on its Web site on specific debt collection issues of concern. For example, the agency issued an alert on the collection of time-barred debts shortly after it had taken an enforcement action related to that issue. FTC call center staff also seek to educate consumers who call to submit a debt collection complaint—for example, informing them of their right to obtain written verification of the debt. The agency also seeks to educate and reach out to participants in the debt collection industry by speaking at industry conferences, participating in panel discussions, and issuing FDCPA advisory opinions. The major credit card issuers are structured as depository institutions and their activities, including those related to debt collection, are therefore overseen by federal depository institution regulators. OCC oversees four of the largest consumer credit card issuers—Bank of America, Capital One, Chase, and Citibank, while FDIC oversees two other large issuers, American Express and Discover. The Federal Reserve, OTS, and the National Credit Union Administration (NCUA) also oversee certain credit card issuers. The depository regulators conduct examinations to evaluate the safety and soundness of their institutions and ensure compliance with federal laws and regulations, including the FTC Act and FCRA. While FDCPA does not apply directly to credit card issuers collecting on their own debts, some of the practices prohibited by the statute, if engaged in by financial institutions, may support a claim of unfair or deceptive practices in violation of the FTC Act, which is the statute on which the federal depository regulators rely in overseeing collection activities. As part of issuers’ safety and soundness examinations, regulators may review the sale of credit card debt, as well as the programs issuers offer delinquent consumers to help them pay their debt, since these issues can affect the financial stability of the bank. Regulators told us they also review issuers’ management and oversight of third-party vendors, including third-party debt collection agencies. If they have reason to suspect problems with these third-party debt collection relationships, they can investigate the collection agency on site at the company workplace. If the regulators identify violations related to debt collection, among th e possible responses could be formal enforcement actions (such as cease and desist orders, civil money penalties, removal orders, and suspension orders) or informal enforcement actions (such as memorandums of understanding and board resolutions). In addition, if appropriate, regulators can seek restitution as a remedy for violations involving unfair or deceptive debt collection practices. Like FTC, the depository regulators collect and track complaints from consumers about issuers. They use these data to focus their risk-based examinations, assess issuers’ compliance with consumer protection laws and regulations, and determine the need for future regulations or educational efforts. Our meetings with state regulators indicated that states vary in how they regulate debt collectors and enforce fair debt collection laws. Agencies that play a key role in overseeing debt collection can include the state’s banking or finance division, office of consumer affairs, and the office of the Attorney General. Some states also have collections or licensing boards—comprising in some cases both government regulators and industry representatives—that serve as the regulatory body for debt collection agencies in the state. Certain states require debt collection agencies doing business in the state to be licensed. State agency officials noted that some states may require debt collectors to pay a licensing fee or post a bond, and some states can suspend or revoke an agency’s license if it has been found to violate state debt collection laws or otherwise violate licensing requirements. One state official also told us that licensing of debt collectors serves to keep debt collectors in compliance with state law without having to expend state resources bringing collectors to court. For example, in Colorado the Attorney General’s office said that in recent years it had brought an average of about 50 to 60 administrative enforcement actions a year— about half of which resulted in settlements and the other half resulted in the issuance of letters of admonition (censures). The office said that one or two cases have resulted in the revocation of a collector’s license—but only rarely has court action been required. Under the auspices of the North American Collection Agency Regulatory Association (NACARA), we held a group meeting with agency staff who oversee debt collection from 17 states. Many of the states represented gather and analyze consumer complaints about debt collection, often through telephone hotlines, postal mail, and online forms. States can also receive referrals from district attorneys, Better Business Bureaus, and other sources. Some states, such as Minnesota and Tennessee, review or investigate every consumer complaint received about a debt collector. Other states, the regulators told us, look collectively at complaint trends or patterns to determine if an investigation or enforcement action may be warranted. At least one state, North Dakota, conducts on-site examinations of every licensed collection agency operating in the state, either through an on-site visit or by mail. North Dakota bases its examination cycle primarily on the complaint volume received against a licensed collection agency, but examinations are still conducted even if there are no complaints received against a particular agency. From January 2006 through May 2009, states took approximately 28 enforcement actions against debt collectors and collection attorneys for debt known to involve, or possibly involving, credit cards, according to the National Association of Attorneys General. In many of these cases state authorities said they imposed civil monetary penalties, recovered consumer funds, or enjoined the collector from engaging in further unlawful collection activities. Often, consumer complaints may serve as the trigger for taking an enforcement action—for example, Minnesota state officials told us that approximately 95 percent of such actions stemmed from individual consumer complaints. As with FTC, a number of state regulators make efforts to educate consumers about their rights under federal and state fair debt collection laws. Some states that we spoke with have developed Web sites, brochures, or videos on public access channels to educate consumers. In some states, regulators also deliver speeches and appear at conferences related to debt collection. Some states and cities incorporate debt collection issues into their broader efforts to improve consumers’ financial literacy. For example, New York City’s Department of Consumer Affairs addressed many debt collection issues during a weeklong “call-a-thon,” from which consumers could get answers to financial questions. States also coordinate with federal entities and among themselves. For example, to coordinate oversight responsibilities, FTC staff said they regularly communicate with state regulators and share information on industry trends and concerns. FTC also shares information with state Attorneys General and local law enforcement agencies through its Consumer Sentinel complaint database. NACARA was created in 1994 to help communicate and coordinate debt collection regulatory and enforcement efforts among member states. In some instances, several states jointly pursued enforcement actions against debt collectors. In addition, 12 NACARA member states are in the process of developing a uniform debt collector licensing application to improve the consistency of information on debt collection agencies across different states. NACARA members with whom we spoke said they have a good working relationship with FTC and have participated in FTC conferences. Large credit card issuers first seek to recover delinquent debt using internal collection departments or first-party collection agencies that collect debt using the issuer’s name. Issuers offer short- and long-term repayment arrangements to assist delinquent debtors. When large issuers are unable to collect these accounts, they typically send them to third- party collection agencies or collection law firms. But these creditors also can sell delinquent debt to a debt-buying firm that may, in turn, seek recovery using in-house collection, third-party collection agencies, or resale of the debt to another debt-buying firm. Figure 2 provides an illustrative example of the lifecycle of one delinquent credit card account. Large credit card issuers maintain internal collection departments that attempt to recover money owed on delinquent credit card accounts. Typically, these issuers use internal collection departments to contact consumers with accounts that are no more than 180 days delinquent and thus have not yet been charged off. Officials with whom we spoke at the six largest issuers have internal policies and procedures that govern their collection practices and audit departments that seek to ensure compliance with applicable laws. While FDCPA does not apply to creditors collecting on their own accounts, all of these issuers said they voluntarily use FDCPA as guidance for their internal collection activities and regularly monitor compliance with applicable state laws. Some issuers told us their collection staff undergo training programs that range in length from 2 to 10 weeks and include topics such as the company’s collection policies, procedures, and technologies; negotiation skills; and compliance with applicable federal and state laws. The collection departments of five of the six largest issuers each had from 850 to 8,390 collectors. (The sixth issuer declined to provide the number of its collection employees.) The great majority of issuers’ internal U.S. collection operations are based in the United States, although one issuer had a call center located in Costa Rica. Several of the large issuers we met with have recently expanded the size of their collection staff due to increases in the number of delinquent accounts; representatives of one issuer told us in February 2009 that its collection staff had increased 20 percent since late 2008. Issuers can assist delinquent debtors experiencing financial hardship by using a short- or long-term payment arrangement to bring the account current or offering to settle a cardholder’s account by accepting less than the full balance due. Temporary hardship programs can last up to 12 months and help borrowers overcome financial difficulties, such as unemployment or short-term illness, by reducing interest rates, finance charges, and fees. Programs of more than 12 months (“work out” programs) address longer-term financial hardships, such as divorce, permanent disability, or the death of a household income provider. Repayment terms for work out programs vary widely among issuers, but the federal depository regulators’ guidance for credit card lending states that the programs should strive to have borrowers repay their credit card debt within 60 months. Issuers may choose to “re-age” the account—or return a delinquent credit card account to current status without collecting the total amount of principal, interest, and fees that are due—if it meets certain criteria. Consumers can benefit from the re-aging of accounts because it can improve their credit reports. Federal banking guidelines exist on the frequency and circumstances under which issuers can re-age credit card accounts. Credit card issuers can outsource debt collection to various types of collection firms. Accounts that have not been charged off are generally outsourced to first-party collection agencies and charged-off accounts are generally outsourced to third-party collection agencies or collection law firms. Contracts between issuers and these agencies often specify the policies and procedures to be used in the collection process. An issuer can also decide to sell credit card debts and the buyer of those debts can, in turn, resell those debts to another buyer. Limited available data exist on the specific amounts of the credit card debt that issuers collect in-house, outsource, or sell because issuers generally consider this to be proprietary business information. Some credit card issuers use “first-party” collection agencies to supplement their in-house collection operations for delinquent accounts that have not yet been charged off. First-party collection agencies use the name of the issuer when contacting consumers and may not be subject to FDCPA. These agencies typically are paid on a fee-for-service rather than contingency basis. Using first-party collection agencies gives issuers additional flexibility to manage fluctuations in the workload and resources of their internal collection operations. Because first-party collectors use the issuers’ name and are collecting from current customers, there is an emphasis on preserving the relationship with the consumer and mitigating the negative perception that consumers can have about their accounts being forwarded to collection. Some issuers also mentioned that their first- party collection agencies are required to adhere to the same standards as their internal collection departments. If an issuer’s internal efforts to collect on accounts have been unsuccessful or the accounts are more than 180 days delinquent and have been charged off, the issuer may choose to place the account with a third- party agency (also known as a contingency agency). Third-party collection agencies are generally paid on commission based on a percentage of the amount recovered, with the percentage being higher for debts that are older or otherwise harder to collect. Third-party agencies typically use their own names when communicating with debtors and are subject to FDCPA, as well as any relevant state laws. The length of time that accounts are placed with these agencies can vary, but can range from several weeks to several months or years. The agencies generally return uncollected accounts to the issuer at the end of the placement period, at which time issuers sometimes place the account with a different collection agency. Some third-party collection agencies focus on recovering credit card debt, while other agencies specialize in recovering other types of debt, such as telecommunications or health care, although these companies may collect credit card debt as well. Officials of one large credit card issuer told us it had contracts with 15 to 20 different third-party collection agencies, while another issuer had contracts with 20 such agencies, and a third issuer with more than 50 agencies. Some of the issuers explained that they choose their collection agencies selectively to avoid legal or reputation risks and to maintain customer relationships. For example, they may review companies’ records of legal compliance, data security practices, and number of Better Business Bureau complaints. Before an issuer provides a portfolio of credit card accounts to a third- party company for collection, it “scrubs” the portfolio to remove accounts for which the debtor has died, filed for bankruptcy, previously settled the debt, or disputed its validity, according to several issuers with whom we met. Several collection companies told us that when they receive a portfolio from an issuer or another collection company, they typically conduct a scrub of their own, including checking the accuracy and completeness of names, addresses, telephone numbers, and other information to ensure the account is valid for collection. Collection companies can use customized models to help determine the best collection strategy for the portfolio. These models assess the likelihood of payment and can help determine payment or settlement terms that the debtor should be offered. The collection process begins when the collection company initiates contact with the debtor either by telephone or in writing. In general, FDCPA requires collectors to provide a consumer with notice of their rights under the law, called a validation notice, within 5 days of initial contact with the debtor, although we spoke with officials from one agency that sends the notice almost immediately. If a debtor cannot be located, companies often use locator methods, such as “skip tracing”—the practice of searching national telephone directories, credit reports, tax assessor and voter registration records, and other sources, as well as contacting employers, friends, and family members of the debtor. Collection companies sometimes use the services of third-party vendors that specialize in skip tracing. Third-party debt collection efforts rely primarily on a combination of telephone and postal mail contacts. Several large debt collection companies have multiple call centers—for example, one large collection company told us it operates about 125 call centers throughout the United States and overseas and employs about 15,000 collectors. Technology fundamentally has changed the practice of debt collection. We toured a call center at one third-party collection company and observed that collectors had on-screen access to detailed information about debtors and their financial histories. The software systems used for collection can also allow supervisors to monitor the collection activities of staff. Software applications also help manage collectors’ workflows and can help ensure compliance with federal and state law. Predictive dialers and other telephone technology improve efficiency by reducing the wait time for collection staff. For example, predictive dialing systems can be programmed not to call consumers earlier, later, or more frequently than permitted by FDCPA or applicable state law. One large agency told us it recently designed a proprietary voice recognition system that tries to recognize when collectors engage in inappropriate behavior, such as speaking with an abusive tone or using profanity. Word processing and automated mail sorting systems allow debt collectors to send customized mass mailings relatively inexpensively. Some collection agencies contract with third-party vendors to handle the design and mailing of their customized FDCPA-compliant letters. Officials at the 12 third-party collection companies and debt buyers with whom we spoke required their collectors to participate in training programs that ranged in length from 1 to 4 weeks. Topics can include debt collection techniques, negotiation skills, compliance with applicable law, and use of desktop technologies. Some collection companies told us they periodically retest their staff and provide additional training to respond to changes to any applicable state fair debt collection law. While compensation plans can vary among companies, the incomes of collection staff are typically some combination of hourly wage and a commission based on their performance in recovering debts. With the authorization of their creditor clients, collection companies can offer a variety of repayment plans to debtors, which may include installment payments (that is, fixed monthly payments) or settlements for less than the amount due. If applicable, and authorized by their creditor clients, companies can also elect to discount interest and fees that have accumulated on the account. Options for methods of payment have expanded in recent years and now include electronic fund transfers, debit cards, and credit cards. Contracts between issuers and collection agencies often specify the policies and procedures to be used during the collection process. According to issuers and collection agencies we met with, this can include details on how and when cardholders may be contacted, options that can be offered for repayment and settlement, and how consumer disputes are to be addressed. For example, several issuers required collection agencies to forward disputed accounts to them for investigation. Several issuers also told us that contracts typically include data security requirements and provisions allowing issuers to monitor and audit the collection agency. For example, large issuers sometimes have access to the internal communications systems of the third-party agencies, allowing them to listen to live collection calls from a remote location. Issuers also said they conduct regular audits of their collection vendors, which include reviews of data security, financial records, and compliance with applicable law and any policies specified by the issuer. While contracts usually specify how long the account will be placed with the agency, some collection agencies told us that early termination is allowed if the agency is not meeting compliance or performance standards. Collection law firms specialize in collecting debts. The National Association of Retail Collection Attorneys stated in a June 2007 comment letter to FTC that about 5 percent of delinquent accounts (including credit card accounts) are referred to collection law firms for possible litigation, typically after collection efforts by internal and third-party collectors have failed. One issuer we spoke with places certain accounts with a collection law firm as soon as the issuer determines that a delinquent debtor has the ability to pay. Collection law firms involved in the recovery of debt are generally paid by contingency fee and receive a set percentage of debt recovered. In addition to using collection law firms, officials of some issuers and third-party collection companies told us they also maintained their own legal staff to litigate collection cases. Many collection law firms use traditional collection methods, such as telephone calls and letters, before starting litigation. These firms may collect on various types of debt, such as installment loans, credit card, automobile, or medical debt. Some of these firms also purchase portfolios of debt. Issuers and debt collection agencies may also contract with a network of collection law firms to facilitate the filing of lawsuits against debtors in multiple states. Collection attorneys and law firms are subject to FDCPA, although some states may exempt collection attorneys from state debt collection laws under certain circumstances. Issuers and other data furnishers, such as collection agencies, can furnish data and information about debtor accounts to consumer reporting agencies, which maintain up-to-date, account-level information on consumer credit histories that is used to help make important decisions about individuals, such as eligibility for credit, employment, or housing. Federal law requires consumer reporting agencies and all data furnishers to take responsibility for ensuring the accuracy of account information being reported. Furnishing data to consumer reporting agencies is optional. While all of the issuers we met with chose to furnish data to consumer reporting agencies, some issuers, third-party collection agencies, and collection law firms may choose not to. Contracts for collection services generally stipulate each party’s responsibility for credit reporting. For example, four of the six large issuers told us that their contracts with collection agencies generally stipulate that the issuer rather than the collection agency retains responsibility for furnishing account data to consumer reporting agencies. Collection companies collecting on their own debts may choose to furnish data as a collection tool—consumers may be motivated to repay their debts to avoid damaging their credit records. One stakeholder told us that those companies that choose not to furnish account data may, among other things, want to limit their exposure to liability related to FCRA compliance. Consumer reporting agencies and the great majority of data furnishers use a standard data format, known as Metro 2, to help ensure consistency and accuracy in the reporting of information. The original Metro format was developed in the mid-1970s and by 1996, more than 95 percent of all data were furnished using this format. The Metro 2 format was introduced in 1997. It requires furnishers to provide more specific and complete information—such as the full account number and other fields that further identify the account—to improve accuracy and completeness. Consumers can dispute information in their credit reports related to delinquent credit card accounts by contacting the issuer, debt collector, or consumer reporting agency by telephone, mail, or online. Data furnishers, such as card issuers or debt collectors, must investigate disputes they receive from consumer reporting agencies and send the results back to the agency. The consumer reporting agency has 30 days to complete its investigation and, if necessary, update the consumer’s credit report. Data furnishers and consumer reporting agencies can use a Web-based automated system called e-Oscar to transmit information regarding consumer disputes. Issuers often sell portfolios of delinquent credit card debt to debt-buying companies. By selling accounts, issuers trade the longer-term cash flows of collection agency recoveries for the short-term proceeds of a sale to recover some of their losses. Credit card accounts can be resold multiple times. Five of the six large issuers with which we spoke currently sell at least some of their delinquent credit card debt to debt buyers. The issuer that does not currently sell its debt told us it had done so in the past but stopped 5 years ago because it believes its internal collection strategies and outsourcing to third-party collectors yield better results. Reputation risk can also be a factor in the decision to sell debts since issuers have limited control over the debt collection practices of new owners of the debt. Because the price issuers receive when they sell credit card debt has declined in recent years, at least one issuer told us it had reduced its sale of such debt—it sold 659,000 accounts with a face value of $3.6 billion in 2008, as compared with 750,000 accounts with a face value of $5.4 billion in 2006. Another issuer told us that in 2009 it sold approximately 6.6 percent of the inventory of charged-off debt it had accrued since 2001, which had been the year of its most recent prior sale of debt. In addition, one issuer told us that it had sold a small percentage of its charged-off debts from 2007 to 2009. Two other issuers declined to provide us with data on their sale of credit card debt because they considered this information proprietary. Some debt-buying companies may purchase portfolios of debt that they collect on themselves, while other debt buyers may outsource all of their collections to third-party collection agencies or law firms. According to the trade association DBA International, debt buyers that do not collect on their own debt (sometimes called “passive” debt buyers) are generally not subject to FDCPA since they take no action to collect on the debt and do not communicate with the consumer. Portfolios of credit card accounts can be sold through public or Web-based auctions or through direct placements arranged by buyers and sellers. A portfolio of debts can be sold in bulk for an agreed-upon price or in a “forward flow” arrangement in which sellers agree to sell a steady volume of accounts for a specified period of time. Forward flow contracts provide sellers with a predictable stream of revenue for their charged-off accounts. In addition, sales of credit card debt can be made through debt brokers— firms that facilitate the transaction between buyer and seller but never themselves attempt to collect on the debt. These firms charge a fee that may range from 6 to 8 percent of the portfolio’s purchase price. One industry publication reported that in 2007 the top three debt brokers— National Loan Exchange, Garnet Capital Advisors, and LoanTrade—had managed a total of $17 billion in credit card sales. We spoke with an official at one of these three debt brokers, who explained its process for brokering the sale of a portfolio of credit card debt: A financial institution contacts the broker with information on the debt portfolio it wishes to sell and the broker analyzes the portfolio and studies market conditions to determine an appropriate price for the portfolio. The broker then describes the portfolio in a detailed memo that is marketed to perhaps 200 potential buyers. A smaller number of interested buyers will receive further information and conduct their own analysis of the portfolio. On behalf of the seller, the broker will then offer the debt portfolio either through a sealed bidding process or an online auction. Sellers and buyers conduct due diligence before making a bid or completing a transaction, which can include a review of the other party’s policy and procedures regarding collection operations, compliance with applicable state and federal laws, and professional references. Some credit card issuers told us they sell accounts only to debt buyers with which they are familiar because of concerns about reputation risk; one of these issuers requires buyers to be certified annually to be eligible to purchase its accounts. Similarly, on the debt buyer side, some buyers require the seller to complete a survey to provide them with more information about the accounts being sold. According to several industry stakeholders we spoke with, when preparing a portfolio for sale, a debt seller generally scrubs the accounts to remove those in which the debtor has died, filed for bankruptcy, settled the debt, or alleged fraud or identity theft. Prior to bidding on a credit card portfolio, debt buyers typically do their own reviews and scrubs of the accounts, according to DBA International. They may also review the portfolio’s contents to determine the potential return on investment and if the strategies required to collect on the accounts would be consistent with the buyer’s operations. According to ACA International’s industry guidance, once a bid has been accepted and a transaction completed, certain documents, such as a bill of sale and a list of the accounts sold, may be used to legally document transfer of ownership. According to several industry stakeholders, as well as industry guidance published by ACA International, contracts for sales of debt portfolios can typically include provisions that specify the nature and extent of the account data that will be provided to the buyer, as well as the buyer’s access to account media—for example, credit card applications and billing statements—or other documentation. Some contracts can include “buy- back” and “put-back” rights, which allow buyers and sellers to remove and receive remuneration for certain accounts, such as those involving evidence of fraud or deceased debtors. The contracts also may include indemnification provisions—for example, holding the first buyer responsible for any liability incurred as a result of the actions of a subsequent buyer. Some contracts also may limit the terms under which the buyer can resell the accounts. For example, one issuer with which we spoke prohibits its debt buyers from reselling the accounts for 1 year after purchase. Another issuer requires the debt buyer to receive its approval to resell the accounts, noting that the criteria for selecting the secondary buyer must be similar to that used by the issuer. The price of a credit card portfolio is largely driven by certain key characteristics—most notably, the age of the debt and the number of times it has previously been placed for collection with a third-party agency. For example, accounts that are 91 days to 6 months past due and never previously placed for collection generally receive the highest prices, while older accounts and those previously placed for collection typically receive far lower prices. Some stakeholders told us that the geographic location of accounts can also affect pricing since state laws on debt collection, statutes of limitation, and other issues can affect the ability to recover on the accounts. For example, one debt broker told us that prices may be lower in states that prohibit the garnishment of wages in debt collection judgments. The debt broker added that the issuer’s underwriting criteria, the average account balance, and the amount of documentation available all can affect the price of a portfolio. Limited publicly available data exist on the exact prices of credit card portfolios. As shown in table 2, Kaulkin Ginsberg estimated that in January 2009, accounts that were up to 6 months delinquent and had not been placed with a collection agency typically sold for an estimated 5½-7½ cents for each dollar of face value. Older debt typically sold for much less—for example, accounts that were more than 2 years delinquent or had been previously placed with two collection agencies sold for an estimated 1-2 cents for each dollar of face value. Prices for all types of delinquent credit card debt have declined significantly in recent years, which Kaulkin Ginsberg attributes largely to a weakening economic environment that has reduced consumers’ ability to repay debts and reduced buyers’ willingness to pay as much for underperforming assets. After a debt buyer purchases a portfolio of accounts it has similar options as an issuer in choosing how to collect on the accounts. It can choose to collect or litigate using internal resources, contract the collection of the account to a third-party agency or law firm, or resell the accounts, or a portion of them, to a secondary buyer. The resale of debt has increased in recent years, according to Kaulkin Ginsberg, and debt can be resold multiple times. One debt buyer estimated that almost half of all credit card accounts purchased directly from original creditors eventually are resold. As with the original sale of a debt portfolio, resale can occur through a public auction, directly between debt buyers, or through a debt broker serving as intermediary. The extent to which debt buyers resell their debt depends to some extent on their business model. “Passive” debt buyers do not attempt to collect debts directly, but rather resell or outsource everything they purchase to collection agencies or law firms. Other debt buyers purchase portfolios, attempt collection for a certain period, and then resell accounts for which collection was not successful. Several industry stakeholders with whom we spoke noted that a debt buyer’s due diligence becomes especially important for portfolios that have been sold multiple times because fraud or inaccurate account data can be more prevalent in these accounts. State and federal enforcement actions, anecdotal evidence, and the volume of consumer complaints to federal agencies—about such things as excessive telephone calls or the addition of unauthorized fees—suggest that problems exist with some processes and practices involved in the collection of credit card debt, although the prevalence of such problems is not known. FDCPA, which was enacted in 1977, does not reflect certain changes that have occurred since that time with regard to modern technology and the debt collection marketplace. The federal depository regulators—FDIC, Federal Reserve, OCC, and OTS—and FTC track consumer complaints related to issuers’ in-house debt collection practices. As shown in table 3, during 2004-2008, the depository regulators received an average of about 2,000 complaints per year about the credit card debt collection practices of the institutions they supervise. These complaints constituted, on average, about 12 percent of all complaints that the depository regulators received about credit cards and 4 percent of complaints received about any topic during that time frame. FTC does not track whether complaints are related specifically to credit card debt, but during the same 5-year period it received about 22,400 complaints annually about original creditors’ overall debt collection practices. Our review of FTC complaint data indicates that roughly 25 percent of the complaints FTC received about debt collection were complaints about original creditors (as opposed to third-party collectors). However, data were not available on the extent to which the consumer complaints were against larger versus smaller creditors. FDIC and OTS complaint data showed that common allegations in complaints received about issuers included attempts to collect debt not owed and inappropriate practices such as excessive telephone calls or harassment. Among the most common complaints that FTC received about creditor debt collection were excessive telephone calls, creditors misrepresenting the amount or legal status of a debt, the addition of unauthorized fees and interest to accounts, and telephone calls from creditors looking for other individuals. However, consumer complaints may not be a reliable indicator of the extent of problems that may be occurring, for several reasons. Many consumers who experience problems with debt collection likely do not complain to any government agency—in many cases because they may not know to which agency to complain or because they do not know that their rights have been violated. Additionally, FTC has noted that a complaint does not necessarily indicate that a violation of law has occurred—either because the complaint is inaccurate or, if accurate, does not represent an actual violation. As discussed earlier, federal depository regulators conduct examinations of the entities they supervise and may take formal or informal enforcement actions when they find noncompliance with applicable laws and regulations. From 1999 to 2008, OCC, OTS, and Federal Reserve did not find any problems in their bank examinations related to credit card debt collection that resulted in a formal enforcement action. FDIC took formal enforcement action during that time frame against three issuers related, among other things, to their oversight of CompuCredit Corporation, a third-party vendor used to market, service, and collect debt on some of the issuers’ credit card accounts. The issuers themselves were not alleged to have engaged in improper debt collection, but they were each found to have had inadequate compliance systems to conduct proper oversight of CompuCredit, which was accused of engaging in deceptive collection practices. The issuers entered into a consent agreement, in which they agreed to a cease and desist order and to pay restitution and civil money penalties, without admitting or denying the alleged violations. Depository regulators also can take informal enforcement actions—s as commitment letters, memorandums of understanding, and board resolutions—when they find weaknesses that are more technical in nature, but for which corrective action still is needed. From 1999 through 2008, OCC told us it took one informal enforcement action against an issuer that related to credit card debt collection, and the Federal Reserve, FDIC, and OTS told us they did not take any. In addition to the enforcement actions taken by the federal depo regulators, in the late 1990s FTC reached settlements with four department stores related to the collection practices of their private-label sitory credit cards. FTC alleged that the stores had induced cardholders who filed for bankruptcy protection to “reaffirm” their credit card accounts and falsely represented that these “reaffirmation agreements” would be filed with the bankruptcy courts. The resulting consent agreements with the four department stores ensured that at least $183 million would be returned to consumers whose debts had been collected illegally. The Department of Justice’s U.S. Trustee Program has taken one enforcement action against an issuer related to credit card debt collection. In November 2008, the program settled with Capital One for allegedly collecting on credit card debts that had been discharged in bankruptcy, which is a violation of the U.S. Bankruptcy Code. According to the Trustee Program, Capitol One did not have effective procedures for identifying customers who had filed for bankruptcy. As a result, the issuer had improperly filed proof of claims in approximately 5,600 cases when it knew or should have known that the debt had been discharged, and the issuer improperly collected approximately $340,000 from debtors’ Chapter 13 bankruptcy estates nationwide in violation of federal bankruptcy law. The scope of this report is largely on the debt collection practices of the very largest credit card issuers—all of which are federally supervised banks—but it should be noted that concern about debt collection practices has often focused on the smaller, subprime credit card issuers. Representatives of the National Consumer Law Center told us that subprime issuers, which are often small, local banks, have been very aggressive in their debt collection efforts, and a report by the center alleged that some high-fee subprime card issuers frequently employ abusive debt collection practices. FDIC staff told us that to the extent that debt collection abuses occur, they may be more common among smaller issuers, particularly subprime issuers, since large issuers tend to have more compliance resources and may be more mindful of the collection practices they use since they are sensitive to preserving their reputations in a mature credit card marketplace. Data on the proportion of consumer complaints on debt collection practices that were made against larger versus smaller issuers are not readily available. Some consumer group representatives have raised concerns about some issuers’—including large issuers—debt collection practices, such as the use of arbitration in resolving debt collection matters. Cardmember agreements sometimes require that disputes about a cardholder’s account be handled through arbitration, a form of alternative dispute resolution in which disputes are resolved by an independent arbitrator, rather than by a judge in a formal court. Some consumer advocates expressed concern that requiring arbitration is unfair because they believe the arbitration system can be biased against consumers. A September 2007 report by Public Citizen that reviewed arbitration cases in California found that business entities prevailed in about 94 percent of debt collection cases. In July 2009, the Minnesota Attorney General announced that it had reached a settlement with the National Arbitration Forum—the country’s largest administrator of credit card and consumer collections arbitrations—in which the company agreed to permanently stop administering arbitrations involving consumer debt. The representatives of the large issuers with whom we spoke said that they rarely or never engage in arbitration involving delinquent or charged-off accounts. No comprehensive data exist on the extent to which abusive practices may be occurring among third-party debt collectors and debt buyers. Nevertheless, FTC, state agencies, and consumer groups have expressed concerns in recent years that abusive practices are occurring. Although the extent of problems is not known, several indicators—primarily complaint data, government enforcement actions, private lawsuits, and anecdotal evidence—suggest they may not be uncommon. FTC receives more complaints about the debt collection industry than it does any other specific industry. In 2008, the agency received about 79,000 complaints on third-party debt collectors, which represented almost 19 percent of all consumer complaints it received on any topic. These figures are for complaints related to the collection of any debt—not just credit card debt—because FTC does not track complaints by type of debt. Complaints about debt collection have increased in recent years and grew 34 percent from 2004 through 2008. Our analysis of FTC complaint data found that the most common complaints from 2004 through 2008 related to debt collectors were, in order of prevalence, (1) misrepresentation of the amount or legal status of a debt; (2) excessive telephone calls; (3) telephone calls from collectors looking for other individuals; (4) use of obscene, profane, or abusive language; and (5) threatening to sue if payment was not made. The Better Business Bureau, which also collects consumer complaints, reported receiving about 16,000 complaints about debt collection companies in 2008. These companies represented the sixth most common source of complaints received during 2005-2008. Some state agencies also collect consumer complaints about debt collection practices. The National Association of Attorneys General found that debt collection complaints were the number one topic of complaints received by state Attorneys General in 2008. Representatives from three state agencies also told us that they receive more complaints about the debt collection industry than any other topic. As noted earlier, complaint data may not be an accurate gauge of the extent of problems. One debt collection industry representative noted that because of the nature of their work, it is unsurprising that large numbers of people have grievances with them. Moreover, consumers’ complaints are not always valid. Industry representatives also point out that the number of complaints against the debt collection industry represents a very small fraction of the more than 1 billion consumer contacts the industry makes each year. Furthermore, increases in consumer complaints may result, in part, from the ease with which technologies such as the Internet allow consumers to file a complaint. These effects would tend to overstate the number of actual problems; on the other hand, consumer complaints are self-reported and there are likely to be a number of complaints that are unreported. Since FDCPA was enacted in 1977, FTC has taken at least 60 enforcement actions alleging violations related to debt collection. We analyzed the 24 actions initiated in 1998-2008 against collection companies and found that 13 of them involved or may have involved the collection of credit card debt (as opposed to other forms of debt). In these actions, FTC alleged violations of FDCPA and/or the FTC Act, which included, among other activities, harassing and abusing consumers, communicating with the consumers’ employers and co-workers about their debts, threatening to initiate lawsuits or criminal actions against consumers if they failed to pay, and failing to notify consumers of their right to dispute and obtain verification of their debts. FTC reached a settlement agreement with the defendant in all 13 cases, and penalties included requiring collectors and debt buyers to pay civil monetary penalties and return wrongfully collected funds to consumers. In some cases, FTC also required debt collection agencies to develop procedures to address the alleged abusive practices. For example, one collection agency had to develop a comprehensive consumer complaint and resolution program and implement a training program that had to be approved by FTC. Examples of FTC’s actions against third-party debt collection companies include the following: In March 2004, FTC alleged that Capital Acquisitions & Management—a debt buyer that purchases credit card debt—violated FDCPA by threatening and harassing numerous consumers to get them to pay debts they did not owe or that were beyond the statute of limitations. According to FTC, the firm bought lists of debts that were outdated and frequently contained no documentation about the original debt and in many cases inadequate information about the original debtor. In its press release, FTC alleged that the firm made efforts to find people with the same name in the same geographic area and tried to collect the debts from them, whether or not they were the actual debtor. The firm would tell these consumers that they were legally obligated to pay the debt and, if they failed to, could be arrested, jailed, or have their property seized, FTC alleged. Capital Acquisitions & Management settled with FTC in March 2004, without admitting liability for any matter alleged in the complaint, and paid a civil penalty of $300,000. In the 8 months following the settlement, FTC reported receiving more than 2,000 consumer complaints against the firm and filed another complaint about the firm’s practices. A second enforcement action against this company and other named defendants resulted in a $1 million judgment as equitable monetary relief and permanently barred the corporate defendants and some of the company’s management from engaging in debt collection activities. In June 2008, FTC alleged that Jefferson Capital Systems, LLC, a debt collection company, and CompuCredit Corporation violated the FTC Act and Jefferson Capital Systems, LLC also violated FDCPA by engaging in deceptive marketing and abusive collection practices. According to FTC, the firms marketed a preapproved credit card to consumers with charged- off debt, telling them that their old debt balance immediately would be transferred to the new credit card and reported as paid in full to consumer reporting agencies. However, consumers who accepted the offer immediately were enrolled in a debt repayment plan and did not receive a credit card until they paid 25 to 50 percent of their charged-off debt. Additionally, FTC alleged that Jefferson Capital used obscene or profane language in debt collection and caused telephones to ring or engaged persons in telephone conversation repeatedly with the intent to annoy, abuse, or harass. The settlement prohibited Jefferson Capital from engaging in the alleged conduct and required it to comply with FDCPA. In November 2008, FTC settled with the debt collection agency Academy Collection Service, Inc. and its owner for $2.25 million, which FTC said was the largest civil penalty FTC assessed in a debt collection action. Academy’s collectors allegedly engaged in false threats of wage garnishment, arrest, and legal action; communicated with third parties about consumers’ debts; and called consumers at their workplace when employers prohibited such calls. Other practices included unauthorized withdrawals from consumers’ bank accounts and the early deposit of consumers’ postdated payment checks. According to its press release, FTC also alleged that Academy dismissed consumers’ complaints without sufficient investigation or did not properly discipline collectors who were found to have violated FDCPA. In addition to the civil money penalty, FTC also required Academy to make certain disclosures, such as consumers’ right to have the company stop contacting them about their debt. FTC also has taken enforcement actions against debt collection companies for allegedly violating FCRA by reporting inaccurate information to consumer reporting agencies. In 2000, FTC alleged that Performance Capital Management maintained old, inaccurate information and failed to report disputes to consumer reporting agencies. The consent decree settling this action imposed a civil penalty of $2 million, which was waived because of the company’s poor financial condition. In 2004, FTC alleged that NCO Group reported accounts using incorrect delinquency dates, which can cause negative information to remain on a consumer’s credit report beyond the 7-year reporting period permitted under FCRA. NCO Group paid a $1.5 million civil penalty to settle FTC’s charges. While comprehensive data on state actions are not available, our analysis of information provided by the National Association of Attorneys General found at least 60 enforcement actions were taken by state attorneys general against debt collection companies from January 2006 through May 2009, of which 28 involved or may have involved the collection of credit card debt. These actions alleged a variety of illegal debt collection practices, such as deducting money from consumers’ bank accounts without authorization, operating in states without proper licenses, and refusing or failing to provide consumers with proof of their debts. Generally, state attorneys general either negotiated a settlement with the debt collection company or brought a court action against the company. Settlements included penalties such as refunds to consumers, cancellation of consumers’ debts, civil penalties, and injunctive relief aimed at preventing future collection violations. Among these state enforcement actions were the following: In 2006, the Massachusetts Office of the Attorney General settled with a debt collection law firm for allegations of unfair debt collection practices that violated state and federal debt collection laws. According to the state’s office, representatives of the firm, among other violations, used obscene language, harassed and embarrassed consumers, exceeded the number of permissible calls, placed calls to consumers at improper hours, disclosed debts to persons other than the consumer, and failed to provide proof of the validity of debts. Under the settlement, the firm is required to pay a total of $75,000, including $20,000 in consumer restitution, and agreed to implement new policies and procedures. In 2007, the Office of the Illinois Attorney General sued a debt buyer for violations of the Illinois Consumer Fraud and Deceptive Business Practices Act. According to the Illinois office, the company used abusive practices to attempt to collect on time-barred debts more than 10 years old, debts that had been discharged in bankruptcy, and debts that had been settled. Additionally, the company allegedly refused or failed to provide proof of debts, illegally contacted consumers’ family members and workplaces, and withdrew money without authorization from consumers’ bank accounts. Under the stipulated final judgment, the company paid $100,000 to the state. As noted earlier, FDCPA provides consumers with a private right of action, allowing them to bring civil actions against debt collectors that violate its provisions and be awarded monetary damages. The Senate report that accompanied FDCPA indicates that Congress intended these private lawsuits to provide an important incentive to debt collection companies to comply with the act. While the exact number of private lawsuits for violations of FDCPA is not known, representatives of the debt collection industry told us that such suits were relatively common. The FDCPA Case Listing Service, LLC—a private firm that tracks such litigation—reported that 5,383 cases were filed against collection agencies, collection law firms, and debt buyers in U.S. District Court in 2008 for alleged violations of FDCPA. A representative of the firm noted that this figure does not include FDCPA lawsuits filed in state courts, of which there are also believed to be a substantial number. While consumers’ private right of action can provide an incentive for debt collectors to comply with FDCPA, representatives of the debt collection industry told us that many of the FDCPA lawsuits filed are for what they consider to be technical violations of the statute that have caused no actual harm to the debtor. For example, the National Association of Retail Collection Attorneys believes that a significant burden has been placed upon debt collectors that have been forced to defend FDCPA suits that claim that the collectors’ validation notice is somehow confusing or misleading. Industry officials told us they believe that some consumer attorneys file FDCPA lawsuits largely for their own personal gain, taking advantage of the attorneys’ fees awarded under FDCPA for attorneys who prevail against collection agencies. Representatives of several debt collection companies told us that in many instances they choose to settle FDCPA cases even when they believe they have done no wrong to avoid the expense of bringing the cases to trial. FDCPA provides that collectors that violate the law are liable to an individual consumer for any actual damages suffered by the consumer, plus any additional damages allowed by the court, not to exceed $1,000 per violation. The court also may award reasonable attorneys’ fees to a consumer who prevails in the action. Damages for class actions are set at the lesser of $500,000 or 1 percent of the debt collector’s net worth. In its 2009 workshop report, FTC proposed that Congress, at a minimum, update these damages to reflect inflation since 1977. Some consumer attorneys with whom we spoke said the amounts were too low to serve as a meaningful deterrent for collection companies. In contrast, one industry representative expressed the view that the amounts paid for attorney fees often far exceed the damage award to the consumer, particularly for technical violations of FDCPA that, in their view, caused no actual consumer harm. FTC’s workshop report noted that lawsuits seeking to collect on credit card debt are usually filed in state court and, depending on the amount of the debt, may be filed either in small claims court or civil court of general jurisdiction. Courts typically apply state contract law to decide collection cases and use state rules of civil procedure and local court rules, the report noted, and state rules of civil procedure require that after filing the debt collector serve the debtor with notice of the action, which can include the date and time the debtor must appear in court. If the debtor does not appear in court to respond to the lawsuit, the judge can generally enter a default judgment in favor of the creditor. Once the owner of a debt receives a favorable judgment, the owner can generally collect on that judgment or award, and in some states can seek to put a lien on the debtor’s property or garnish the debtor’s wages or bank accounts. While no national figures are readily available on the number of debt collection lawsuits filed in the United States—involving credit card or any other form of debt—the numbers are widely recognized to be very large. FTC’s 2009 workshop report noted that the majority of cases on many state court dockets on any given day are debt collection cases. A report by the Urban Justice Center estimated that in 2006, 320,000 debt collection cases were filed just in New York City’s Civil Court. In Chicago’s Cook County Circuit Court, more than 119,000 civil debt collection lawsuits were pending as of June 2008, according to a review by the Chicago Tribune. State officials in Ohio told us that municipal court judges there handle as many as 1,000 debt collection cases per week. A review by the Boston Globe found that at least 60 percent of small claims cases filed in Massachusetts in 2005 were filed by debt collectors. Consumer groups, attorneys, and FTC all acknowledge that the number of these state court cases has increased in recent years and is putting a strain on the state court systems. Kaulkin Ginsberg and the National Association of Retail Collection Attorneys have noted that the growth of the debt-buying industry has resulted in increases in collection lawsuits because entities that purchase delinquent debt often use collection law firms as their primary tool for recovery. FTC’s workshop report highlighted concerns related to the prevalence of default judgments in debt collection litigation. For example, in Cook County, Illinois, it is estimated that debt collectors obtained a default judgment in more than 45 percent of debt collection lawsuits filed in 2007. The Urban Justice Center estimated that 80 percent of the debt collection cases it reviewed for 2006 in New York City resulted in default judgments. When a consumer does not show up in court to respond to the suit, a default judgment generally may be entered against them. Consumer advocates and consumer attorneys have raised concerns that debt collectors often file suits with weak evidence supporting the alleged debt, knowing that most likely the consumer will not appear in court and they will receive a default judgment. Moreover, advocates say consumers often do not appear to contest a debt collection lawsuit because they have not been properly served with notice of the lawsuit. In response to concerns about the number of default judgments, representatives of the debt collection industry say that in many debt collection cases, defendants may legitimately owe the debt but do not appear in court because they want to avoid the associated costs of offering a defense that they know will be unsuccessful. Representatives of the National Consumer Law Center, the National Association of Consumer Advocates, Consumer Union, and attorneys at legal aid clinics have stated that they have observed a number of other debt collection practices that raise concern. Because there is limited information about the extent to which these practices occur, most of the evidence remains anecdotal. Collection of debt discharged in bankruptcy. Under the federal Bankruptcy Code, creditors are prohibited from taking any form of collection action on debts discharged in bankruptcy, including legal action and communications with the debtor, such as telephone calls and letters. As noted earlier, federal agencies have reached settlement with companies alleged to have engaged in collection activities on discharged debt. In addition, at least one debt buyer we identified purchases discharged bankruptcy debt. There may be instances in which debts that have been initially designated as discharged can later become collectable—such as cases where the courts discover additional assets that can be divided among creditors or where debtors may choose to repay discharged debts out of a sense of moral duty. However, some consumer representatives have expressed concerns that the purchase and sale of discharged debt may foster improper collection practices. Collection of time-barred debt. As noted earlier, while it is generally illegal to sue or threaten to sue to recover debt that is beyond the statute of limitations (time-barred debt), FDCPA does not prohibit other attempts to collect on such debt, such as through telephone calls or letters. Some consumer advocates have reported to FTC that some collectors still make false threats of suit or actually sue on time-barred debts—and in some cases obtain a default judgment on time-barred debts from consumers who may be unaware that a collector may not lawfully sue on debt over a certain age. FTC addressed this issue in a recent roundtable it held in August 2009 on debt collection litigation and arbitration issues. FTC plans to hold two other roundtables on these issues later this year. Revival of time-barred debt. Some consumer attorneys have also reported that some debt collectors have used unlawful tactics in an attempt to revive a time-barred debt—that is, to extend the time available to sue a debtor if the statute of limitations has past or is approaching. Consumer representatives have alleged that some companies have unjustly sought to extend the limitations period by altering a debt’s recorded delinquency date or by persuading consumers to make a very small payment or making unauthorized payments in the debtor’s name. Having adequate information is a key element in ensuring a fair and efficient system for collecting debt. According to FTC and other stakeholders, collection agencies and debt buyers sometimes may not have adequate information about their accounts and may not always have access to documentation needed to verify the debt. The flow of information plays an important role in the process of debt collection. Credit card issuers provide their third-party collection agencies with information about the debtor—including name, address, telephone number, date of birth, Social Security number, and employer—and about the debt itself, including account number, balance, date of first delinquency, and date of charge off. Additional information that may be provided by issuers includes the last date of payment; a breakout of the principal, interest, and fees that compose the amount due; monthly payment date; minimum payment amount; and any notes describing the issuer’s internal collection efforts on the account. Some issuers allow third-party agencies to access account information through the issuer’s own data system during the collection process. FTC, state agencies, consumer advocates, and others have expressed concerns that debt collection companies sometimes have inadequate information about the accounts for which they are collecting—increasing the likelihood that the collector reaches the wrong consumer or tries to collect the wrong amount. Consumer groups and others note that this problem appears to be most acute when debt is sold and the transfer of information between seller and buyer may not be complete. It is common for a debt buyer to receive only a computerized summary of the issuers’ business records, and the specific account data transferred to a debt buyer varies with each sale. Problems with the sufficiency of data that are transferred can be exacerbated when accounts are sold multiple times, and there are numerous areas in which account integrity could be compromised, according to industry data specialists with whom we spoke. For example, important account information—such as results of disputed account investigations, consumer complaints about billing errors, and information on settlement agreements and identity theft—may not always be transferred to debt buyers. To help improve information flows, FTC’s 2009 workshop report proposed that Congress modify FDCPA to require that the initial validation notices provided to consumers include three additional pieces of information. First, the agency recommended that validation notices notify consumers of two significant rights they have under FDCPA: the right to have collection efforts suspended prior to debt verification and the right to require collectors to cease contact upon written request. Second, FTC recommended that validation notices include the name of the original creditor. FTC and consumer groups have noted that this would benefit consumers as well as collectors by making it easier for consumers to recognize their debts when they have been sold to a debt buyer under a different name than that of the original creditor. Third, FTC recommended that validation notices include not just the total amount of the debt, but also an itemization of principal, interest, and fees, which it said would allow consumers to determine if any charges being demanded by a debt collector were erroneous or subject to dispute. A related area of concern has been the availability of account media—that is, billing statements, credit card agreements, card applications, or other items that help substantiate the validity of the debt. Contracts between issuers and debt buyers usually specify the terms of the account media provided to the buyer. For example, in our discussions with issuers and debt buyers and our review of sample contracts, we found that oftentimes, buyers will have the right to request media either for a certain period of time subsequent to the purchase of a portfolio or for a certain number of accounts in the portfolio. Debt buyers may use such media to support a lawsuit or to address a consumer dispute. Some contracts between primary debt buyers and secondary debt buyers provide that if the secondary debt buyers request account media, the primary debt buyers will attempt to obtain them from the original creditor. Similarly, contracts between secondary debt buyers and tertiary debt buyers provide that the tertiary buyer can request media from the secondary buyer—which then requests them from the primary buyer, which requests them from the issuer (see fig. 3). This process can be problematic because if any company in the chain fails to respond (or goes out of business), it can be difficult to obtain the media needed to document and verify an account. The credit and collection industry trade association ACA International has suggested that Congress require by statute that creditors and debt buyers maintain specific account documentation until the time they sell, forward, or assign a debt to another entity, at which time the documentation would be required to be made available to that entity. Some industry representatives have noted that improving information flows in the debt collection process would have costs as well as benefits. For example, they note that requirements for maintaining and transferring media (such as credit card agreements) for all accounts would impose financial costs to creditors and collectors. Moreover, industry representatives say that the need for account media is relatively rare—for example, one collection attorney estimated that such media from issuers or previous debt buyers would be relevant to fewer than 1 percent of his firm’s collection disputes. In addition, representatives of the credit card industry have said that the transfer of more account information can raise privacy and data security concerns—for example, by allowing more parties to hold sensitive account information there may be an increased risk for data breaches and identity theft. While these issues would need to be considered, FTC and consumer advocates maintain that it remains important nonetheless to find ways to better ensure that debt collectors have adequate information about the accounts for which they are collecting. FDCPA requires that, if a consumer disputes the validity of a debt in writing, the debt collection agency must provide the consumer with documented verification of the debt. However, the statute does not precisely set out what constitutes verification of the debt. Collection companies’ policies for responding to requests for verification vary. In many cases, contracts between issuers and collection agencies stipulate how the agency responds to requests for verification. FTC, consumer advocates, and state agencies have said that, in practice, many debt collectors and debt buyers do very little to verify debts that consumers dispute. In particular, they say that the verification provided by debt buyers sometimes consists of little more than a written statement that the amount being demanded is what the creditor claims is owed. Collection agencies’ ability to provide adequate documentation to verify a debt may be limited if they do not have access to account media, as is sometimes the case. Debt collection industry representatives claim that considerable confusion exists about what constitutes adequate verification under FDCPA, and collectors largely have had to rely on case law. In one key case, the Fourth Circuit of the U.S. Court of Appeals found in 1999 that while the debt collector must obtain verification from the creditor for the amount demanded, the collector is not required to keep detailed files of the alleged debt. To clarify and improve the debt verification process, FTC’s 2009 workshop report proposed that FDCPA be amended to require debt collection agencies to conduct reasonable investigations that are responsive to the specific disputes consumers have raised. FTC points out that such a requirement would be comparable to the “reasonable investigation” standards for addressing consumer disputes that are imposed by FCRA and Regulation Z, which implements the Fair Credit Billing Act. FTC officials told us that what constitutes a reasonable investigation would depend on the specific facts of the dispute, including the type of debt and the cost of obtaining information. Some debt collection industry participants say that because the circumstances of a dispute can vary, any new statute or implementing regulations should avoid requiring a specific checklist of items required for verifying a debt. However, in general, FTC, consumer representatives, and industry participants agree that clarification is needed on what constitutes adequate verification of a debt under FDCPA. FDCPA was enacted in 1977. While some sections have been amended, it has not been substantially revised to reflect changes that have occurred in technology and in the debt collection marketplace. Most stakeholders involved in the process of debt collection with whom we spoke— representing consumers, state and federal agencies, credit card issuers, debt collectors, and debt buyers—have expressed support for updating FDCPA. Communication technologies that are ubiquitous today—mobile telephones, e-mail, caller identification, answering machines, and fax machines—were not prevalent when FDCPA was enacted in 1977. Collection companies sometimes have faced difficulties in trying to use these technologies while remaining in compliance with the act: Answering machines and voice mail. FDCPA requires that a collection agency identify itself as such to a debtor and also not state that a debtor owes any debt to any other party who might answer the telephone. A debt collector may violate FDCPA if the collector leaves a message on a consumer’s answering machine or voice mail that fails to disclose that the collector is calling in an attempt to collect a debt. However, the debt collector may also violate FDCPA if someone other than the debtor overhears a telephone recording revealing the debt collection effort. One court acknowledged the difficulty a debt collector has in complying with all of the provisions of FDCPA at the same time when leaving voice mail, and inferred that debt collectors may need to reach debtors by postal mail, in-person contact, or by speaking directly to them via telephone instead of using voice mail. Mobile telephones. FDCPA restricts the hours in which debt collectors can call consumers and prohibits collectors from imposing additional telephone charges on consumers. However, because mobile telephone users may not be, at a given time, in the geographic location indicated by the telephone’s area code, debt collectors calling a mobile telephone cannot be certain they are calling within the permitted hours. Furthermore, unlike users of land lines, mobile telephone users often incur charges of some sort whenever they receive a call. Caller identification. When debt collectors call consumers who have caller identification on their telephones, the collectors may be disclosing their names and telephone numbers, which could be construed as a violation of FDCPA if a third party sees that a debt collector is calling. However, some stakeholders have questioned if conveying false or blocked information through caller identification would be a violation of FDCPA’s and the FTC Act’s prohibitions on making a false or misleading representation, as well as FDCPA’s prohibition of making telephone calls without meaningful disclosure of the caller’s identity. E-mail and faxes. Debt collection agencies have been reluctant to use e- mail and faxes to communicate with debtors because of the risk that someone other than the debtor may read the transmission, which could violate FDCPA’s prohibition on disclosure to third parties. Predictive dialers. Predictive dialers—which are used heavily in the debt collection industry to efficiently manage high call volumes—sometimes can result in inadvertent hang-ups or dead air, which could be a violation of FDCPA’s prohibition on causing a telephone to ring repeatedly with intent to annoy, abuse, or harass a consumer. Because FDCPA does not address these technologies, collectors often have had to rely on case law to determine their appropriate use, and this has created challenges for debt collection industry participants wanting to comply with the law. In a comment letter to FTC, ACA International stated that “onflicting court decisions make it challenging to comply with all applicable laws” and that without guidance on the application of FDCPA to these new methods of communication, debt collectors are without a reference point to assess the legality of using these technologies to communicate with consumers. Similarly, the National Association of Retail Collection Attorneys noted in a comment letter that “conflicting court decisions have made regulatory compliance a guessing game, rather than a predictable endeavor.” FDCPA requires FTC to provide Congress with an annual report describing its FDCPA enforcement efforts and provide any recommendations for statutory changes. However, FDCPA does not authorize FTC or any other agency to issue rules to implement the act. The legislative history of the act indicates that rulemaking authority was not provided to any agency because the relevant committee regarded the legislation as comprehensive and believed it would fully address all collection abuses. However, because no administrative agency can promulgate rules for FDCPA, limited means exist for clarifying ambiguities or filling gaps in the statute and addressing issues that arise as technology and the marketplace evolve. As we have seen, the advent of the debt- buying industry has created new challenges with regard to information flows that were not envisioned when FDCPA was drafted. FTC officials noted that if FDCPA were amended to require collectors to respond to consumer disputes with reasonable verification measures, a rulemaking would be the appropriate method for determining what constitutes a “reasonable” verification process. Similarly, FTC and some industry representatives note that rulemaking authority would allow the agency to address current and future technologies in the marketplace. Representatives of some consumer groups and state agencies told us that they support providing FTC with rulemaking authority for FDCPA. Among debt collection trade associations, the National Association of Retail Collection Attorneys has supported giving FTC rulemaking authority, which it says would help resolve potentially conflicting court interpretations and help ensure industry compliance. ACA International has not explicitly called for amending FDCPA to give FTC rulemaking authority, but has recommended that FTC “make regulatory changes” as it deems necessary. Officials from DBA International, a trade association for debt buyers, told us it had not taken a position on FTC rulemaking authority. FTC already has rulemaking authority to implement other consumer protection statutes—for example, the agency issued the Telemarketing Sales Rule in 1995, revised in 2003, to respond to changes in telephone technologies and the marketplace. FTC has issued four FDCPA “advisory opinions,” which protect debt collectors from liability for actions taken in good faith reliance on the opinions. In addition, FTC staff have issued a commentary on FDCPA and also have issued a number of “staff opinions,” but the commentary and these opinions are not legally binding and have not always carried much weight in the courts, according to FTC staff. As a result, debt collectors have often had to rely on case law—which they note has sometimes been ambiguous or contradictory— in interpreting how to comply with FDCPA, and there has been no regulatory process to help address the changing marketplace for debt collection. The rise in credit card delinquencies and charge offs that has accompanied the current economic recession has focused new attention on the practices of creditors and third-party companies in collecting on delinquent credit card debt. FDCPA, enacted in 1977, has been an important tool in addressing unfair third-party debt collection practices, but it has not kept up with the evolving marketplace or with changes in technology, and FTC has previously recommended that Congress make certain changes to the statute. We believe that in at least three areas, FDCPA would benefit from modification to provide needed clarity for industry and to enhance consumer protections. First, FDCPA is limited in addressing problems associated with information flows. With the advent of debt buying has come the repeated resale of accounts—making it more difficult to verify debts and obtain appropriate documentation as credit card accounts get further from their original owner. FDCPA does not, for example, address the account information that should be provided when a debt is sold nor does it address the procedures and information that constitute “verification” of the debt. Statutory changes to better address these issues could help ensure that participants in the debt collection industry have clear guidelines on what information they must provide to each other and to consumers, and could help reduce instances where collectors seek payment from an incorrect party or for an incorrect amount. Second, because FDCPA was enacted prior to the advent of technologies such as mobile telephones, e-mail, and voice mail, its provisions on communicating with consumers are outdated. This has resulted in considerable ambiguity and confusion on using these technologies in compliance with the law, and collection companies have been reluctant to use some modern technologies. Statutory changes to ensure technology issues are addressed could benefit both industry and consumers, allowing the industry to more efficiently conduct its operations and consumers to receive information expeditiously and with appropriate protections. Finally, because FTC does not have rulemaking authority under FDCPA, there is no regulatory process to keep up with an evolving marketplace and changes in technology. With rulemaking authority, FTC could better regulate the practices of debt collectors and ensure that consumers are protected from unfair and abusive practices. To help ensure that the debt collection system better protects consumers without unduly burdening the legitimate process of collection, Congress should consider modifying the Fair Debt Collection Practices Act to account for changes in the marketplace that have occurred in recent years. Among such modifications, Congress should consider, in particular, options for modifying FDCPA to help ensure that debt collectors and debt buyers have adequate information about the debts transferred and adequate documentation to verify the debts they seek to collect from consumers, reflect technologies that were not prevalent when the act was originally enacted, and provide FTC with the authority to issue rules to implement the act. We provided a draft of this report to FDIC, Federal Reserve, FTC, OCC, and OTS for comment. FDIC, Federal Reserve, FTC, and OTS provided technical comments that we incorporated as appropriate. In addition, FDIC and FTC provided written responses, which are reprinted in appendixes II and III, respectively. In its response, FDIC noted that it takes seriously its responsibilities to enforce consumer protection laws and regulations related to debt collection and that it has taken formal enforcement actions and assessed civil money penalties against financial institutions to address noncompliance with these laws and regulations. In FTC’s response, it noted that its February 2009 workshop report, Collecting Consumer Debts: The Challenge of Change, concurred with our view that Congress should consider amending FDCPA to give FTC the authority to issue implementing rules. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the report date. At that time, we will provide copies to other interested congressional committees, as well as the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the Federal Trade Commission, the Comptroller of the Currency, and the Acting Director of the Office of Thrift Supervision. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Our report objectives were to examine (1) the protections provided consumers under federal and state laws related to credit card debt collection, and the roles and responsibilities of federal and state agencies in enforcing these laws; (2) the processes and practices involved in collecting and selling delinquent credit card debt; and (3) any issues that may exist related to some of these processes and practices. The focus of our report was on the collection of consumer credit card debt as opposed to other forms of debt. However, because collection agencies may collect on multiple kinds of debt, it was not always possible to isolate debt collection processes related specifically to credit card debt. We indicate in the report whether data that we present are specific to credit card debt or may include other types of debt. Our report also focuses on the largest credit card issuers and debt collection companies that ranged in size from medium to very large; therefore, the collection processes and practices described in this report may not be representative of smaller credit card issuers or debt collection companies. To address our first objective, we reviewed and analyzed relevant federal laws, rules, and guidance and we interviewed officials from the Federal Trade Commission (FTC) and the federal depository institution regulators—Board of Governors of the Federal Reserve System (Federal Reserve), Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Office of Thrift Supervision (OTS), and the National Credit Union Administration. We reviewed the procedures the federal regulators use in their bank examinations to review issuers’ debt collection policies and practices. We also reviewed two compendiums that summarized state laws applicable to debt collection— the National Consumer Law Center’s Fair Debt Collection and Collection Actions legal practice guides and ACA International’s Guide to State Collection Laws and Practice. We did not conduct our own review of all state fair debt collection statutes, but we did review the statutes of selected states—California, Colorado, Massachusetts, and Texas—which we selected because they included provisions that differed in some ways from the Fair Debt Collection Practices Act. We interviewed staff with the office of the attorney general in these four states and relied upon them for the analysis of and information about the meaning and scope of their state debt collection laws. In addition, we conducted a group interview, coordinated by the National Association of Attorneys General, with staff from the office of the attorney general of 15 additional states who chose to participate. We also met with staff from state and local agencies responsible for regulating the collection industry in a group meeting that was coordinated by the North American Collection Agency Regulatory Association to learn about state and local agencies’ activities, roles, and responsibilities. Seventeen of the group’s 24 U.S. members elected to participate in this meeting. To address our second objective, we interviewed representatives of the six largest credit card issuers as measured by total outstanding credit card loans, as of December 31, 2007, in the Card Industry Directory. These issuers, which represented about 83 percent of total outstanding U.S. credit card debt, were American Express, Bank of America, Capital One Financial Corp., Citigroup Inc., Discover Financial Services Inc., and JPMorgan Chase & Co. We reviewed the internal collection department policies of one issuer and the internal collection training materials used by three issuers, as well as several sample contracts between issuers and debt collection agencies and between issuers and debt buyers. We also reviewed the Securities and Exchange Commission filings of selected issuers and publicly held debt collection companies. In addition, we met with six third-party debt collection agencies, six companies that purchase credit card debt, one law firm that specializes in debt collection, and one collection attorney. We chose these entities because some or a significant portion of their business included the collection or purchase of credit card debt and because they ranged in size from medium to very large. These companies included some of the largest industry players, although data are not available on the share of the respective markets that they represent. We made several attempts to meet with at least one small debt collection agency—fewer than 20 employees—but were unsuccessful in gaining the cooperation of any such companies that we contacted. Additionally, we met with trade associations that included ACA International (which represents creditors, third-party collection agencies, collection attorneys, and debt buyers), DBA International (which represents debt buyers), the National Association of Retail Collection Attorneys, the American Bankers Association, and the Consumer Data Industry Association (which represents consumer reporting agencies). We also reviewed the guidance and other information that ACA International provides to its members. Finally, we toured the collection facilities of one card issuer and one large debt collection agency and listened in on a number of calls to consumers made by collections staff. To address our third objective, we reviewed FTC’s annual reports to Congress on the Fair Debt Collection Practices Act from 1998 to 2009, as well as its consumer education materials and other relevant documents. We also reviewed the transcript, report, and public comments resulting from the workshop on debt collection that FTC hosted in October 2007. We obtained and analyzed consumer complaint data from 2004 to 2008 that FTC maintains in its Consumer Sentinel database. Additionally, we reviewed all of the enforcement actions that FTC filed against debt collection agencies from 1998 to 2008 and examined their associated complaints, press releases, consent orders and agreements, and permanent injunctions. We did not include cases that clearly did not involve debt specific to credit cards. However, sometimes the type of debt involved could not be determined from the documents, and in those cases we included the case but specified that it was not known if credit card debt was involved. We also received information from the Department of Justice’s U.S. Trustee Program on its role in taking enforcement action related to the collection of credit card debt in cases involving bankruptcy filings. In addition, we collected and analyzed data from FDIC, Federal Reserve, OCC, and OTS on consumer complaints submitted in 2004-2008 related to credit card issuers’ debt collection activities. We also gathered information from these agencies on the informal and formal enforcement actions, if any, they had taken against issuers for violations identified during bank examinations in 1999-2008. We reviewed bank examination reports and relevant documents associated with enforcement actions, such as orders to cease and desist. We did not gather complaint data or information on enforcement actions from the National Credit Union Administration because officials told us credit unions represent a very small share of the credit card market. To assess the reliability of FTC’s Consumer Sentinel database as well as the consumer complaint data provided by the four federal depository regulators, we reviewed these data for obvious errors in consistency and completeness and we interviewed agency staff responsible for maintaining the data. We determined that the data were sufficiently reliable for the purposes of this report. However, complaint data may both over- and underestimate the number of actual problems in the industry because complaints may not be accurate or they may not represent a law violation. Consumer complaints are also self- reported and there are likely to be a number of complaints that are unreported. We identified enforcement actions related to debt collection at the state level by reviewing the National Association of Attorneys General’s biweekly Consumer Protection Reports from January 2006 through May 2009, which compile information on state and federal enforcement of consumer protection laws, legislative initiatives, and consumer education efforts. These reports may not be representative of all state attorney general enforcement actions because they are a compilation of press releases from their offices’ Web sites, not all of which may publish such press releases. To the extent feasible, we identified those enforcement actions related to credit card debt and, as available, reviewed related press releases and other documents. We also reviewed and analyzed consumer complaint data related to debt collection agencies that had been collected by the national Better Business Bureau and the National Association of Attorneys General. We reported these data because they provided information relevant to our review, but we did not test the reliability of these data because they appeared to corroborate FTC’s consumer complaint data. We also reviewed studies and reports by consumer organizations, such as the Urban Justice Center and Public Citizen, related to debt collection. In addition, we met with attorneys who represent consumers in debt collection cases and with representatives of consumer organizations, including the National Consumer Law Center, Consumers Union, and the National Association of Consumer Advocates. Because the debt collection industry is mostly composed of privately held companies, the amount of publicly available data about the industry is limited. To identify information on the industry, we conducted a literature search and we talked with a researcher from the Federal Reserve Bank of Philadelphia and officials from ACA International and DBA International, as well as other industry participants. We reviewed two industry surveys commissioned by ACA International, as well as reports published by Kaulkin Ginsberg and the Nilson Report. To determine the reliability of industry data in the Kaulkin Ginsberg reports, we interviewed company representatives about their methodology. They told us their estimates are developed from discussions with industry participants, financial statements, and other data obtained in the firm’s capacity as an industry advisor. We could not assess the reliability of the firm’s data, but our review of its methodology indicates that their data may not be representative of the entire debt collection industry. Officials from the Nilson Report declined our request to discuss the methodology used in their reports. We reviewed the descriptions of the survey methodologies contained in the ACA reports and determined that while their methodology was generally sound, because of the low response rate and the absence of nonresponse bias analysis, and the wide confidence intervals around key estimates due to the small number of responses, the resulting survey data may not be reliable for making precise quantitative estimates. However, we report some of the results from these reports because limited other publicly available sources of such data exist. During the course of our review, we also found several companies on the Internet that said they provided debt collection industry research and statistics for a fee, but we did not pursue these because their methodology suggested they faced potentially severe risks to reliability. We conducted this performance audit from July 2008 to September 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Jason Bromberg (Assistant Director), Anthony Bova, Christine Houle, Tiffani Humble, Marc Molino, Carl Ramirez, Linda Rego, and Barbara Roesmann made key contributions to this report. | Approximately 6.6 percent of credit cards were 30 or more days past due in the first quarter of 2009--the highest rate in 18 years. To recover delinquent debt, credit card issuers may use their own collection departments, outside collection agencies, collection law firms, or sell the debt. GAO was asked to examine (1) the federal and state consumer protections and enforcement responsibilities related to credit card debt collection, (2) the processes and practices involved in collecting and selling delinquent credit card debt, and (3) any issues that may exist related to some of these processes and practices. To address these objectives, GAO analyzed documents and interviewed representatives from six large credit card issuers, six third-party debt collection agencies, six debt buyers, two law firms, federal and state agencies, and attorneys and organizations representing consumers and collectors. The primary federal law governing third-party debt collection is the Fair Debt Collection Practices Act (FDCPA), which contains provisions on how collectors can communicate with consumers and prohibits collectors from using abusive, deceptive, and unfair collection practices. Some states have fair debt collection laws that provide protections additional to those of FDCPA. The Federal Trade Commission (FTC) is the primary enforcement agency for the debt collection industry; it collects consumer complaints, enforces violations of relevant laws, and undertakes consumer education efforts. Federal depository regulators oversee credit card issuers' collection practices, and various state agencies enforce state fair debt collection laws. Collecting and selling delinquent debt involves multiple parties. Credit card issuers typically collect on accounts less than 6 months delinquent using internal collection departments or "first-party" agencies that collect under the issuer's name, and often hire third-party collection agencies or law firms to collect on older accounts. Contracts between issuers and collectors often specify the collection policies and practices used. Third-party collection agencies rely primarily on telephone calls and postal mail in their operations, but often use automated mail systems and other technologies to do so efficiently in large volume. Credit card accounts often are sold--and may be resold multiple times. Several factors influence the price of these accounts, including their age, location, and number of times previously placed for collection. State and federal enforcement actions, anecdotal evidence, and the volume of consumer complaints to federal agencies--about such things as excessive telephone calls or the addition of unauthorized fees--suggest that problems exist with some processes and practices involved in the collection of credit card debt, although the prevalence of such problems is not known. One issue is that collection agencies and debt buyers often may not have adequate information about their accounts--sometimes leading the collector to try to collect from the wrong consumer or for the wrong amount--or may not have access to billing statements or other documentation needed to verify the debt. Further, with the advent of the debt-buying industry, accounts are frequently sold and resold, which can make verification more difficult as the owner of the debt becomes farther removed from the original creditor. Communications technologies that are ubiquitous today, such as mobile telephones, e-mail, and voice mail, were not prevalent when FDCPA was enacted in 1977. Significant uncertainty exists about how to use these technologies in compliance with the statute--for example, a debt collector may violate FDCPA if someone other than the debtor overhears a voice mail message revealing the debt collection effort. Additionally, FDCPA does not provide FTC with rulemaking authority, which has limited the agency's ability to address concerns related to the adequacy of account information, collectors' use of modern technologies, and other issues that arise in an evolving marketplace. |
Sponsors of defined benefit pension plans are responsible for managing the financial risks associated with their plans’ general administration. Such risks can include fluctuations in the value of plan assets and in interest rates, either of which can cause volatility in the plan’s funded status and plan contributions. This type of volatility has been exacerbated by recent fluctuations in the national economy, while a 2006 accounting standard change caused pension funding status to take a more prominent role on private sector plan sponsors’ balance sheets, making such volatility more visible.sponsors have chosen to lessen their exposure to such financial risks by shifting away from defined benefit plans and choosing to offer or emphasize defined contribution plans, such as 401(k) plans, whereby the Over the past several decades, many various risks are borne by the participants whose sustainable retirement income will depend on factors such as the participants’ contribution decisions, the investment returns on their personal accounts, their spend- down decisions in retirement, and their longevity. Likewise, sponsors who have chosen to retain their defined benefit plans have taken steps to reduce their plans’ financial risks by other means. In some cases, these steps have also resulted in the transfer of risk to participants. The steps sponsors can take to limit the financial risks they see posed by their plans are commonly referred to as pension “de-risking.” Broadly speaking, de-risking actions can be divided into two groups, internal and external methods. Internal methods of de-risking—although beyond the scope of our study—allow the plan sponsor to reduce risk without directly removing liabilities, or participants, from the plan. These methods may include restricting plan participation or modifying the benefit formula to reduce future benefit accruals. They may also include adjustments to the allocation of plan assets, such as by liability-driven investing. This may involve shifting away from equities and toward fixed income securities that match the duration of plan liabilities in order to shield the plan from risks associated with market fluctuations in both stock market values and interest rates. Although these internal methods allow sponsors to mitigate some of the risks associated with their plans, the existing liabilities remain in the plans and, as a result, continue to expose sponsors to certain remaining risks. For example, plan sponsors continue to be subject to the longevity risk of plan participants living longer than anticipated. External approaches, on the other hand, involve permanently removing a portion of pension liabilities from the plan, discharging the obligation to pay a lifetime annuity to plan participants. Two of these approaches can be appropriately termed “risk transfers” because the risks of providing pension income or managing pension assets are essentially transferred to another party outside the plan. One form of risk transfer—also beyond the scope of our study—is the purchase of a “buy-out” group annuity, whereby plan assets are transferred to an insurance company that then assumes the responsibility for making pension benefit payments to participants removed from the plan. When a sponsor implements an annuity buyout, the risks associated with providing promised pension benefits are shifted from the plan sponsor to the insurer. In 2012, two large plan sponsors, General Motors and Verizon, purchased group annuities from Prudential Insurance Company involving the transfer of a reported $32.6 billion in plan liabilities. A second form of risk transfer is a “lump sum window” offer—the form of risk transfer that is the focus of our study. Any lump sum window offer must satisfy applicable requirements under the Internal Revenue Code. In a lump sum window offer, the participant is offered a choice between three optional forms of his or her benefits accrued to date. Generally, the participants who are given the offer will be separated participants— participants no longer employed by the sponsor—waiting for their pension annuity to begin in the future, or retirees already receiving their pension annuity payments. The three options are as follows: 1. Annuity at normal retirement age (or current annuity) – In the case of a separated participant not yet in pay status, this is their lifetime annuity promised under the plan that would begin at a future date, often age 65. In the case of a retiree in pay status, it is the lifetime annuity they are currently receiving. 2. Immediate annuity (or alternate annuity) – In the case of a separated participant not yet in pay status, this is their lifetime annuity promised under the plan, with payments beginning at the time of the lump sum offer rather than at their normal retirement age. The payments are reduced by a specified factor to account for the earlier commencement of benefits. In the case of a retiree in pay status, it is the lifetime annuity they are currently receiving, but they may have the option of changing to another form of benefit offered under the plan. 3. Lump sum – In the case of both a separated participant not yet in pay status or a retiree in pay status, this is the actuarial equivalent of the remaining expected payments of their lifetime annuity, given to them in a single immediate payment. The participant then has a limited amount of time, or window, to choose between the three options. When participants elect to receive their benefit as a lump sum, the risks involved in providing retirement income are thus transferred from the sponsor to the participants. ERISA establishes protections for plan participants and their beneficiaries, and sets minimum funding standards for pension plans that are sponsored by private employers, among other provisions. One broad protection offered by ERISA is the requirement that sponsors be subject to fiduciary standards in their management and administration of the plan. As fiduciaries under ERISA, sponsors are required to administer the plan solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and defraying plan expenses. However, some functions, such as those related to establishing a plan and choosing its design features, are considered settlor functions that are not subject to ERISA’s fiduciary standards. For example, a sponsor’s decision to take risk transfer actions, such as offering a lump sum window, is a matter of plan design, generally making it a settlor function rather than a fiduciary function. However, once the sponsor embarks on implementation of the strategy, such action would fall within the realm of its fiduciary role, requiring the sponsor to operate in the best interest of participants and beneficiaries. The administration of ERISA is divided among three federal agencies: the Department of Labor (DOL), the Department of the Treasury (specifically the Internal Revenue Service ), and the Pension Benefit Guaranty Corporation (PBGC). DOL takes primary responsibility for ERISA reporting and disclosure requirements. In addition, DOL promulgates regulations and produces guidance related to reporting and disclosure. Within DOL, the mission of the Employee Benefits Security Administration (EBSA) includes efforts to ensure the security of Americans’ retirement benefits by assisting and educating plan participants, plan sponsors, service providers, and fiduciaries. To that end, EBSA develops regulations and enforces the law, including ERISA’s fiduciary standards. As GAO has reported previously, certain disclosures are specifically required to be written in a manner calculated to be understood by the average participant, and for disclosures that do not include such a requirement, DOL officials have noted that ERISA’s basic fiduciary standards require that fiduciaries consider how understandable the disclosures are. ERISA also created the ERISA Advisory Council to advise the Secretary of Labor. The council has carried out its role by studying testimony and deliberating on various topics and submitting recommendations regarding the Secretary’s functions under ERISA. Due to the recent heightened interest in risk transfers and their perceived increase in popularity, the council held hearings in 2013 exclusively focused on such actions and the effects they may have on plan participants.summarizing the hearings, the council observed that there had been an increased level of activity by sponsors to reduce or eliminate the risks associated with their pension plan liabilities and concluded with several recommendations to DOL. For example, the council recommended that disclosures associated with lump sum windows include information which In its final report enables a participant to make an informed decision. In addition, the council recommended DOL consider collecting relevant information at the time sponsors take risk transfer actions. For its part, the IRS determines whether private sector pension plans qualify for preferential tax treatment under the Internal Revenue Code. Qualified pension plans receive favorable tax treatment, generally including the deferral of taxes on contributions and investment earnings until benefits are received. To be qualified, a plan must meet a number of requirements. Plan sponsors can request a determination letter that addresses the qualified status of the plan. In addition, a plan sponsor can request that the IRS address a unique issue requiring immediate guidance that is not likely to be provided through the determination letter process. If the IRS determines that it is in the interest of good tax administration to respond to this request, its response, known as a private letter ruling, will interpret and apply tax laws to the sponsor’s represented set of facts. By law, this specific ruling may not be used or cited as precedent by other taxpayers or by IRS personnel. Also, to protect the value of each participant’s pension benefit, the Internal Revenue Code prescribes the interest rate and mortality table that the sponsor must use to calculate the minimum amount of any lump sum option. A plan may pay a larger lump sum, but it may not pay less than this prescribed minimum. Further, sponsors are required to provide several specific pieces of information to the participant as part of the offer. For example, sponsors, when distributing pension benefits in any form, are required to provide notices to participants detailing tax implications, rollover options, and a description of the financial effect of electing an optional form of benefit. As part of this description, the participant must receive a statement comparing the relative value of the new form of benefit to their original benefit. For instance, when an optional lump sum would replace a monthly annuity, participants must be shown how the lump sum compares to the value of that annuity. Also, in order to receive the benefit in a form other than an annuity, such as a lump sum, the participant (and if married, the spouse) must receive and sign a waiver consenting to this alternative form of payment. The PBGC, also established by ERISA, acts as an insurer of private- sector defined benefit pension plans by guaranteeing participants’ benefits up to certain statutory limits. In the case of covered single- employer plans, PBGC protects participants if the plan terminates with insufficient assets to pay all benefits, such as in the bankruptcy of a plan sponsor with an underfunded plan. Under ERISA, plan sponsors pay premiums to PBGC to help fund its guarantees. The law currently requires sponsors to pay both a per-participant flat rate premium and a variable rate premium based on the plan’s level of underfunding. PBGC also collects a termination premium from sponsors who terminate their plans under certain criteria. In both the case of a sponsor’s buyout through a group annuity purchase and the case of a participant’s acceptance of a lump sum payment, the participant loses the protections of ERISA and the guarantees offered by PBGC. Group annuities provided by an insurance company are guaranteed by state benefit guaranty associations up to certain levels established by the state. Lump sum payments carry no guarantees with respect to the amount and duration of future retirement income they may ultimately provide. Data are lacking about the prevalence of lump sum windows, as there are no requirements that sponsors report when they use this practice. However, experts in the field of retirement pensions, including DOL’s ERISA Advisory Council, generally maintain that since 2012 an increasing number of sponsors have used lump sum window offers to shed plan liabilities. The offers we identified included offers made to separated vested participants not yet receiving benefits, as well as offers targeted to retirees who were already receiving benefit payments. While lump sum windows have the effect of reducing the size of sponsors’ pension plans, thereby reducing sponsors’ financial risk, the recent reported increase in use may reflect enhanced financial cost-saving incentives for such actions. These include changing federal laws and regulations governing the interest rates and mortality tables used to calculate lump sums, and those affecting PBGC premium rates. Likewise, other longstanding rules may also serve as incentives to act. Sponsors must also take into account their unique business circumstances and certain disincentives associated with lump sum windows. Comprehensive data on the details and the number of lump sum window offers are not publicly available. Although DOL takes primary responsibility for ERISA reporting requirements, neither it nor the other two agencies that oversee ERISA provisions, IRS and PBGC, are required to track or compile comprehensive data on such offers. As a result, the information currently required to be reported by sponsors when they implement lump sum windows is insufficient to provide a complete picture of the extent of the practice. For example, whenever lump sums are paid out from a pension fund, the sponsor is required to report the payout to IRS.associated with a lump sum window from other types of payouts from pension funds, such as monthly annuity payments. In addition, some However, such reporting does not distinguish payouts sponsors may choose to disclose limited information about lump sum window offers within their annual corporate reports and some may do so as part of periodic filings to the SEC. However, absent more specific requirements to report on lump sum window offers, meaningful data on the extent of their use do not exist. Nevertheless, pension experts generally agree that sponsors’ use of lump sum windows has become more frequent in recent years. In summarizing its 2013 hearings on pension de-risking, the ERISA Advisory Council concluded that the testimony they had heard served to confirm that risk transfer actions, such as lump sum windows, are on the rise. Studies cited by leading pension consulting firms, albeit without full disclosure of their data and study methods, have furthered this perception. Citing proprietary data, one firm has estimated that nearly 200 sponsors implemented lump sum windows during 2012. That firm reported that its survey of 180 plan sponsors found that 26 percent had implemented a lump sum window in 2012, and another 41 percent were in the process of, or considering, taking such action between 2013 and 2015. Another firm reported that its study indicated that of 223 sponsors surveyed, 12 percent had recently implemented a lump sum window. Of the remaining sponsors, 43 percent were reported to have said they were very or somewhat likely to do so in 2014. We based our analysis on publically available information from a variety of sources, including information collected from PBGC, a participant advocacy group, SEC filings, corporate reports, and media reports. We verified this information to the extent possible. In October 2014, PBGC informed us, based on limited sources of information, that they were aware of at least 17 additional lump sum windows announced by sponsors during 2013 and 2014. However, we were not able to verify this information before the publication of this report. time, these 22 cases alone involved offers to approximately 498,000 participants. Public data on the dollar amount of lump sums paid were limited, but for the 16 sponsors providing this information, we found the total payouts to be just over $9.25 billion in 2012. Based on its study of lump sum windows completed during 2012, a pension consulting firm reported acceptance rates ranging between 25 and 85 percent, with a majority being between 45 and 65 percent. Most (19 of 22) of the lump sum windows we identified only targeted participants who were not yet receiving their retirement annuity. However, three of the actions involved lump sums being offered to retired participants who had already begun receiving annuity payments. According to many pension experts, the lump sum windows implemented by Ford Motor Company and General Motors Company in 2012 could be viewed as a new approach to the practice, as they were reported to be the first known instances of lump sum offers to retirees in payment status rather than to separated vested participants not yet retired. Prior to implementation, it was also widely reported that both sponsors had requested and obtained IRS private letter rulings stating that their actions would “not fail to satisfy” certain provisions of the Internal Revenue Code. According to the letters, one important question was whether such lump sums would violate existing rules governing the amount and benefit payment period. In both private letter rulings, IRS concluded that such actions were permissible because the lump sum option was being offered pursuant to a plan amendment and only during a limited window period. Substantial financial advantages exist for plan sponsors considering implementing lump sum windows. In general, sponsors’ use of lump sum windows reduces the size of their pension plans, which can result in reduced financial volatility for the sponsor’s cash flow, income statement, and balance sheet, as well as reduced administrative burden and costs. However, changing federal laws and regulations concerning interest rates, mortality tables, and PBGC premiums may be providing additional cost-saving incentives for more plan sponsors to offer lump sums to their plans’ participants in recent years. Moreover, certain longstanding rules can also afford savings to sponsors by allowing them to offer lower lump sums by choosing an advantageous interest rate and excluding certain additional plan benefits, such as early retirement subsidies, when calculating lump sums. Lump sum windows also offer sponsors an opportunity to reduce oversized plan liabilities, such as in cases where the pension plan is large relative to the size of the plan sponsor’s business. They also offer sponsors an opportunity to target specific groups of individuals, such as vested terminated participants who may have had no prior relationship to the plan sponsor because they were in a plan that had been taken over as part of a merger or acquisition deal. At the same time, implementation of lump sum windows also involves costs. Sponsors have to weigh both the incentives and disincentives before taking such actions in order to determine if implementing a lump sum window addresses their unique business goals in a cost-effective manner. The federal laws and regulations regarding how lump sums are calculated have been changing in recent years. From the sponsor’s perspective, these changes make it more advantageous to implement a lump sum window at this time. Rules concerning interest rates have become more favorable, making it more advantageous to implement a lump sum window now and in the future than it was in the past. Impending changes to mortality tables provide an incentive to implement a lump sum window now to realize a potential financial cost-savings, an opportunity that will likely disappear when new mortality tables are adopted. Rising PBGC premiums also provide an ongoing and rising incentive for some plan sponsors to remove liabilities from the plan via a lump sum window or some other means. Switch to More Favorable Interest Rates Recent changes to the rules regarding how lump sums are calculated allow the use of interest rates that can result in lower lump sums for participants, which would be advantageous to plan sponsors trying to minimize the cost of implementing a lump sum window offer. Prior to enactment of the Pension Protection Act of 2006 (PPA), sponsors were required to calculate lump sums using interest rates on 30-year Treasury bonds. Since PPA, sponsors have been allowed to use generally higher corporate bond interest rates, which can serve to lower the amount of the lump sums offered to many participants. A consulting firm estimated that, because of the general reduction in lump sum amounts resulting from this rule change, one of their client sponsors paying out $40 million in lump sums could potentially save about $10 million due to the switch to the higher rates. The PPA switch from Treasury bond rates to corporate bond rates became fully effective in 2012, and some experts believe that this timing may partly explain the reported recent increase in risk transfers since 2012. Illustration of How PPA Rules on Interest Rates Can Affect Lump Sums Bob is 45, has a lifetime deferred retirement pension of $10,000 a year starting at age 65, and was offered a lump sum in October 2012. Prior to PPA, Bob’s immediate lump sum would have been $62,643, calculated based on a 30-year Treasury interest rate of 3.65 percent. After PPA, Bob’s immediate lump sum is $32,453, calculated based on a corporate bond interest rate of 6.02 percent, or 48 percent less than it would have been under rules prior to PPA. In addition, the Moving Ahead for Progress in the 21st Century Act (MAP- 21) allowed more sponsors to take advantage of this rule change by temporarily raising the interest rates that can be used to value plan liabilities, significantly improving many plans’ reported funded status, which in turn allowed more plan sponsors to consider offering lump-sum payouts. The mortality tables which sponsors must use in determining minimum lump sum amounts provide another incentive to conduct a lump sum window at this time. This is because the tables currently required for this purpose under IRS regulations do not reflect the accelerated rate of longevity improvements that have occurred in recent years. These longevity improvements have been reflected in updated mortality tables recently released by the Society of Actuaries (SOA) and they are expected to be adopted by IRS for lump sum calculations, but possibly not until 2016. The new SOA tables reflect a longer life expectancy for individuals, and when used to calculate lump sums will yield correspondingly larger lump sum amounts. Thus, sponsors making lump sum offers prior to IRS’s anticipated adoption of the new tables can realize substantial financial savings since their lump sum calculations will still be based on older tables. According to SOA, the new mortality tables reflect a 10.4 to 11.3 percent longer life expectancy for individuals age 65 in 2014—increases that could translate into lump sums that are markedly greater than those based on the current tables used for 2014 lump sum calculations. Therefore, sponsors with lump sum payouts exceeding, for example, $100 million could potentially save millions of dollars by taking action before the adoption of new mortality tables, all other factors remaining the same. Prior to SOA’s release of the new tables, in August 2013, IRS announced that the currently required tables will continue to be used for the calculation of minimum lump sum payments in 2014 and 2015, and IRS officials we interviewed said there is currently no timetable for when it will adopt new tables. They said nothing precludes IRS from adopting new tables prior to 2016, but they said it will not occur until the agency completes its issuance process. Several pension experts are of the opinion that the switch is not likely to occur until at least 2016. Until then, sponsors can continue to use the current mortality tables and generate relatively lower lump sums, providing a window of opportunity to implement a lump sum window at lower cost than in the future. Illustration of How Use of Current versus New Mortality Tables Can Affect Lump Sums Jane is 45, has a lifetime deferred retirement pension of $10,000 a year starting at age 65, and was offered a lump sum in October 2012. Jane’s immediate lump sum would be $35,944, calculated based on new mortality tables reflecting more up-to-date longevity estimates. Jane’s immediate lump sum is $32,453, calculated based on current mortality tables, or 10 percent less than it would be using the new tables. Recent federal legislation that has increased PBGC premium rates, as well as scheduled additional future increases, creates another potential cost-saving incentive for sponsors to conduct a lump sum window offer. PBGC premiums are based, in part, on the number of participants in a plan, so reducing the number of participants via a lump sum window directly reduces the total amount of the annual premium for that sponsor. The flat rate portion of the single-employer premium rose 63 percent— from $35 to $57 per participant—between 2012 and 2015. Further, this rate is scheduled to increase another 12 percent, to $64 per participant, in 2016, for an overall rate increase of 83 percent from 2012 to 2016. Thus, for each participant that had been removed from a plan prior to 2015, the sponsor reduced its 2015 PBGC single-employer, flat rate premium costs by $57. Likewise, removal of participants in 2016 will result in similar savings. Terminated vested participants can be a particularly attractive group through which to achieve PBGC premium savings through a lump sum offer since they often represent a large portion of a population but a small portion of the participant liabilities. According to a leading consultant’s analysis of selected plans, terminated vested participants can represent less than one-sixth of the total amount of liabilities in single-employer pension plans but nearly a third of the total plan participant counts. As a result, terminated vested participants can account for a significant portion of a plan’s ongoing administrative expense, such as PBGC premiums. A sponsor can generate significant administrative cost savings, especially for large plans, if they can remove participants and their associated premium costs from the plan. Experts differ in their opinion of the extent to which rising PBGC premium rates act as an incentive for sponsors to implement a lump sum window. Notably, two of the sponsors we spoke to said the rate increases did not factor into their decision to any great extent. However, one said they were a concern and that the impending premium increases could prompt them to take further action in the future. In addition to recent and impending changes in federal rules, certain longstanding federal rules can also act as financial incentives to sponsors considering implementing a lump sum window by potentially reducing the size of lump sum amounts or by allowing the sponsor to avoid potential plan costs. Ability to Choose a “Lookback” Rate One longstanding IRS rule that can sometimes provide a significant financial incentive for offering a lump sum window is the provision that permits plan sponsors to select the interest rate used for lump sum calculations from up to 17 months prior to the month of the lump sum offer. This interest rate is commonly known as a “lookback” rate. IRS officials we interviewed pointed out that when used for the calculation of lump sums that are part of a plan’s ongoing design (not a lump sum window situation), this rule can work to the advantage of either the plan sponsor or the plan participant at different points in time, depending on whether interest rates have decreased or increased since the “lookback” month. However, when used in association with a one-time lump sum window with a fixed payment date, the “lookback” rate can be selectively used to financial advantage by plan sponsors when interest rates have decreased. This is because it allows sponsors to choose favorable interest rates that are higher than prevailing rates, resulting in smaller lump sum payouts. In 2012, as interest rates were declining, this rule allowed plans to look back to higher rates from as early as August 2011. Of the 11 sponsors whose information packets we examined, all sponsors who disclosed the interest rates used for the lump sum calculations had used sponsor-favorable “lookback” interest rates from between 11 and 16 months prior to the lump sum payment date. Illustration of How the “Lookback” Rules on Interest Rates Can Affect Lump Sums Dan is 45, has a lifetime deferred retirement pension of $10,000 a year starting at age 65, and was offered a lump sum in October 2012. Dan’s immediate lump sum would have been $46,967, calculated based on prevailing interest rates as of September 2012, the month prior to the lump sum offer. Dan’s immediate lump sum is $32,453, calculated based on “lookback” rates as of August 2011, or 31 percent less than it would have been using a rate as of the month prior to the offer. Ability to Exclude Certain Additional Plan Benefits Another longstanding rule that provides an incentive for offering a lump sum window is the rule that allows sponsors to exclude certain additional plan benefits when calculating the amount of the lump sum. These additional plan benefits that are sometimes provided by pension plans include subsidized early retirement benefits, subsidized joint-and-survivor benefits, and supplemental early retirement benefits. Although a separated participant, in the absence of a lump sum window, might have gone on to be eligible for and collect such additional benefits in the future, or might already be eligible for such benefits, the lump sum may still be calculated assuming the participant would have collected a normal retirement benefit without any additional benefits. Illustration of How the Exclusion of Early Retirement Subsidies Can Affect Lump Sums Pam is 45, has a lifetime deferred retirement pension of $10,000 a year starting at age 65, but also qualifies for a subsidized, unreduced early retirement benefit starting at age 60. She was offered a lump sum in October 2012. Pam’s immediate lump sum would have been $54,301, if the lump sum is calculated assuming that Pam would have retired at age 60, i.e., if the early retirement subsidy had been included in the lump sum calculation. Pam’s immediate lump sum is $32,453, if the lump sum is calculated assuming that Pam would have retired at age 65, i.e., if the early retirement subsidy was not included in the lump sum calculation, or 40 percent less than it would have been if the subsidized, unreduced early retirement benefit was included. In addition to these potential incentives, sponsors and experts say the decision to implement a lump sum window is often driven by how large the sponsor’s pension liabilities have become in comparison to the overall size of the business. This consideration takes on particular importance when a business downsizes or, conversely, acquires other companies. Indeed, two of the three sponsors we spoke to said recent restructuring of their companies had resulted in their plan’s liabilities becoming unacceptably large relative to the overall size of the business. Both had recently experienced significant downsizing of their core business, yet both had retained large amounts of benefit obligations owed to participants. This particular issue was also mentioned by one of the sponsors who requested an IRS private letter ruling prior to offering lump sums to retirees in pay status. The sponsor had stated that the pension obligations reported on the company’s financial statements had become “disproportionately large” and very sensitive to swings in interest rates. They explained that such volatility increases the cost of financing, makes cash flow management more difficult, and makes the company less competitive in the marketplace. The sponsors we talked to said their decision to reduce their pension liabilities was a means to shore up their overall balance sheet. The other sponsor we interviewed told us that, in their case, their business had grown due to the acquisition of other companies. However, with the mergers had come additional pension liabilities and costs associated with the defined benefit plans of the acquired companies. They said they were now burdened with pension costs associated with separated vested participants who had never been directly associated with their corporation. This sponsor told us they implemented a lump sum window primarily on the advice of their pension consultant, who presented the action as a cost-effective means of reducing administrative burden and costs associated these types of separated participants. Implementing a lump sum window is not cost-free for plan sponsors. Despite the potential incentives, many experts point out that the decision to implement a lump sum window will be based on each sponsor’s unique business considerations, and potential downsides must be considered. Disincentives include the administrative costs involved, future costs associated with adverse selection, the need to make sizeable immediate payments, interest rate uncertainty, and foregone potential returns. Administrative costs. Conducting a lump sum window requires sponsors to collect and verify data on their participant population to properly value their benefit obligations, which in some cases may involve the reconciliation of thousands of participant data records. In addition, participant communications, including information materials, must be prepared, and call centers may need to be set up, requiring staffing and training. If these administrative tasks are performed in- house, it will take time and resources; if outsourced to a third party, the sponsor will likely incur service fees. Adverse selection. When lump sums are offered, it is possible that relatively unhealthy participants will be more likely to accept the lump sum and, conversely, healthier participants will choose to keep their existing deferred annuity. If so, the remaining plan participants may outlive the mortality assumptions used to value liabilities, requiring additional plan funding in the future to cover benefit payments. Sizeable immediate payments. The payment of lump sums results in an immediate depletion of plan assets. In such cases, it is possible that the sponsor might have to sell assets at a poor time, when their position in the market is low. In addition, lump sum payouts could reduce the funded ratio of an underfunded plan, potentially increasing minimum required contributions. Interest rate uncertainty. Future interest rate increases can reduce the lump sum amounts to be paid, so that the sponsor might have achieved greater benefits if action had been postponed. However, the potential effect of interest rate increases on the value of plan assets would also be a consideration. For example, if a sponsor anticipates that interest rates will rise in the future, they will need to determine whether the cost savings associated with paying lower lump sum amounts then is offset by the potential for investment losses on plan assets before the lump sum window is executed. Foregone potential returns. Lump sum payments can come at the expense of future market earnings, if future rates of return on the assets would have exceeded the interest rate used to calculate the lump sums. Foregone potential returns is a flipside of risk reduction, as reduced risk often means reduced potential rewards as well. When participants of defined benefit pension plans accept lump sums, they are waiving their right to receive a lifetime income stream from their pension plan and must manage the payment received on their own from that point forward. Some may try to replicate an income stream by using their lump sum to purchase an annuity on the retail market. Others may roll over their lump sum into an Individual Retirement Account (IRA) and then invest and withdraw funds at their discretion. Still others may choose to use the lump sum to pay off debt or purchase consumer goods. While the participant may manage or spend their lump sum in ways that are beneficial to their circumstances, participants in all three of these situations are at risk of losing value from their retirement savings in various ways. In cases where participants accept the lump sum and then wish to replicate a lifetime income stream by purchasing an annuity on their own, the amount of their monthly benefit could be significantly lower than what would have been provided by their plans. It might seem counterintuitive for an individual to use a lump sum to purchase a lifetime annuity, since the individual could have just kept the lifetime annuity he or she already had from the defined benefit plan. Most of the participants we interviewed who accepted lump sum payments told us that they did not trust the security of their plan benefit (discussed further in the next section), and some said they were encouraged by others to purchase a retail annuity. Using the lump sum to purchase a retail annuity could result in significantly less annuity income than what would have been provided by the plan because different factors are at play for sponsors converting pension annuities to lump sums than for insurance companies selling Insurers in the retail market use lifetime annuities on the retail market.different interest rate assumptions and mortality tables than those used by plan sponsors to calculate minimum required lump sums, and also include other factors such as profit margins in their pricing. Additionally, unlike plan sponsors, insurers can price annuities differently for men and women when selling annuities outside the qualified retirement plan environment. These reductions in retirement income can also be thought of as the gap between the amount of lump sum offered and the amount of lump sum that would be needed to replicate the pension benefit. valuation of a plan lump sum payment can be pronounced for reasons such as 1) discount rate (interest rate) differences and mortality assumption differences, 2) gender differences, and 3) differences between group and retail annuity pricing. As illustrated in figure 1, on average, lump sum values were insufficient to meet the group annuity purchase rates in order to replace the coverage in the retail market. This is likely due in large part to differences in the actuarial factors used to value minimum lump sums, as set by law and regulation, versus those used by insurance companies to price annuities. One such factor is the discount rates, or interest rates used to convert future projected annuity payments into a lump sum amount or an annuity price. The generally higher lump sum discount rates have the effect of making the lump sum less than the amount needed to purchase a corresponding annuity, with the gap increasing at younger ages. A second factor is the mortality (or longevity) assumption. As noted earlier, the mortality assumption for determining minimum lump sums has not kept up with increases in longevity and, all else equal, has the effect of making lump sums today lower than they would be with up-to-date tables. In contrast, insurance companies will factor this increased longevity into their pricing, so that this factor will also tend to make minimum lump sums insufficient to purchase a corresponding annuity. The reduction in retirement income, or the gap between the amount of the lump sum offered and the amount needed, varies significantly by both the age and gender of the participant. Regarding gender differences, for example, figure 1 shows a 36 percent reduction in income for a 55 year- old male, compared to a 41 percent reduction for a 55-year-old female, from accepting a lump sum and purchasing an annuity. This gender differential occurs because federal law requires a sponsor calculating the amount of the lump sum payment to assume both men and women have the same life expectancy, while an insurer offering retail annuities outside the qualified retirement plan environment generally can charge different rates to men and women. On average, women live longer than men and thus collect benefits over a longer period of time. The insurer will thus require a woman to pay more than a man of the same age to purchase an equivalent lifetime monthly benefit. Most participants accepting the lump sum payment, but then wishing to still have an annuity, will be subject to purchasing a more costly individual retail annuity rather than a group annuity. One reason for this cost difference is that the individual retail annuity market is also subject to adverse selection, which means that when given a choice, relatively healthier individuals will tend to purchase or select annuities, increasing average costs because such individuals are expected to live longer. According to the American Academy of Actuaries, adverse selection can add about a 10 percent increase to the annuity price. Retail annuities can also include additional distribution, administrative and sales charges that can add further to their cost differential over group annuities. Moreover, certain individuals, particularly older retirees, may find that regardless of cost, they do not have the ability to purchase a lifetime annuity on their own. For example, one retail annuity site we examined would not offer lifetime annuities to individuals older than age 85. An expert also told us that some insurers will not sell a retail annuity for less than a certain price. Although in many instances the acceptance of a lump sum payment with the intention of purchasing a retail annuity essentially results in the exchange of a cheaper plan annuity to purchase a more expensive retail annuity, some participants have received contacts encouraging them to do so. One financial planner we spoke with told us that he noticed that a few participants who had been offered lump sums were approached by financial service providers trying to sell retail annuity products. Additionally, our interviews of participants found that a few (3) participants had received unsolicited contacts about purchasing an annuity with the lump sum. However, none of the participants that accepted a lump sum actually purchased an annuity with most of their lump sum payment. The financial planner, who advised participants affiliated with two prominent lump sum window offers in 2012, said he counseled many of the participants considering the purchase of a retail annuity to simply stay in their plan and receive lifetime annuity income through the plan. Participants who elect lump sum payments and roll them over into IRAs now have the ability to control and manage their own funds. But they must also manage the risks and challenges associated with decisions regarding the investment and withdrawal of the funds that were previously the responsibility of their DB plan sponsor.earn a rate of return that allows them to accumulate and withdraw the monies in amounts that replicate the benefit they gave up under the plan, or to provide protection over their entire retirement period should they live to an old age. As with any investment strategy, the participant will face a tradeoff between maximizing return with riskier investments, such as stocks, versus maintaining their assets with lower return, lower volatility investments, such as bonds. Participants who roll over their lump sums into IRAs will face risks in managing and investing the monies for later drawdown. Specifically, by making this choice, participants must contend with 1) the potential of outliving their assets; 2) complex decisions concerning the investment of the lump sum and the drawdown of the assets; and 3) the difficulty of finding trusted advice. A major risk that participants face overall is that they may outlive their lump sum assets. Figure 2 shows how long a hypothetical lump sum, based on a $10,000 annual ($833 monthly) benefit, would last for a 45- year-old participant if the participant invested the lump sum and drew down the monies beginning at age 65. The illustration shows that the age at which the drawdown exhausts the monies is highly sensitive to the rate of return. For example, at an annualized 2 percent rate of return, the participant’s monies will exhaust after 5 years at age 70. However, at an annualized 7 percent rate of return, the participant’s monies will last an additional 30 years, exhausting after 35 years at age 100. While these drawdown scenarios are not specific to a participant’s gender, they do highlight that women may be particularly vulnerable to outliving their assets as women tend to have longer life expectancies than men. Managing Assets Prior to and through Retirement Participants face challenges in managing the many complex decisions involving their lump sum during both the accumulation phase prior to retirement and the spend-down phase after they begin drawing down their lump sum. These decisions are further complicated by the ups and downs of financial markets, including fluctuating rates of return, effect of fees, and deciding when and how much to withdraw, especially when spouses or other beneficiaries need to be taken into consideration. Fluctuating rates of return. Unlike the constant rates of return reflected in the preceding spend-down scenario (see figure 2), participants’ investments may fluctuate, and the sequence of fluctuating rates of return can pose additional risks. For example, due to net cash outflows from a retiree’s spend-down of his or her lump sum, the lump sum account has a diminishing asset base that can be particularly at risk if the retiree encounters periods of low returns or losses, as the account will have less time to recover from such downturns. Further, the continued draw-down of the account during such periods means that assets might have to be sold at depressed values, and less money will remain in the account to benefit from any future market upturn. Effect of fees. As prior GAO work on fees has shown, fees can significantly decrease retirement assets. Even a small fee deducted from one’s assets annually could represent a large amount of money years later had these funds remained in the account to be reinvested. This means that participants will have to carefully consider fees as they review alternative investment options. Compared to participant controlled investment in account-based pension plans, this can be more difficult in the retail market. Loss of budgeting signal. A monthly pension has the advantage of providing a retiree a budgeting signal as to how much can reasonably and safely be spent each month. During the spend-down phase, this valuable information is lost when a participant converts a monthly pension into a single lump sum. The retiree may spend more of the lump sum each month than is sustainable. In addition, the retiree may have to make large unforeseen expenditures at certain times without realizing the likely negative impact on the exhaustion date of the lump sum, whereas for a retiree receiving a monthly pension, a large expenditure can be seen relative to the monthly pension amount and may lead the retiree to take other remedial measures. Additionally, in some cases the retiree may unnecessarily restrict his or her standard of living by spending less each month than a steady pension would have permitted. Diminished capacity. Managing assets through retirement may be particularly challenging for retirees who experience diminished physical or mental capacity as they age. For example, a retiree with dementia may find it more difficult to manage the many decisions involved with investing and drawing down an IRA compared to the relative simplicity of receiving a monthly pension check. As one scholar has noted, if the retiree misuses a monthly pension check, another check will arrive the following month. However, if the retiree makes investments that result in significant losses for their IRA, there may be no additional funds for future withdrawal. Planning for spouses. Our previous illustration assumes the money is drawn down for an individual’s lifetime. Acceptance of a lump sum over $5,000 for married or formerly married individuals requires spousal consent to waive the right to a future annuity based on the combined lifetime of participant and spouse, known as a joint and survivor annuity. However, this does not preclude the participant from including a spouse or beneficiary in his retirement planning. If the participant wishes to account for his spouse’s lifetime as well, he may need to add more years of spend-down, either by lowering the amount paid out per month or taking on additional investment risk in an attempt to achieve greater returns. Participants assuming responsibility for managing their funds may find dealing with all these challenges difficult and may seek out professional advice to assist them. According to a DOL official, many participants are unlikely to understand the full complexity of accepting a lump sum and may not be well-equipped to manage the lump sum assets on their own. Ideally, a financial planner should be able to help people navigate the myriad decisions required to accept and manage a lump sum payment. However, participants could face additional challenges finding trusted advice in managing their assets if they do not feel comfortable managing investment and drawdown decisions on their own. Others might find it challenging to afford a financial planner. In previous work, we have found that participants can receive conflicted advice because the financial interests of those giving advice may not be aligned with the best interests of the participant. Those offering investment advice to participants may be motivated by financial gain through sales of preferred financial products, commissions, or other fees for services. that their advisor might have benefited more financially had they elected the lump sum, noting that the advisor was interested in managing a large sum of money. The specific investment products held in 401(k) plans and IRAs, as well as the various financial professionals who service them, are subject to oversight from applicable securities, banking, or insurance regulators, which can include both federal and state regulators. For example, mutual funds, offered in both plans and IRAs, are generally regulated by the Securities and Exchange Commission (SEC), which requires funds to disclose fees and to inform investors of products’ potential risks. An investment adviser provides a wide range of investment advisory services, including management of client portfolios. Investment advisers manage the portfolios of individuals as well as the portfolios of pension funds and mutual funds. Broker-dealers provide brokerage services where they act as an agent for someone else; a dealer acts as a principal for its own account. SEC has primary responsibility for oversight of investment advisers and broker- dealers, while those who sell insurance products are also subject to state insurance regulation. Investment advisers, broker-dealers, and insurance agents are subject to different standards of practice. Results of our participant questionnaire reveal that participants given lump sum offers often received unsolicited financial advice, for example, from financial planners, investment advisors, or even other plan participants. About a quarter (10 of 37) of the participants who completed our questionnaire reported being contacted by individuals not formally connected with the pension plan who offered unsolicited services directly related to the lump sum payment. For example, participants reported being contacted by individuals offering to provide tax advice, help create a retirement or financial plan, or invest the funds. Some (9) participants noted unsolicited mail and email invitations they received at the time of the lump sum offer, and being contacted by individuals offering to help them manage the money. GAO-13-30. participants who accepted lump sums directly rolled over their distribution into a 401(k) or an IRA. One of the most critical decisions that participants must make with their lump sums is whether they will continue to manage their lump sum payments as part of their retirement planning goals. When participants choose to use the lump sums to pay off debts or spend the money on consumer goods, rather than keep the funds in the tax-qualified retirement system, this is often referred to as “leakage.”“leakage” may be appropriate for some participants. They may have other uses for their payment that are beneficial to their circumstances, for example, paying health care expenses, paying for additional education that may lead to more secure employment, or bequeathing the money. Besides potentially diminishing their retirement savings, participants who do not directly roll over all of their lump sum payment into a tax-preferred account may be subject to certain additional taxes or withholding. For example, when a participant cashes out their lump sum payment, there is an additional tax of 10 percent, in addition to ordinary income tax, if the participant is younger than age 59½. In addition, the sponsor must withhold 20 percent of the value of the lump sum to cover federal and, if applicable, state taxes. The ultimate tax liability will depend on the participant’s individual circumstances, but he or she is likely to witness some erosion in the value of the initial lump sum. Studies have found that younger workers, lower earners, and persons with smaller distributions are most likely to take lump sums and not keep them as retirement savings. On the other hand, individuals may have important immediate spending needs that must be addressed prior to retirement. Our interviews of participants presented with lump sum window offers found that only 2 of the 15 participants who accepted the lump sum cashed it out to pay for immediate expenditures. In both cases, the participants had important immediate needs associated with their expenditures. In one case the former participant used most of the lump sum to pay for living expenses; in the other the former participant used most of the monies to pay down mortgage debt. Participants need information in certain key areas to make an informed decision about their options when provided a lump sum offer. While our analysis of materials provided by plan sponsors showed that they appeared to include certain required information, they often lacked other key information. Most participants we interviewed cited fear that their sponsor would not deliver on their pension promise as a primary reason for accepting the lump sum offer, but many of these participants were not aware of the protections afforded by PBGC. Based on a review of publications by federal agencies, the ERISA Advisory Council, financial advisors, investment firms, financial services firms, and participant advocacy groups, as well as relevant federal laws and regulations, we identified eight key areas of information that participants need to weigh their options and determine what is in their best interest when faced with a lump sum window offer (see table 1). Under existing federal law and regulations, plan sponsors who offer a lump sum in place of a retirement annuity are required to provide certain disclosures to participants related to some of the eight key areas we identified. For example, the sponsors’ disclosures to participants are required to include information on the need for spousal consent, the tax implications of taking a lump sum, and the relative value of the lump sum compared with the plan’s benefits. However, this information, even when provided as required, may not be sufficient to enable participants to make an informed decision. During the ERISA Advisory Council hearings in 2013, several experts testified about their concerns for participants being offered lump sums. In their testimony, some experts noted that participants may not fully understand their retirement benefits or the risks involved in taking their benefits in the form of a lump sum payment. For example, participants electing a lump sum assume responsibility for investing their retirement assets and thus bear the risk of both market losses and of outliving their retirement assets. The council recommended that the disclosure materials include additional information to clarify, among other things, the tax implications of a lump sum payment, the treatment of early retirement subsidies in the lump sum calculation, and how participants’ benefit options compare against each other. In our review and analysis of 11 packets of information that sponsors— representing about 248,000 participant offers—provided to participants regarding a lump sum window offer, we found that all of the packets lacked important information that could have helped participants. However, all packets appeared to include information that is required by For current federal law and regulations governing benefit distributions.example, all packets included a spousal waiver for electing a lump sum and information about the tax implications associated with the participant’s decision. In addition, all of the packets included the required relative value statement. Further, one packet GAO reviewed was commendable in that it provided 7 of the 8 key pieces of information GAO identified, and provided several resources beyond this threshold information. Most packets (8 of 11) provided at least 5 of the 8 key pieces of information GAO identified as necessary to make an informed decision. However, our review also revealed that all 11 packets lacked at least one key piece of information a participant would need to make a more fully informed decision about his or her benefit choices, as described below. Our interviews with 33 plan participants revealed they may have lacked key information, as many (13 of 33) told us that more information would have helped them assess whether or not to accept the lump sum. We found that all the sponsors’ packets initially presented at least two benefit options: the lump sum payment and the monthly benefit amount for an immediate annuity. Most packets (9 of 11) also presented a deferred annuity option: the estimated monthly benefit amount promised under the plan once the participant reached the plan’s normal retirement age. Only one packet provided the amount of the monthly annuity at the plan’s early retirement age. In the cases involving the two packets that did not provide information about a deferred annuity option at normal retirement age, the participants were separated participants who had not begun to receive monthly pension benefits. While some participants might have on file the estimated monthly benefit amount at normal retirement Without that information, it would be challenging age, others may not.for participants to determine if deferring receipt of benefits until reaching normal retirement age should be an option worth considering. One participant we interviewed whose sponsor did not provide this information said that she was glad she had retained records showing her estimated pension amount because otherwise it would have been difficult to assess her lump sum offer effectively. Three participants we interviewed (affiliated with one plan sponsor) were very concerned that their sponsor did not provide information on the estimated monthly benefits that participants could receive once they qualified for an early retirement. According to that plan’s provisions, participants who had enough years of employment could receive unreduced monthly benefits as early as age 60 rather than at the normal retirement age of 65. If participants are not informed of this option, they may not realize that they could be eligible to receive the same monthly benefit 5 years sooner. With respect to the lump sum calculation, we found that the information in only 2 of the 11 packets fully explained how the lump sum had been generated, providing sufficient information to facilitate an understanding of the interest rate, mortality table, and benefit used by the sponsor. The remaining 9 packets lacked some key information used in calculating the lump sum amount, such as the interest rates or mortality assumptions. For example, 8 of the 11 packets did not disclose the interest rates used for the calculation. about the specific mortality assumptions used in the calculation. Lastly, 4 packets did not explain whether certain additional plan benefits, such as early retirement subsidies, were included in the calculation. Although not all participants would necessarily use information about interest rates, mortality assumptions, or treatment of additional plan benefits to help them arrive at a decision, our discussions with participants informed us that some (7) likely would. Six packets provided the interest rates used to develop the relative value notice, but no mention was made regarding whether these rates were also used in calculating the lump sum. GAO did not consider the inclusion of these interest rates sufficient for participants’ purposes in assessing the lump sum offer. interest rates or mortality assumptions had been used so they could assess whether the assumptions were fair. Some participants (7 of 15) said they wanted the underlying assumptions and a clearer explanation as to how the lump sum was calculated to confirm it had been calculated correctly. A few of these participants (4 of 15) said they had been able to obtain information on mortality assumptions or interest rates through a call center, and all of these participants said they should not have had to track down this information themselves. For example, one participant said that she had to contact the call center several times before learning she would have to write a formal request to receive the information. This individual believed the information should have been provided clearly in the information materials. In all the packets we reviewed, we found the relative value notice required by IRS to inform participants how the overall value of the lump sum compares to that of the plan’s annuity. These statements typically took the form of a table. We found little additional explanation in any of the packets to help participants understand what the numbers meant. Some participants (7 of 33) said the relative value statements were not user friendly or particularly helpful for them in assessing whether to accept the lump sum. 26 C.F.R. § 1.417(a)(3)-1(c)(1)(iv) and (v). In its bulletin accompanying the issuance of the final regulations on the Relative Value Notice (Internal Revenue Bulletin 2006-16), IRS states that the regulations were developed to help plan participants compare different forms of their pension benefits “without professional advice.” The regulation offers some flexibility as to how sponsors should convey this information. Specifically, the sponsor can 1) state the lump sum amount as a percentage of the actuarial present value of the monthly annuity, 2) state the amount of the annuity that is the actuarial equivalent of the lump sum, or 3) state the actuarial present value of both the lump sum and the annuity. statement showed that the lump sum payment was less valuable than the annuity. In two other cases, the relative value statement showed that the lump sum payment was actually worth significantly more than the annuity (114 and 120 percent). Plan participants may not understand the importance and effect of assumptions used to calculate the relative values, and the materials we reviewed did not explain why the lump sum values may be more or less valuable than an annuity. In the absence of any further explanation, it is unclear how participants could have interpreted the results or to what extent the notice could help them reach an informed decision. In addition, in many (5 of 11) of the packets, the relative value statements compared the lump sum payment amount to the value of an immediate annuity starting at the same time as the lump sum payment would occur, but not the value of the deferred annuity available when the participant reached full retirement age, often at age 65. It also was not clear if any of these packets included the value of a deferred annuity beginning at early retirement age with any additional plan benefits. A number of the packets did not disclose whether the participant would be eligible for any additional plan benefits, such as early retirement subsidies, if they waited to claim their annuity (4 of 11). IRS guidance allows sponsors to show a relative value notice for an immediate annuity, which may exclude consideration of certain additional plan benefits that have not yet been earned. However, this may limit the usefulness of the relative value statement for participants, who may be eligible for early retirement benefits at some point in the future or who could qualify for other types of additional plan benefits. Further, none of the relative value statements included information about how much it would cost on the open market to replicate the same stream of payments from the plan’s lifetime annuity. While there is no obligation for sponsors to do so, and it might not be reasonable to expect sponsors to research the open market to provide such an estimate, many participants trying to assess the relative value of a lump sum could benefit from researching and considering this cost. Several participants (4 of 33) said they had either researched or asked their financial advisor to estimate how much it would cost to buy a market annuity equal to their promised lifetime annuity. Two others had tried to determine the monthly benefit they would be able to secure if they used their lump sum to purchase a market annuity. After reviewing the figures provided, all 6 participants who analyzed the cost of a market annuity relative to either their plan’s monthly annuity benefit or the lump sum amount rejected the lump sum offer. To make an informed decision about accepting a lump sum, individuals also need to understand potential positive and negative ramifications of their decisions. All 11 of the packets we reviewed discussed at least one of the potential negative ramifications of accepting a lump sum payment, and about half (6) also discussed at least one of the positive ramifications of accepting an offer (see table 2). A few participants (4 of 33) said that more information related to the positive and negative ramifications would have helped them decide whether or not to accept the lump sum. beneficiary other than a spouse when they die. For instance, one woman wanted to ensure that her daughter would benefit from the pension funds, and one man we interviewed lived in a state that did not recognize same- sex marriages at the time the lump sum offer was made and wanted to ensure his partner would be able to access the funds. Participants’ understanding of the positive and negative ramifications of accepting a lump sum offer would be enhanced to the extent the participants have adequate levels of financial literacy (combined with adequate disclosure of information as discussed above). For example, understanding the risk of outliving one’s assets could help participants make a more informed decision. In addition, for participants who do elect a lump sum, financial literacy could help with the challenges of managing that lump sum. Participants’ elections are also influenced by factors other than rational analysis of benefits and risks. combined with financial literacy, could potentially help counteract behavioral tendencies that sometimes might not result in the best outcomes for participants. As demonstrated by research from the field of behavioral finance and economics, emotion and intuition can play a role in financial decision-making, as people are not always rational as would be assumed under conventional financial and economic theory. provided to them about the tax implications of their decision was understandable, and almost all the individuals who accepted a lump sum rolled it into an IRA. To make an informed decision regarding lump sums, individuals also need to assess the risk that a plan might not have sufficient funds to fully make promised payments, and understand the extent to which their promised pension would be guaranteed by PBGC if that were to happen. Indeed, most participants we interviewed (10 of 15) who accepted lump sums said that one of the main reasons they chose to accept the lump sum was because they were worried the sponsor would default on its pension promise. explained the role of PBGC or provided information on the level of PBGC protections to an individual’s lifetime annuity. Technically, pension payments are paid out of the plan, not by the plan sponsor. The sponsor’s obligation is to make required, actuarially determined contributions to the plan. So a plan sponsor cannot “default on its promise to pay pension benefits,” but can default on its required contributions to the plan. could lose some or all of their benefits. Many of these individuals (6 of 10) were not aware of the protections offered by PBGC. Pension Benefit Guaranty Corporation (PBGC) Protections PBGC is a government corporation created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect pension benefits in private defined benefit plans. When plans insured by PBGC end—known as a plan termination—without enough money to pay all benefits, PBGC’s single-employer insurance program pays participants the benefit they would have received from their pension plan up to certain limits set by law. PBGC’s maximum benefit guarantee is set each year under ERISA. The maximum guarantee applicable to a plan is generally fixed as of that plan’s termination date. For 2014, the maximum guaranteed amount for singe-employer plans is about $59,320 per year for workers who begin receiving payments from PBGC at age 65. The maximum guarantee is lower for participants who begin receiving payments from PBGC before age 65, or if the pension includes benefits for a surviving spouse or other beneficiary. The maximum benefit is higher for participants who are over age 65 when they begin receiving benefits. In addition, PBGC’s guaranteed benefit amounts are subject to the “phase-in” limit (related to benefit increases made in the previous 5 years) and the “accrued-at-normal” limit (which excludes supplemental benefits). Participants can find out whether their pension plan is insured by PBGC by obtaining a copy of the plan’s “Summary Plan Description,” or SPD, from the employer or plan administrator. A table showing PBGC’s maximum guarantee at various ages can be found at http://www.pbgc.gov/wr/benefits/guaranteed-benefits/maximum-guarantee.html. The other participants (4 of 10) were aware of PBGC’s protections, but said they were worried they would not receive their full benefit or any benefit at all from PBGC if their pension plan defaulted. Specifically, a few individuals we interviewed (3 of 15) told us that they had accepted the lump sum—even though they believed it to be a bad deal—because they were afraid they might ultimately be left with nothing if their plan sponsor went out of business or mishandled the pension funds. For example, one participant said he was afraid he would “walk away with nothing,” and another said he was concerned he would “only get pennies on the dollar.” Yet another participant said he had decided to “get out while the going is good.” Understanding how to complete the administrative process of making a benefit election and who to contact for help are two other important pieces of information plan participants need in order to make an informed decision. All 11 of the election material packets we reviewed provided clear administrative instructions on how to elect a lump sum, immediate annuity, or deferred annuity. Similarly, all packets provided a contact, such as a call center, for asking general questions about the lump sum offer. In addition, almost all the plan sponsors provided contact information for at least one source of federal assistance, typically the IRS. Participants responding to our questionnaire generally did not raise concerns related to the administrative steps needed to elect a lump sum or retain their annuity, or the length of time they had to make their decision. Specifically, most said the data included in the election materials (such as years of service and age) were accurate (29 of 37) and that they found the process of completing the paperwork fairly straightforward (23 of 37). Few (2 of 37) reported experiencing significant administrative burdens in gathering the required information (identification, notarized consents, etc). A few themes emerged regarding the primary reasons participants who completed our questionnaire either accepted or rejected their lump sum offer, and how they went about making their decisions (see figure 3). Specifically, most participants accepting the lump sum offer were motivated by fear that retaining their annuity would hurt their prospects for a secure retirement (10 of 15), either because the pension plan would default on its promise (10 of 15) or because the plan sponsor would not In contrast, many manage the pension benefits responsibly (6 of 15).participants who chose to reject the lump sum offer indicated that their retirement might be more secure if they retained their annuity. Specifically, most of these participants (17 of 22) did not think the lump sum amount would last as long as they expected to live and a majority (14 of 22) believed that the calculation was unfair or not to their benefit. Most participants (27 of 37) reported taking at least three steps to assess whether or not to accept the lump sum. Specifically, most participants reported conducting research using the Internet and reading articles about lump sum offers. Many participants (20) also reported trying to estimate the lump sum’s value based on anticipated life expectancy and using various interest rates. About a third of participants (11 of 37) reported receiving a tool from their sponsor—such as a spreadsheet or calculator—they could use to assess the lump sum offer and of those, many (7 of 11) said it was very helpful. Two participants who did not receive such a tool from their sponsor said they wished they had. Most (30 of 37) participants also consulted with professionals, such as financial advisors or tax professionals, to help them assess the lump sum offer. About a quarter of participants (9 of 37) reported receiving unsolicited contacts by individuals not formally connected with the pension plan while trying to decide whether to accept the lump sum. While plan sponsors may be permitted by law to choose to offer their participants lump sum windows to reduce the financial risks associated with their defined benefit plans, the full extent of their use is unknown. It is apparent that lump sum windows affect a significant number of plan participants and can involve very large amounts of lump sum payments. Some of the recent lump sum window offers may have been driven by federal rules that may serve as cost-saving incentives for sponsors to take such actions. Through lump sum payments, sponsors transfer the risks and responsibility of retirement security away from themselves—and the defined benefit system more generally—and onto participants. As the proportion of the U.S. population over age 65 increases, the importance of retirement security for our country’s well-being increases as well. Yet the federal agencies charged with pension oversight have not been able to fully examine how these risk transfers impact workers and retirees— and thus cannot take steps to ensure any potential adverse effects on participants are minimized. Given the likelihood that plan sponsors will continue to use lump sum window offers as a means of reducing current pension liabilities, we share a number of the 2013 ERISA Advisory Council’s concerns about these risk transfers. For example, the pension oversight agencies lack data about when and where these actions occur, who is affected, and how these actions impact participants. This means that the agencies may not have sufficient information to determine whether additional participant protections are needed when sponsors implement lump sum windows. For participants being asked to choose between a lifetime benefit option and a lump sum, it is important that they understand how the two compare. As our analyses show, once a participant cashes out a lifetime annuity by taking a lump sum, the participant’s retirement savings can be diminished in a number of ways or used on other expenses. Participants may not be aware of the effect that certain allowable assumptions used to determine their lump sum—such as outdated mortality tables and favorable “lookback” interest rates—may have on their ultimate payment amount. In most cases, the lump sum payment received is unlikely to purchase an equivalent annuity on the retail annuity market. Furthermore, the lump sum is exposed to potential erosion over the years, as the participant assumes all the risks inherent in managing both the investment and drawdown of their lump sum amount. Regrettably, such challenges may become more acute as the participant ages and the effort required for sound financial management becomes more burdensome. Ultimately, the greatest risk associated with accepting a lump sum is the risk of outliving it, which may occur despite the most savvy management. Participants presented with a lump sum offer may not have a full appreciation of the range of risks involved in forfeiting their lifetime annuity under their sponsor’s plan. While we found that some sponsors did a commendable job in their efforts to inform participants about their benefit choices, it is notable that such efforts often fell short of fully preparing the participant to make an informed decision based on many of the eight key factors we identified. The relative value statements were often confusing, explanations of how the lump sum was calculated were often lacking, and many participants did not understand the PBGC protections they would be giving up by taking a lump sum. To ensure that federal regulators have better information about lump sum windows and to better ensure that participants have ready access to key information they need to make a decision when presented with a lump sum offer, the Department of Labor should: 1. Require plan sponsors to notify DOL at the time they implement a lump sum window offer, including the number and category of participants being extended the offer (e.g., separated vested; retiree) as well as examples of the materials provided to them. 2. Coordinate with IRS and PBGC to clarify the guidance regarding the information sponsors should provide to participants when extending lump sum window offers and place the guidance on the agency’s website. Guidance should include clear and understandable presentations of information, such as the relative value of the lump sum, the role and level of protections provided by PBGC, and the positive and negative ramifications of accepting the lump sum. Such guidance could also include promising practices for information materials from plan sponsors which are particularly effective in facilitating informed participant decision-making. In addition, to provide participants with useful information and to provide for lump sums that are based on up-to-date assumptions, Treasury should: 1. Review its regulations governing the information contained in relative value statements to ensure these statements provide a meaningful comparison of all benefit options, especially in instances where the loss of certain additional plan benefits may not be disclosed. 2. Review the applicability and appropriateness of allowing sponsors to select a “lookback” interest rate for use in calculating lump sums associated with a lump sum window that can serve to advantage the interests of the sponsor. 3. Establish a process and a timeline for periodically updating the mortality tables used to determine minimum required lump sums— including a means for monitoring when experts’ views may indicate that mortality tables may have become outdated, and for taking expedited action if warranted. We provided a draft of this report to DOL, Treasury (including IRS), and PBGC for their review and comment. Treasury and PBGC did not provide written comments. DOL provided written comments, which are reproduced in appendix III. DOL, Treasury (on behalf of IRS) and PBGC provided technical comments, which we incorporated where appropriate. In oral comments, Treasury officials generally agreed with our recommendations. In its written comments, DOL generally agreed with the findings and conclusions of the report. They noted the challenges participants may face when they take on the risks of pension management themselves. Specifically, DOL noted that EBSA is especially committed to increasing awareness of lifetime income options because participants are increasingly taking on many retirement management responsibilities. GAO agrees that increasing awareness of lifetime income options in retirement is a worthy goal. Additionally, understanding the scope of lump sum window offers and the informational needs participants have under such offers could help focus efforts to educate participants on the importance of lifetime income options at the point of decision. DOL generally agreed with the recommendations of the report. Specifically, they agreed that the type of information that would be collected pursuant to our first recommendation would be helpful in determining the extent to which lump sum window offers are made and the types of disclosures participants receive. However, DOL noted that ERISA does not clearly grant the department the authority to impose such a requirement on plan sponsors and said that it will be necessary for EBSA to determine whether DOL has such authority. We agree that DOL should determine whether there is any action it could take within the scope of its existing authority to implement this recommendation. Should DOL conclude as a result of its analysis that the department lacks authority to require plan sponsors to notify the department at the time they implement a lump sum window, we would encourage DOL to pursue appropriate legislative changes. DOL agreed with the second recommendation on coordinating with Treasury (including IRS) and PBGC to clarify guidance regarding information sponsors should provide to participants when extending a lump sum window offer. They noted the manner of publishing such guidance would depend on the coordination process with IRS and PBGC. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of this report until 30 days from the report date. We are sending copies of this report to the Secretary of Labor, the Secretary of the Treasury, Commissioner of Internal Revenue, the Acting Director of PBGC, and other interested parties. This report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7215 or jeszeckc@gao.gov Contact points for our Offices of Congressional Relations and Public Affairs can be found on the last page of this report. Key contributors are listed in appendix IV. Our objectives were to examine 1) the extent to which sponsors of defined benefit plans are transferring risk through the use of lump sum windows, and the incentives for sponsors to take such actions, 2) the implications for participants who accept a lump sum payment, and 3) the extent to which sponsors’ lump sum window informational materials enable participants to make an informed decision. To address these objectives we collected and analyzed available information about pension risk transfers. We also interviewed managers from three plan sponsors and other stakeholders, such as consultants, insurance company representatives, independent fiduciaries, and subject matter experts. In addition, we administered a questionnaire to plan participants, interviewed selected participants, and collected and analyzed disclosure materials given to participants. We developed a lump sum calculator to analyze lump sum calculations. Lastly, we reviewed literature, as well as federal laws and regulations relevant to pension risk transfers. We conducted this performance audit from March 2013 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. We reviewed literature, laws, and regulations relevant to risk transfer activities. Most literature was obtained from ERISA Advisory Council testimonies, pension expert and consultant presentations, and other materials obtained during pension-related conferences, as well as publications and whitepapers issued by subject matter experts, pension- related organizations, business associations, consulting firms, and insurance companies. Legal research primarily focused on the Employee Retirement Income Security Act of 1974 (ERISA), Pension Protection Act of 2006 (PPA), Moving Ahead for Progress in the 21st Century Act (MAP- 21), and the Internal Revenue Code, but also included additional research on laws and regulations governing retirement income, benefit distributions, and participant disclosures. We used a variety of sources to collect information about recent pension risk transfer actions that U.S. plan sponsors have taken. Prior to identifying these actions, we asked relevant federal agency officials and pension experts what sources of information were available and we were told such sources were limited. To identify sponsors who had implemented a lump sum window during 2012, we first used lists provided to us by the Pension Benefit Guaranty Corporation (PBGC) officials and the Pension Rights Center. We verified the lists to the extent possible, primarily with information contained in sponsors’ SEC filings and corporate reports. We removed sponsors from the lists if we could not find sufficient evidence that they had performed a lump sum window during 2012. We made efforts to contact managers associated with 18 risk transfer actions in order to collect additional information and schedule interviews. For all but three sponsors, we either were not able to establish contact with the appropriate manager, the sponsor was unresponsive to our efforts, or we were told that the sponsor did not wish to participate in our study. During the interviews with the three sponsors who agreed to speak with us, we asked questions regarding the lump sum window implementation process they followed, the reasons behind their decision to transfer pension risk, and to the extent possible, the outcomes of the action. In some cases, we also collected informational materials that had been provided to participants offered lump sums. To supplement the sponsor interviews, we interviewed other stakeholders, such as pension consultants, insurance company representatives, an independent fiduciary, and subject matter experts. We asked them about several aspects related to lump sum offers, such as recent trends, what is driving the practice, and their potential effect on plan participants. We also reviewed written reports, papers, and studies conducted by consulting firms and other pension experts to gain a better understanding about the prevalence of pension risk transfers, in general, and why sponsors may be conducting or considering them. To collect information to provide the participant perspective of lump sum windows, we first used social media to identify corporate alumni groups associated with the sponsors we had identified as having offered lump sums during 2012. From those groups we solicited participants who had been offered lump sums and received over 65 responses from participants who were interested in participating in our study. From those, we selected 37 participants across as many sponsors as possible. To those individuals we administered a questionnaire that asked them to provide information on their overall experience when offered a lump sum, what they considered when making their decision, their opinion on the understandability and usefulness of the information packet they had received from the sponsor, and why they ultimately made the choice they did. We also conducted phone interviews with 33 of the 37 participants in order to gain additional insight into their questionnaire responses, and to supplement the information captured by the instrument. We did not independently verify information presented by participants in these interviews. Consequently, no legal conclusions can be drawn from our work as to whether plan sponsors complied with any applicable legal requirements. Our selection of participants to survey was also designed to yield a group of participants that represented a relatively broad variety of attributes, such as gender, age, and whether they had accepted the lump sum offer or not. The selected participants represented 11 different sponsors. Most of these individuals were ages 50 to 59, with the remaining individuals fairly evenly split between the 40 to 49 and 60 to 69 year old age groups. Almost all the participants had been salaried employees. Most individuals in the survey group were currently working full time. Most, including those who were working and those who were fully retired, had other sources of retirement income in addition to the defined benefit plan for which they were offered a lump sum, including Individual Retirement Accounts, 401(k) or 403(b) plans, and Social Security benefits. Of these 37 participants, 15 accepted the lump sum offer and 22 rejected the lump sum offer. While not generalizable, we used the participants’ responses from the questionnaires and phone interviews to inform our discussion about the factors participants weighed when making their benefit choices. In addition, we developed a lump sum calculator to generate lump sum amounts based on participant information obtained during our interviews, such as age, gender, and deferred annuity amount. Using the calculator, we mimicked sponsor lump sum calculations to gain a better understanding of how mandated assumptions affect lump sum amounts, and how changes in those assumptions affected amounts for participants across differing ages and gender. For details of those analyses, see appendix II. During participant interviews we asked participants if they could provide us the written materials that sponsors gave them when offering the lump sum. We asked participants to redact any personally identifiable information such as names or offer amounts, and asked for as many materials as they could provide. Because these materials were participant-provided, we cannot be certain whether the materials we reviewed were accurate and complete representations of the materials provided by each sponsor to its affected participants. Similarly, participants provided us materials in hardcopy, so, for example, materials that sponsors provided electronically might not have been transmitted to GAO unless the participant had printed and retained this information. Electronic information likely would have been password protected and not available for GAO’s review. We collected at least one packet for each of the 11 sponsors executing lump sum offers to the participants we interviewed. These 11 sponsors represent, according to our review of SEC filings, about 248,000 participant offers. To analyze participant packets, we identified eight key areas of information participants would need to understand in order to make an informed decision about a lump sum offer. To identify these areas, we gathered information from federal agencies, the ERISA Advisory Council, financial advisors, investment firms, financial services firms, participant advocacy groups, and federal laws and regulations. Since these key factors were gathered from diverse sources, they were also vetted and reviewed by GAO’s Chief Actuary and a research methodologist to ensure they could be applied when we analyzed the materials for informational content. To apply the eight key factors to the informational materials, we identified specific pieces of information, or sub-factors, that the packet would need to contain in order to fully satisfy the main factor. GAO developed decision rules for each main factor regarding how many of these sub- factors were needed in order to fully satisfy the main factor. Under these decision rules, for seven of the eight key factors, all sub-factors needed to be present to fully satisfy the main factor. However, for one of the eight factors, our decision rule only required that one of the elements be present. Specifically, for our factor on “What are the potential positive and negative ramifications of accepting the lump sum?,” we identified many potential positive or negative ramifications that could be highlighted in the materials, but specified that a packet only need to list at least one negative ramification of accepting the lump sum to satisfy this factor. Table 3 has more detail on the extent to which the packets, in aggregate, met our main factors and sub-factors. As noted earlier, this review was an information review and did not constitute a compliance or legal review. Our only purpose in conducting this review was to determine whether the information packets provided to participants in connection with lump sum offers contained sufficient information to enable them to make informed decisions. Consequently, no legal conclusions can be drawn from our work as to whether plan sponsors complied with any applicable legal requirements. As with the development of these factors for analyzing the information packets, the process for implementing the factors was vetted and reviewed by GAO’s Chief Actuary and a research methodologist. An analyst reviewed the materials for informational content based on the implementation sub- factors and a second, independent analyst verified the process and validated determinations of the review. At the most basic level, determining a lump sum is converting a stream of projected future monthly benefits into a present value. A present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return, also known as an interest rate or discount rate. The future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value. In the context of a monthly benefit provided by a defined benefit pension plan, the stream of payments generally commences at an age specified by the plan, known as the normal retirement age, or at an optional early retirement age for eligible participants, and ends when the participant dies (or when the later of the participant and beneficiary dies, for a joint annuity). How long the stream of benefits will last depends on how long the participant lives, and lump sums take into account the probability that the participant will be alive at each future date. A mortality table is a common actuarial convention which shows, for each age, the probability that a person will die before his or her next birthday. For ease of reference, we refer to this simply as § 417(e)(3) throughout this appendix. segments of a corporate bond yield curve.term corporate bond interest rate applied to projected pension payments payable within 5 years; the second segment is a medium-term corporate bond interest rate applied to payments payable 5 years or more, but less than 20 years, into the future; and the third segment is a long-term corporate bond interest rate applied to payments payable in 20 years or more. We constructed a calculator of minimum lump sums to show some of the effect certain methods and assumptions can have on the calculation. We constructed a number of illustrative individuals to show how the minimum lump sums may vary according to key participant characteristics, namely age, gender, and retirement age, and key input calculation parameters, namely interest rates, mortality tables, and the inclusion or exclusion of certain additional plan benefits. While we performed lump sum calculations across a number of illustrative individuals, throughout this appendix we present the results for single individuals in 10-year age increments, from age 35 to age 95. We assumed all individuals are full integer ages—that is, the participant has his or her birthday on the measurement date of the lump sum offer. For terminated vested participants, we assumed a normal retirement age of 65. For retired participants, the present value of their lump sum is calculated and commences at their current age and is based on the remaining payments that are expected to be due from that point forward. Technically, our calculator projects an annual lump sum factor, which produced a lump sum based on an annual benefit. We used a common actuarial adjustment factor to account for monthly payments. We verified our lump sum calculations in two ways. First, when we started our study we asked Pension Benefit Guaranty Corporation (PBGC) officials with actuarial expertise to furnish us with lump sum amounts based on varying age and benefit commencement assumptions using various mortality and interest rate assumptions consistent with § 417(e)(3).to base our calculations on annual benefit amounts, and asked the officials to perform the calculation using such a method. Additionally, to determine if we could come reasonably close to actual offers, we reviewed lump sum offers in two participant packets for which we had enough information to calculate or approximate the lump sum in that packet. Our calculations differed by 1.5 percent and nearly zero percent for the two offers we reviewed. The 1.5 percent difference is very modest and may be due to the fact that the birth date or the date of normal retirement age of the participant we used differed from the date of the offer by a few calendar months. Based on these small differences, and since our purpose was to then estimate changes to lump sums based on changes in certain assumptions, we deemed our calculator to be adequate for such purposes. We discuss our lump sum results below and show how values can change depending on certain key factors. Generally, we are comparing alternative assumptions to our baseline assumptions. We found, of the materials we reviewed, that many of the lump sum election windows occurred between September and December 2012. Based on our review of election materials, we found that many of these sponsors elected to use August 2011 interest rates for the 2012 plan year. Thus, our “baseline” assumption is an offer made in October 2012, using a methodology under § 417(e)(3) for August 2011 interest rates for the 2012 plan year, along with the IRS published unisex mortality table for the 2012 plan year, and without including any additional plan benefits. Comparisons and deviations from this baseline are noted with the figures. Figure 4 compares, for our range of ages, the PPA interest rate basis (our baseline) against the pre-PPA interest rate basis for minimum lump sums, for a lump sum payment offer made in October 2012. As noted, our baseline uses August 2011 corporate bond segment rates (for the 2012 plan year), which under PPA uses corporate bond rates published by IRS as the interest rate used to determine minimum required lump sums. The comparison uses the August 2011 30-year Treasury Securities Rate (TSR), as the 30-year TSR was used to determine minimum required lump sums prior to PPA. Figure 4 shows that lump sum payments are most disparate for younger individuals. This occurs because these individuals have their payments discounted at the second or third segment rates, which are much higher than the 30-year TSR in this instance, and because lump sum amounts for younger participants are more sensitive to changes in interest rates because of the greater length of the discounting period. As shown, minimum lump sums for 35-year-old participants would have increased by 142 percent if an August 2011 30- year TSR was used instead of the baseline. Figure 5 compares the effect of using the “lookback” interest rates that sponsors are allowed to select (our August 2011 interest rates baseline used for the 2012 plan year) against using interest rates as of the month immediately preceding the month of the lump sum offer (September 2012 rates). As noted previously, sponsors may elect a stability period of one year with a maximum lookback of 5 months. This means that the rates used at the time of the offer may be nearly 17 months old compared to rates that are current just before the offer. As shown, minimum lump sums would have been higher at all ages, as much as 65 percent higher for 35-year-olds, if more current interest rates were used instead of the “lookback” rates. Figure 6 compares the effect of using current prescribed mortality tables (baseline) against using more up-to-date mortality tables on a participant’s minimum lump sum amount at selected ages. Here we show lump sums that are calculated using the new mortality tables and projection scales devised by the Retirement Planning Experience Committee of the Society of Actuaries and compare that to the current mortality tables used for lump sum payments under § 417(e)(3). The differences in lump sum values, which are also sensitive to the assumed interest rate, vary significantly depending on the age of the participant. As shown, the more up-to-date mortality method improves lump sums by as little as 5 percent for 95-year-olds but as much as 13 percent for 35-year- olds. Figure 7 compares baseline lump sums against an estimate of what they would be if based on group annuity purchase rates. It shows how a lump sum payment, calculated in 2012 using sponsor-elected August 2011 corporate bond interest rates (for the 2012 plan year) and the prescribed mortality tables, would compare to lump sum payments calculated in the month before the offer was made, or September 2012, using the interest rate, mortality assumptions, and loading factors used by PBGC. This method uses the survey that PBGC takes of recent prices of group annuities to derive the interest factors that are used to calculate the present value of future benefit-payment obligations under section 4044 of the Employee Retirement Income Security Act of 1974 (ERISA). These future benefits are obligations that PBGC must pay to participants in the plans that they have taken over as trustee. As observed earlier in the report, figure 7 shows that lump sum payments under the minimum method prescribed under § 417(e)(3) can be significantly smaller than the lump sums that would be necessary to repurchase an annuity that matches the benefit forgone under the participant’s plan. In this case, and because retail annuity data is not easily available, we used a group annuity methodology consistent with For example, a 55-year-old female PBGC section 4044 assumptions. would receive a lump sum payment of $67,020 under the § 417(e)(3) minimum, while she would need $114,460, or a 71 percent larger lump sum, to purchase an annuity that would have been provided under her plan (in this case, a $10,000 annual, or $833 monthly, benefit starting at age 65). As noted earlier in the report, group annuities are generally only available to large pension plans, and retail annuities are generally more expensive due to adverse selection and administrative charges or other fees, so an individual would likely need an even larger lump sum payment to replicate their prior benefit on the retail market. Additionally, a loading factor consistent with 4044 assumptions is added to the lump sum. In the case of the annuity prices, which are all less than $200,000, this is a charge of 5 percent of the preliminary annuity price plus $200. For a more detailed description of loading assumptions for all annuity prices, see Appendix C to 29 C.F.R. Part 4044. In addition to the contact named above, Kimberly Granger (Assistant Director); Frank Todisco (Chief Actuary); Amy Buck; Chuck Ford; David Perkins; Walter Vance; Roger Thomas; and Sheila McCoy made key contributions to this report. Also contributing to this report were Gene Kuehneman; James Bennett; Sue Bernstein; Margie Shields; Amber Yancey-Carroll; Angie Jacobs; David Lin; and Marissa Jones. | Since 2012, a number of large pension plan sponsors have given selected participants a limited-time option of receiving their retirement benefits in the form of a lump sum. Although sponsors' decisions to make certain lump sum “window” offers may be permissible by law, questions have been raised about participants' understanding of the financial tradeoffs associated with their choice. GAO was asked to review critical issues associated with these types of offers. This report focuses on 1) the prevalence of lump sum offers and sponsors' incentives to use them, 2) the implications for participants, and 3) the extent to which selected lump sum materials provided to participants include key information. To conduct this work, GAO identified sponsors offering lump sum windows and used social media to identify participants given offers. GAO reviewed 11 informational packets acquired through interviews with selected plan sponsors and participants. GAO also analyzed lump sum calculations and interviewed federal officials and pension experts. Little public data are available to assess the extent to which sponsors of defined benefit plans are offering participants immediate lump sums to replace their lifetime annuities, but certain laws and regulations provide incentives for use of this practice. Although the U.S. Department of Labor (DOL) has primary responsibility for overseeing pension sponsors' reporting requirements, it does not require sponsors to report such lump sum offers, making oversight difficult. Pension experts generally agree that there has been a recent increase in these types of offers. By reviewing the limited public information that is available, GAO identified 22 plan sponsors who had offered lump sum windows in 2012, involving approximately 498,000 participants and resulting in lump sum payouts totaling more than $9.25 billion. Most of these payouts went to participants who had separated from employment and were not yet retired, but some went to retirees already receiving pension benefits. Sponsors are currently afforded enhanced financial incentives to make these offers by certain laws and regulations issued by the U.S. Department of the Treasury (specifically the Internal Revenue Service) governing the interest rates and mortality tables used to calculate lump sums. Participants potentially face a reduction in their retirement assets when they accept a lump sum offer. The amount of the lump sum payment may be less than what it would cost in the retail market to replace the plan's benefit because the mortality and interest rates used by retail market insurers are different from the rates used by sponsors, particularly when calculating lump sums for younger participants and women. Participants who assume management of their lump sum payment gain control of their assets but also face potential investment challenges. In addition, some participants may not continue to save their lump sum payment for retirement but instead may spend some or all of it. GAO reviewed 11 packets of informational materials provided by sponsors offering lump sums to as many as 248,000 participants and found that the packets consistently lacked key information needed to make an informed decision or were otherwise unclear. Using various sources, including financial advisors, federal agency publications, laws, and regulations, GAO identified eight key types of information that participants need to have a sound understanding of a lump sum offer. While GAO did not review the packets for compliance or legal adequacy, most packets provided a substantial amount of this key information. However, all of the packets GAO reviewed lacked at least some key information. For example, the relative value notices were often unclear about how the value of the lump sum compared to the value of the lifetime monthly benefit provided by the plan. Similarly, many packets did not clearly indicate the interest rate or mortality assumptions used, limiting participants' ability to assess how the lump sum payment was calculated. Further, few of the packets informed participants about the benefit protections they would keep by staying in their employer's plan—full or partial protections provided by the Pension Benefit Guaranty Corporation, the agency that insures defined benefit pensions when a sponsor defaults. This omission is notable because many participants GAO interviewed cited fear of sponsor default as an important factor in choosing the lump sum. GAO recommends that DOL improve oversight by requiring plan sponsors to notify the agency when they implement lump sum windows, and coordinate with Treasury to clarify guidance on the information sponsors provide to participants. Further, Treasury should reassess regulations governing relative value statements, as well as the interest rates and mortality tables used in calculating lump sums. Agencies generally agreed with GAO's recommendations. |
For fiscal year 1996, VA sought an appropriation of about $17 billion to maintain and operate 173 hospitals, 376 outpatient clinics, 136 nursing homes, and 39 domiciliaries. VA facilities are expected to provide inpatient hospital care to 930,000 patients, nursing home care to 35,000 patients, and domiciliary care to 18,700 patients. In addition, VA outpatient clinics are expected to handle 25.3 million outpatient visits. The Congressional Budget Resolution, however, would essentially freeze the VA medical care appropriation at the fiscal year 1995 spending level—$16.2 billion—for the next 7 years. Final action on VA’s fiscal year 1996 appropriation is pending. The VA health care system consists of (1) a health benefits program and (2) a health care delivery program. The two programs are closely intertwined. For example, VA outpatient clinics are not allowed to use available resources to provide services to many veterans because (1) the services, such as prosthetics, are not covered under the veterans’ health care benefits and (2) the clinics are not permitted under the law to sell such noncovered services to veterans. In administering the veterans’ health benefits program, VA’s responsibilities are similar to those of the Health Care Financing Administration (HCFA) in administering Medicare benefits and to those of private health insurance companies in administering health insurance policies. For example, VA is responsible for determining (1) which benefits veterans are eligible to receive, (2) whether and how much veterans must contribute toward the cost of their care, (3) whether the health care services veterans need are covered under their benefits, and (4) where veterans obtain covered services (that is, whether they must use VA-operated facilities or can obtain needed services from other providers at VA expense). Similarly, VA, like HCFA and private insurers, is responsible for ensuring that the health benefits provided to its “policyholders”—veterans—are (1) medically necessary and (2) provided in the most appropriate care setting (such as a hospital, nursing home, or outpatient clinic). In operating a health care delivery program, VA’s role is similar to that of the major private sector health care delivery networks, such as those operated by Columbia/Hospital Corporation of America and Humana. For example, VA strives to ensure that its facilities (1) provide care of an acceptable quality, (2) are used to their optimum capacity, (3) are located where they are accessible to its target population, (4) provide good customer service, (5) offer potential patients services and amenities comparable to competing facilities, and (6) operate effective billing and collection systems. The veteran population, which totaled about 26.4 million in 1995, is both declining and aging. Between 1990 and 2010, VA projects the veteran population will decline 26 percent. The decline will be most notable among veterans under 65 years of age—from about 20.0 million to 11.5 million. By contrast, the number of veterans aged 85 and older will increase more than eight-fold. At that time, veterans aged 85 and older will make up about 6 percent of the veteran population. Coinciding with the overall decline in the number of veterans is a decline in the percentage of veterans who served during wartime. VA projects the total number of wartime veterans to decline from 21 million in 1990 to 13.6 million in 2010. Even more dramatic is the shift in the number of wartime veterans by period of service. By 1995, deaths of World War II veterans had accelerated to the point that Vietnam-era veterans outnumbered World War II veterans by about 826,000. By 2010, Persian Gulf veterans are expected to outnumber both Korean War and World War II veterans. Most veterans who served during wartime had no combat exposure. About 35 percent of U.S. veterans were actually exposed to combat. (See fig. 1.) About 8.3 percent of veterans have compensable service-connected disabilities. Surprisingly, veterans who served during peacetime are almost twice as likely to have service-connected disabilities as veterans of the Korean War and only slightly less likely to have service-connected disabilities than Vietnam-era veterans. (See fig. 2.) Of the more than 2.2 million veterans with compensable service-connected disabilities, over half have disability ratings of 10 or 20 percent. Of the remaining veterans with service-connected disabilities, about 488,000 had disabilities rated at 30 or 40 percent. (See fig. 3.) Any person who served on active duty in the uniformed services for the minimum amount of time specified by law and who was discharged, released, or retired under other than dishonorable conditions is currently eligible for VA health care benefits. Although all veterans meeting the basic requirements are “eligible” for hospital, nursing home, and at least some outpatient care, the VA law establishes a complex priority system—based on such factors as the presence and extent of any service-connected disability, the incomes of veterans with nonservice-connected disabilities, and the type and purpose of care needed—to determine which services are covered and which veterans receive care within available resources. The distinction between covered and noncovered services in discussing veterans’ health benefits is important because VA facilities are generally restricted to providing “covered” services to veterans. As a result, VA facilities are not allowed to provide other services directly to veterans or others even if they have the capacity to provide the services and the patient agrees to pay for them. Certain veterans, commonly referred to as Category A, or mandatory care category, veterans, have the highest priority for hospital and nursing home care. More specifically, VA must provide hospital care, and, if space and resources are available, may provide nursing home care to veterans who have service-connected disabilities, were discharged from the military for disabilities that were incurred or aggravated in the line of duty, are former prisoners of war, were exposed to toxic substances or ionizing radiation, served in the Mexican Border Period or World War I, receive disability compensation, receive nonservice-connected disability pension benefits, and have incomes below the means test threshold (as of January 1995, $20,469 for a single veteran or $24,565 for a veteran with one dependent, plus $1,368 for each additional dependent). For higher-income veterans who do not qualify under these conditions, VA may provide hospital and nursing home care if space and resources are available. These veterans, commonly known as Category C, or discretionary care category, veterans, must pay a part of the cost of the care they receive. VA also provides three basic levels of outpatient care benefits: comprehensive care, which includes all services needed to treat any service-connected care, which is limited to treating conditions related to a hospital-related care, which provides only the outpatient services needed to (1) prepare for a hospital admission, (2) obviate the need for a hospital admission, or (3) complete treatment begun during a hospital stay. Separate mandatory and discretionary categories apply to outpatient care. Only veterans with service-connected disabilities rated at 50 percent or higher (about 465,000 veterans) are in the mandatory category for comprehensive outpatient care. All veterans with service-connected disabilities are in the mandatory care category for treatments related to their disabilities; they are also eligible for hospital-related care of nonservice-connected conditions, but, with the exception of veterans with disabilities rated at 30 or 40 percent, they are in the discretionary care category. Most veterans with no service-connected disabilities are eligible only for hospital-related outpatient care and, with few exceptions, are in the discretionary care category. Table 1 summarizes VA eligibility provisions. Eligibility for VA health care has undergone a gradual evolution since the 1930 establishment of VA. Initially, the only veterans eligible for VA health care were those (1) with injuries incurred during wartime service or (2) incapable of earning a living because of a permanent disability, tuberculosis, or neuropsychiatric disability suffered after their wartime service. Originally, eligibility was for hospital and domiciliary care only. Eligibility for hospital care was later expanded to include veterans injured during other than combat duty and subsequently to all veterans without service-connected disabilities. “The possible adverse effects of the proposed legislation should also, I believe, be considered. This bill would for the first time mean that non-service-connected veterans would be receiving outpatient treatment even though we have endeavored to make revisions which would relate this only to hospital care. The outpatient treatment of the non-service-connected might be an opening wedge to a further extension of this type of medical treatment.” Thirteen years later, the Veterans Health Care Expansion Act of 1973 (P.L. 93-82) further extended outpatient treatment for veterans with nonservice-connected disabilities, authorizing outpatient treatment for any disability to “obviate the need of hospital admission.” Although there have been a number of further revisions to outpatient eligibility since 1973, most veterans’ eligibility for ambulatory care services continues to be restricted to hospital-related care. With the gradual evolution of VA eligibility, the VA system now provides a wide range of inpatient, outpatient, and long-term care services to veterans both with and without service-connected disabilities. VA has gradually shifted from a system primarily providing treatment for veterans with service-connected disabilities incurred in wartime to a system increasingly focused on the treatment of low-income veterans with medical conditions unrelated to military service. For example, in fiscal year 1995, only about 12 percent of VA hospital patients were treated for service-connected disabilities. By contrast, about 59 percent of the patients treated had no service-connected disabilities. (See fig. 4.) VA has limited authority to (1) buy health care services from non-VA providers and (2) sell health care services either to veterans or others. Generally, veterans can use their health benefits only in VA-operated health care facilities. There are several exceptions that allow VA to purchase care from non-VA providers: VA-operated nursing home and domiciliary care is augmented by contracts with community nursing homes and by per diem payments for veterans in state-operated veterans’ homes. VA pays private sector physicians and other health care providers to provide services to certain veterans when the services needed are unavailable within the VA system or when the veterans live too far from a VA facility (commonly referred to as fee-basis care). The authorization to use fee-basis physicians is primarily limited to service-connected veterans. VA pays for hospitalization in non-VA facilities in medical emergencies. Patients are expected to transfer to VA hospitals when their conditions stabilize. Veterans treated in VA facilities can be provided scarce medical specialist services from other public and private providers through sharing agreements and contracts between VA and non-VA providers. VA hospitals have limited authority to contract with other providers for specialized medical resources, including equipment, personnel, or techniques, that because of costs, limited availability, or unusual nature are unique in the medical community. Similarly, as a health care provider, VA can sell health care services only on an exception basis. Specifically, VA hospitals and outpatient clinics can sell health care services to the Department of Defense (DOD) and other federal specialized medical resources to nonfederal hospitals, clinics, and medical schools. VA cannot, however, sell health care services directly to either veterans or nonveterans. Unlike public and private health insurance, the VA health benefits program does not (1) have a well-defined benefit package or (2) entitle veterans to, or guarantee the availability of, covered services. Similarly, as a health care provider, VA, unlike private sector providers, is severely limited in its ability to both buy health care services from and sell health care services to individuals and other providers. These differences help make VA’s eligibility provisions a source of frustration for veterans, VA physicians, and VA’s administrative staff. The problems created by these provisions include the following: Veterans are often uncertain about what services they are eligible to receive and what right they have to demand that VA provide them. Physicians and administrative staff find the eligibility provisions hard to administer. Veterans have uneven access to care because the availability of covered services is not guaranteed. Physicians are put in the untenable position of having to deny needed, but noncovered, health care services to veterans. Because of these problems, veterans may be unable to consistently obtain needed health care services from VA facilities. Because public and private insurance policies generally have a defined benefit package, both policyholders and providers know in advance what services are covered and what, if any, limitations apply to the availability of services. Defined benefit packages also preserve insurers’ flexibility in responding to funding constraints by allowing them to adjust covered benefits on the basis of funds available. An insurer might offer multiple policies with varying benefits, but individuals with the same policy have the same benefits. Like private insurance, VA essentially offers multiple health benefit “policies” with varying benefits. Unlike private insurance, however, veterans with the same “policy” will not necessarily receive the same services. Only those veterans whose “policy” covers all medically necessary care—primarily those veterans with service-connected disabilities rated at 50 percent or more—have clearly defined, uniform benefits. Because coverage of outpatient services for most veterans varies on the basis of their medical conditions, a veteran may be eligible to receive different services at different times. For example, if a veteran with no service-connected disabilities is scheduled for admission to a VA hospital for elective surgery, he or she is eligible to receive any outpatient service needed to prepare for the hospital admission, including a physical examination with X rays and blood tests. However, if the same veteran sought a routine physical examination from a VA outpatient clinic, he or she would not be eligible for an examination, X rays, or blood tests because there is no apparent need for hospital-related care. Because of the lack of a well-defined benefit package, veterans are often confused by VA’s complex eligibility provisions. The services they can get from VA depend on such factors as the presence and extent of any service-connected disability, income, period of service, and the seriousness of the condition. To further add to veterans’ confusion about which health care services they are eligible to receive from VA, title 38 of the U.S. Code specifies the types of medical services that cannot be provided on an outpatient basis. For example, VA outpatient clinics cannot provide prosthetic devices, such as wheelchairs, crutches, eyeglasses, and hearing aids, to veterans not eligible for comprehensive outpatient services; dental care to most veterans unless they were examined and had their treatments started while in a VA hospital; and routine prenatal care and delivery services through the VA health care system. Veterans are not the only ones confused by VA eligibility provisions. Those tasked with applying and enforcing the provisions daily—VA physicians and administrative staff—express similar frustration in attempting to interpret the provisions. Although the criterion to obviate the need for hospitalization is most often cited as the primary source of frustration, VA administrative staff must also enforce a series of other requirements, which add administrative costs not typically incurred under other public or private insurance programs. “shall be based on the physician’s judgment that the medical services to be provided are necessary to evaluate or treat a disability that would normally require hospital admission, or which, if untreated would reasonably be expected to require hospital care in the immediate future.” To assess medical centers’ implementation of this criterion, we used medical profiles of six veterans developed from actual medical records and presented them to 19 medical centers for eligibility determinations.At these 19 centers, interpretations of the criterion ranged from permissive (care for any medical condition) to restrictive (care only for certain medical conditions). In other words, from the veteran’s perspective, access to VA care will depend greatly on which medical center he or she visits. For example, if one veteran we profiled had visited all 19 medical centers, he would have been determined eligible by 10 centers but ineligible by 9 others. “is so vaguely worded that every doctor can come up with one or more interpretations that will suit any situation . . .. Having no clear policy, we have no uniformity. The same patient with the same condition may be denied care by one physician, only to walk out of the clinic the next day with a handful of prescriptions supplied by the doctor in the next office.” With thousands of VA physicians making eligibility decisions each working day, the number of potential interpretations is, to say the least, very large. In addition to interpreting the obviate-the-need criterion, VA physicians or administrative staff must evaluate a series of other eligibility requirements before deciding whether individual veterans are eligible for the health care services they seek. For example, they must determine whether the disability for which care is being sought is service connected or aggravating a service-connected disability, because different rules apply to service-connected and nonservice-connected care; determine the disability rating for veterans with service-connected disabilities because the outpatient services they are eligible for and their priority for care depend on their rating; and determine the income and assets of veterans with no service-connected disabilities because their eligibility for (and priority for receiving) care depends on a determination of their ability to pay for care. Under private health insurance, Medicare, and Medicaid, the availability of covered services is guaranteed. For example, all beneficiaries who meet the basic eligibility requirements for Medicare are entitled to receive all medically necessary care covered under the Medicare part A benefit package. Similarly, those Medicare beneficiaries who enroll for part B benefits are entitled to receive all medically necessary care covered under the part B benefit package. As an entitlement program, Medicare spending increases as utilization increases, creating guaranteed access to covered services. Under the VA health care system, however, being in the mandatory care category does not entitle veterans to, or guarantee the availability of, needed services. The VA health care system is funded by a fixed annual appropriation; once appropriated funds have been expended, the VA health care system is not required to, and in fact is not allowed to, provide additional health care services—even to veterans in the mandatory care category. Although title 38 of the U.S. Code contains frequent references to services that “shall” or “must” be provided to mandatory care group veterans, in practical application the terms mean that services “shall” or “must” be provided if adequate resources have been appropriated to pay for them. Being in the mandatory care category essentially gives veterans a higher priority for treatment than veterans in the discretionary care category. In effect, veterans, rather than the government, assume a significant portion of the financial risk in the VA health care system because there is no guarantee that sufficient funds will be appropriated to enable the government to provide services to all veterans seeking care. Historically, however, sufficient funds have been appropriated to meet the health care needs of all veterans in the mandatory care category and most of those in the discretionary care categories. Because the provision of VA outpatient services is conditioned on the availability of space and resources, veterans cannot be assured that health care services are available when they need them. Even veterans in the mandatory care category are theoretically limited to health care services that can be provided with available space and resources. If demand for VA care exceeds the capacity of the system or of an individual facility to provide care, then health care services are rationed. The Congress established general priorities for VA to use in rationing outpatient care when resources are not available to care for all veterans. VA delegated rationing decisions to its medical centers; that is, each must independently make choices about when and how to ration care. Using a questionnaire, we obtained information from VA’s 158 medical centers on their rationing practices. In fiscal year 1991, 118 centers reported that they rationed outpatient care for nonservice-connected conditions, and 40 reported no rationing. Rationing generally occurred because resources did not always match veterans’ demands for care. When the 118 centers rationed care, they also used differing methods. Some rationed care according to economic status, others by medical service, and still others by medical condition. The method used can greatly affect who is turned away. For example, rationing by economic status will help ensure that veterans of similar financial means are served or turned away. On the other hand, rationing by medical service or medical condition helps ensure that veterans with similar medical needs are treated the same way. The 118 medical centers’ varying rationing practices resulted in significant inconsistencies in veterans’ access to care both among and within centers. For example, higher-income veterans frequently received care at many medical centers, while lower-income veterans or those who also had service-connected disabilities were turned away at other centers. Some centers that rationed care by either medical service or medical condition sometimes turned away lower-income veterans who needed certain types of services while caring for higher-income veterans who needed other types of services. One major source of frustration for VA facilities is their inability to provide needed health care services to veterans when those services are not covered under their veterans’ benefits. Unlike private sector physicians, who can generally provide any available outpatient service to any patient willing to pay, VA facilities and physicians are generally unable to provide noncovered services to veterans. In the private sector, physicians and clinics can sell their services to any person regardless of whether the service is covered by insurance. Essentially, the patient assumes the financial responsibility for any services not covered under his or her health insurance or for any charges that exceed insurance coverage. Although VA health care facilities are primarily restricted to use by veterans, VA actually has greater authority to sell health care services to nonveterans through sharing agreements than it does to sell these same services to veterans. Specifically, VA hospitals and clinics cannot, under current law, sell veterans those services not covered under their veterans’ health care benefits even if they (1) have public or private insurance that would pay for the care or (2) agree to pay for the services out of their own funds. In a 1993 review, we examined veterans’ efforts to obtain care from alternative sources when VA medical centers did not provide it. Through discussions with 198 veterans turned away at six medical centers, we learned that 85 percent obtained needed care after VA medical centers turned them away. Most obtained care outside the VA system, but some veterans returned to VA for care, either at the same center that turned them away or at another center. The 198 veterans turned away needed varying levels of medical care. Some had requested medications for chronic medical conditions, such as diabetes or hypertension. Others presented new conditions that were as yet undiagnosed. In some cases, the conditions, if left untreated, could be ultimately life threatening, such as high blood pressure or cancer. In other cases, the conditions were potentially less serious, such as psoriasis. VA hospitals too often serve patients whose care could be more efficiently provided in alternative settings, such as an outpatient clinic or nursing home. VA, the major veterans’ service organizations, and the Vice President’s National Performance Review attribute many of the inappropriate admissions to VA’s eligibility provisions, citing (1) studies showing that over 40 percent of admissions could have been avoided through use of outpatient care and (2) anecdotes, such as the one about a patient who had to be admitted to the hospital to get a pair of crutches. Our review, however, found little basis for linking most inappropriate hospitalizations to VA eligibility provisions. In 1985, we reported that about 43 percent of the days of care medical and surgical patients spent in the VA hospitals reviewed could have been avoided. Since then, a number of studies by VA researchers and VA’s Office of Inspector General (IG) have found similar problems. For example, a 1991 VA-funded study of admissions to VA acute medical and surgical bed sections estimated that 43 percent (+/- 3 percent) of admissions were nonacute. Nonacute admissions in the 50 randomly selected VA hospitals studied ranged from 25 to 72 percent. The study suggested several reasons why there is a higher rate of nonacute admissions to VA hospitals than private sector hospitals, including the following: VA facilities do not have the necessary financial incentives to make the transition to outpatient care. VA, unlike the private sector, does not have formal mechanisms to control nonacute admissions, such as mandatory preadmission review. VA, unlike the private sector, has a significantly expanded social mission that may influence the use of patient resources. A 1993 study by VA researchers reported similar findings. At the 24 VA hospitals studied, 47 percent of admissions and 45 percent of days of care in acute medical wards were nonacute; 64 percent of admissions and 34 percent of days of care in surgical wards were nonacute. Reasons cited for nonacute admissions and days of care included nonavailability of outpatient care, conservative physician practices, inadequate discharge planning, and social factors. The authors suggested that VA establish a systemwide utilization review program. VA, however, has not established either an internal utilization review requirement or contracted for external reviews. We recently testified that establishing preadmission certification procedures similar to those used by private health insurers could save VA hundreds of millions of dollars by reducing nonacute admissions to VA hospitals. We noted that all fee-for-service health plans participating in the Federal Employees Health Benefits Program are required to operate a preadmission certification program to help limit nonacute admissions and days of care. VA’s Under Secretary for Health announced plans to implement a preadmission certification program at the same hearing. Although the VA study also cited eligibility as contributing to some inappropriate admissions and days of care, the study identified only minor changes needed in VA eligibility provisions. Specifically, it recommended changes in the law to (1) allow veterans with nonservice-connected disabilities to be placed in VA-supported community nursing homes without first being admitted to a VA hospital and (2) allow prosthetic devices to be furnished to veterans on an outpatient basis. Trying to link the studies discussed here to VA eligibility provisions is, in our view, inappropriate because the studies did not contain the types of data needed to make such a link. In other words, the studies did not determine whether the patients inappropriately admitted to VA hospitals had service-connected or nonservice-connected disabilities, whether they were in the mandatory or discretionary care category for outpatient care, or whether they would have been eligible to receive the services they needed on an outpatient basis. Had such information been included in the studies, it would be possible to determine whether a higher incidence of nonacute admissions occurred for veterans in the discretionary care category for outpatient care than for those in the mandatory care category. Similarly, while the anecdotes VA cites represent real limitations in VA eligibility provisions that need to be addressed, VA lacks data to show how many inappropriate hospital admissions resulted from the limitations. For example, how many of the approximately 7,000 patients admitted to VA hospitals in fiscal year 1994 for fractures of the arms and legs were treated on an outpatient basis and then admitted for the purpose of providing crutches? Only 765 of the 7,000 admissions were for 1 day, the most likely length of stay for patients admitted to enable VA to give them a pair of crutches or other routine outpatient care. Studies by the VA IG show limited enforcement of outpatient eligibility provisions. VA’s IG estimated that over half of the outpatient visits of veterans in the discretionary care category were to receive services that were not covered under the veterans’ VA benefits. This suggests that VA physicians are more likely to “stretch” the outpatient benefit to provide crutches to veterans with broken legs than to admit the veteran to the hospital for that purpose. Eligibility reform proposals introduced during the past year would eliminate the restrictions on veterans’ access to outpatient care. In doing so, however, the proposals would likely generate significant new demand for VA outpatient care services. In addition, the bills generally do not address the other provisions in current law that contribute to inappropriate use of VA health care resources and uneven access to health care services. (See table 2.) Each of the four major bills introduced during the past year would create a uniform benefit package by eliminating the obviate-the-need restriction on coverage of outpatient care. The bills would make all 26 million veterans eligible for comprehensive outpatient services. In addition, the four bills would expand the number of veterans in the mandatory care category for comprehensive outpatient care from about 465,000 to 9 million to 11 million veterans. Eliminating the obviate-the-need restriction on access to ambulatory care would simplify administration of health care benefits because VA physicians would no longer need to determine whether a patient would likely end up in the hospital if he or she was not treated. Eliminating the restriction would also promote greater equity by reducing the inconsistencies in eligibility decisions. Finally, eliminating the restriction would make benefits more understandable by essentially making veterans eligible for the full continuum of inpatient and outpatient care. Most of the bills do not address the other major restrictions on VA eligibility and the ability of VA to provide noncovered services to veterans. Specifics follow: VA would continue to be unable to provide noncovered services directly to veterans under all of the bills. Because all veterans would become eligible for comprehensive outpatient services, there would be fewer noncovered services. Current restrictions on provision of dental, prenatal, and maternity care would not be changed under any of the proposals. S. 1345 would remove the restriction on direct admission of veterans with no service-connected disabilities to community nursing homes. All of the bills would retain the discretionary funding of VA health care. H.R. 1385 would, however, require VA to ensure that veterans have reasonably similar access to VA health care regardless of where they live. Only H.R. 1385 specifically addresses the uneven availability of VA care. That bill would require VA to expand its capacity to provide outpatient care and allocate resources to its facilities in a way that would give veterans access to care that is reasonably similar regardless of where they live. The other bills do not address the uneven availability of VA health care services caused by resource limitations, VA’s limited provider network, and inconsistent VA rationing policies. Appendix I contains a more detailed description of the major provisions of the four bills. By making all 26.4 million veterans eligible for comprehensive outpatient care, the four bills would likely generate significant new demand for both outpatient and inpatient care. The increased demand could be heightened by the synergistic effects of other changes in the VA health care system to improve access and customer service and expand contracting. The bills would, however, provide little or no new sources of revenue to offset the costs of the new services. This would put increased pressure on the Congress to appropriate funds to meet the health care demands generated through eligibility expansions, particularly for the 9 million to 11 million additional veterans who would be placed in the mandatory care category for comprehensive outpatient benefits. Although VA and CBO arrived at strikingly different conclusions about the budgetary effects of the bills, we find CBO’s arguments more compelling because they address the potential increased demand. Under the four bills, over 26 million veterans would become eligible to receive services that currently are available primarily to the approximately 465,000 veterans with service-connected disabilities rated at 50 percent or higher. Even many veterans who rely on other health care coverage for most of their needs are likely to attempt to take advantage of added VA benefits such as prescription drugs, which are not typically covered under other health insurance. Medicare does not cover outpatient prescription drugs, making VA an attractive alternative. Medicare-eligible veterans already make significant use of VA outpatient prescriptions even with the current eligibility limitations. Removing the restrictions on access to outpatient care would likely significantly increase demand for outpatient prescriptions. Another area where workload would likely increase dramatically is prosthetic devices, such as eyeglasses, contact lenses, and hearing aids. In addressing the restriction in current law on provision of crutches to veterans with broken legs, the four bills would also eliminate the restriction on provision of other prosthetic devices, such as eyeglasses, contact lenses, and hearing aids. H.R. 2491 would, however, give the Secretary of Veterans Affairs the authority to restrict the provision of eyeglasses, contact lenses, and hearing aids. If concurrent changes are made in the accessibility of VA health care services, in VA customer service, and in the extent to which veterans are allowed to use private providers under contract to VA, the impact of eligibility reforms on demand for VA care will likely be heightened. As it strives to make the transition from a hospital-based system to an ambulatory-care-based system, VA is attempting to bring ambulatory care closer to veterans’ homes. Because distance is one of the primary factors affecting veterans’ use of VA health care, actions to give veterans access to outpatient care closer to their homes, either through expansion of VA-operated clinics or through contracts with community providers, will likely increase demand for services. Similarly, our reports over the past 5 years have identified continuing problems in VA customer service, including long waiting times, poor staff attitudes, and lack of such amenities as bedside telephones. As part of its response to the National Performance Review, VA has developed detailed plans to improve customer service that include installing bedside telephones, reducing waiting times, and training staff. These efforts are likely to help VA retain current users and will likely attract new users as VA’s reputation for customer service improves. Finally, increased contracting with private sector providers closer to veterans’ homes could attract new users. Both S. 1345 and H.R. 2491 would expand VA’s authority to contract with private sector providers. Such contracting might enable veterans to use the same physicians, clinics, and hospitals they use now but have VA rather than their private insurance or Medicare pay for the care. Three of the bills—H.R. 2491, S. 1345, and S. 1563—would provide new sources of revenue, but they would not offset the costs of eligibility expansions. The provisions in those bills, which would allow VA to retain certain third-party recoveries, would not be used to offset VA appropriations and therefore would not change the budgetary impact of these reform proposals. The bills essentially assume that eligibility reform will not require new sources of revenue because they will generate significant savings by making it possible for VA to treat on an outpatient basis 20 to 40 percent of veterans currently in VA hospitals. These savings would then be used to pay for the increased outpatient workload generated by the patients diverted to outpatient care. There is, however, little evidence to suggest that eligibility reform alone will result in significant numbers of veterans being diverted to outpatient care. Expanding the number of veterans in the mandatory care category while retaining current resource constraints might force rationing of care to veterans in the mandatory care group. Expanding the mandatory care category would place great pressure on the Congress to fully fund services for veterans in the mandatory care category. Historically, the Congress has fully funded both VA’s mandatory and discretionary workload. Considering the significant portion of VA resources currently used to provide services to veterans in the discretionary care category and the limited data VA provides the Congress on which to base funding decisions, it would be exceedingly difficult for the Congress to appropriate funds for the care of only a portion of the veterans in the mandatory care category. About 15 percent of veterans using VA medical centers have no service-connected disabilities and have incomes that place them in the discretionary care category for both inpatient and outpatient care. But VA does not differentiate between services provided to veterans in the mandatory and discretionary care categories in justifying its budget request. As a result, the Congress has little basis for determining which portion of VA’s discretionary workload to fund. Although two proposals (H.R. 2491 and H.R. 1385) propose establishment of an enrollment process, such a process may jeopardize VA’s safety net mission. Because low-income veterans are typically the fourth highest priority for care in the proposed enrollment process, reforms that provide a richer benefit package or increase the number of higher-priority veterans, or a combination of both, could reduce funds available to treat low-income veterans. For example, under the new definition of health care in S. 1345, veterans in the top three priority categories would be in the mandatory care category for virtually any service offered by VA. Further, VA would be required to provide comprehensive care to about 3 million veterans previously eligible for limited outpatient care. Under the VA proposal, about 1.8 million veterans currently eligible for limited outpatient care would be placed in the highest-priority group for comprehensive care. The VA proposal would also place veterans with noncompensable service-connected disabilities (estimated to number about 1.2 million) above low-income veterans with no service-connected disabilities in the priority ranking of veterans in the mandatory care category. Only after the needs are met for the top three priority categories could VA fund care for low-income veterans. We are concerned that sufficient funds might not be available to fulfill VA’s safety net mission after meeting the expanded demands for care of higher-priority veterans. Because most of the reform proposals do not address the uneven availability of VA services, however, the increased demand for care generated by eligibility expansions would likely heighten the problems VA already faces in trying to equitably distribute available resources. VA and CBO estimated the budgetary impact of H.R. 2491, the most modest of the reform proposals, with strikingly different results: VA concluded that because the bill was similar to the administration’s proposal, it would be budget neutral, generating net savings of $268 million that could be reinvested to expand outpatient care or construct new facilities. CBO estimated that the bill could add $3 billion or more to the deficit annually. A number of problems have been identified with both cost estimates that reduce their usefulness in assessing the potential impact of the bill on VA’s budget. We agree with CBO’s overall conclusion, however, that any broad expansion in benefits will generate significant new demand for VA health care that could potentially add billions to the budget deficit. VA did not adequately consider the increased demand for outpatient care likely to be generated by the eligibility expansions, incorrectly assumed a strong link between inappropriate admissions to VA hospitals and VA eligibility provisions that would be addressed through the reform proposals, and made a number of questionable assumptions in its calculations. VA developed a complex formula for estimating the cost effects of eligibility reform based on its overall assumption that eligibility reform would enable it to divert 20 percent of its hospital patients to outpatient care. The results, however, are sensitive to a series of assumptions about such things as how many veterans are inappropriately admitted to VA hospitals because of restrictions on outpatient eligibility; how long, on average, those veterans stay in the hospital; and how eligibility reform would affect demand for outpatient care. We have the following concerns about VA’s assumptions or how they were used in VA’s calculations of savings to be realized from eligibility reforms: Eligibility reform would enable VA to eliminate 20 percent of hospital admissions. One argument frequently used to promote the need for eligibility reform is that the obviate-the-need provision prevents VA from providing care in the most cost-effective setting. The presumed savings from removing the restrictions on access to ambulatory care services would then be used to offset the costs of expanded benefits. We agree that significant savings can accrue from shifting a sizable portion of VA’s inpatient services to other settings. But we do not believe that current eligibility provisions prevent VA from shifting much of its current inpatient services to ambulatory care settings. The same obviate-the-need provision discussed earlier as making it difficult for VA physicians to determine whether to provide outpatient care for certain conditions makes it clear that care can be provided to any veteran, regardless of income or other factors, if it would prevent a hospital admission. The eligibility provisions, for example, allow VA to perform cataract surgery on an outpatient basis to obviate the need for inpatient care. Accordingly, we do not believe it would be appropriate to assume that the management inefficiencies that have prevented VA from effectively implementing the provision and shifting care to outpatient settings for over 20 years would be eliminated and the planned savings actually realized. Actions such as the preadmission certification program previously discussed could, however, generate savings that could be used to offset the costs of eligibility reform. An average of 7 days of hospital care would be saved for every patient diverted to outpatient care. This assumption is not sound given VA’s argument that the patients it would be diverting were admitted in order to provide them routine outpatient care. Because the inpatients VA expects to shift to outpatient care are essentially self-care patients with no acute medical need, VA would most likely be drawing from patients with the shortest lengths of stay—such as veterans admitted to provide them crutches or as a prerequisite to placement in a community nursing home. In fiscal year 1994, about 37 percent of VA medical and surgical patients had 1- to 3-day stays. We believe it would be more reasonable to assume the average length of stay of patients to be diverted to outpatient care to be 1 to 3 days. Changing the assumption about average length of stay dramatically alters VA’s savings estimates. Substituting 3 days for VA’s assumption of a 7-day average length of stay would change VA’s projected savings of $268 million from eligibility reform into an overall increase in VA costs of almost $167 million. Because the less sick patients would be shifted to outpatient care, the costs of treating patients remaining in the hospital would increase by 10 percent per admission. Although VA’s formula originally included this adjustment, VA did not include the calculation in its savings estimates. Including this adjustment would turn VA’s projected savings of $268 million into a cost increase of $51 million. An increase in demand would not occur for outpatient care other than demand generated by veterans shifted from inpatient to outpatient care. VA anticipates limited new demand because, according to headquarters officials, the administration proposal and H.R. 2491 were designed to give VA added flexibility, not to attract new users. Although headquarters officials anticipate few new users, medical centers are already aggressively pursuing new users. CBO estimated that the eligibility reform provisions of H.R. 2491 could increase the deficit by $3 billion or more annually if the Congress fully funds the increased demand for outpatient care that the eligibility expansions would likely generate. CBO’s estimates were based in part on tables contained in what at the time was VA’s newly released 1992 National Survey of Veterans. VA claimed that CBO misinterpreted one of the tables in the survey—which VA acknowledged was confusing—and raised concerns about CBO’s methodology and the accuracy of its projections. After reviewing VA’s concerns, CBO determined that any problem in interpreting the survey data did not affect its overall conclusion that the bill would not be budget neutral because the expanded eligibility would generate significant new demand. CBO assumes in conducting budgetary impact analyses that if demand increases under a discretionary program, funds will be appropriated to meet that demand. CBO estimated that the cost of providing outpatient care to the 10.5 million veterans who are currently eligible only for hospital-related outpatient care would far outweigh the savings from shifting inpatients to outpatient care. Further, CBO concluded that VA could incur significant costs under provisions that expand VA’s authority to provide prosthetic devices on an outpatient basis. Finally, CBO noted that the bill could increase costs by billions more if the induced demand for outpatient care resulted in corresponding increases in demand for hospital care. The cost of eligibility reform depends on a number of factors, including the benefits covered, the number of veterans offered the benefits, and the extent to which veterans are expected to pay for or contribute toward the cost of their health care benefits. The current reform proposals would essentially make all 26 million veterans eligible for comprehensive inpatient and outpatient care with little or no change in the system’s sources of revenue. Three basic approaches could be used, individually or in combination, to develop budget-neutral eligibility reform. These are (1) set limits on covered benefits, (2) limit the number of veterans eligible for health care benefits, and (3) generate increased revenues to pay for expanded benefits. Another approach would be to allow VA to “reinvest” savings achieved through efficiency improvements in expanded benefits. One way to control the increase in workload likely to result from eligibility expansions would be to develop one or more defined benefit packages patterned after public and private health insurance. This would narrow the range of services veterans could obtain from VA, allowing workload to be reduced by the eliminated services to offset the workload from increased demand for other services. Like private health insurers, VA could adjust the benefit package annually on the basis of the availability of resources. Creating a defined benefit package could result in some veterans receiving a narrower range of services than they receive now, while others would receive additional benefits. This approach would essentially take some benefits away from veterans with the greatest service-connected disabilities and give additional benefits to veterans with lesser service-connected disabilities and to veterans with no service-connected disabilities. One option for addressing this problem is to establish separate benefit packages for different types of veterans. For example, veterans with disabilities rated at 50 percent or higher might continue to be entitled to any needed outpatient service, while a narrower package of outpatient benefits—perhaps excluding such items as eyeglasses, hearing aids, and prescription drugs—could be provided to higher-income veterans with no service-connected disabilities. Another way to develop budget-neutral eligibility reform would be to pay for expanded eligibility for some veterans by restricting or eliminating eligibility for others. Under current law, all veterans are eligible for VA hospital and nursing home care and at least some outpatient care, but there is a complex set of priorities for care based on such factors as presence and degree of service-connected disability, period of service, and income. In practical application, however, these priorities have little effect on the VA health care system. In preparation of VA budget justifications, no distinction is made between veterans in the mandatory and discretionary care categories, let alone those in different priority groups within the mandatory and discretionary care categories. Two of the reform bills (H.R. 1385 and H.R. 2491) would authorize VA to control demand for VA services through the use of priorities for care and an enrollment process. Among the approaches that could be used to limit the number of veterans taking advantage of expanded benefits is to limit VA eligibility to those veterans who lack other public or private insurance. Exceptions could be made for treatment of service-connected disabilities and for services not covered under veterans’ public or private insurance. Such an approach might help target available funds toward those veterans most in need. The Congress would face a difficult choice, however, in determining whether VA health care is (1) a benefit of service that should be available regardless of alternate coverage or (2) a safety net available only to those who lack health care options. Limiting eligibility of veterans with nonservice-connected disabilities to those whose income is below the current, or some new, means test limit would allow VA to retarget some resources currently used to provide services to higher-income veterans. Because about 15 percent of VA users have incomes above the means test threshold, eliminating their eligibility would make additional resources available to offset increased demand for outpatient services by veterans in higher-priority categories. Such veterans could be allowed to purchase services from VA facilities on a space-available basis. Another way to limit the number of veterans eligible for expanded VA benefits is to restrict enrollment in VA health care to current VA users. This approach could limit the potential “woodwork” effect and thereby reduce the costs of eligibility reforms. While current users might increase their use of VA health care in response to expanded benefits, most such veterans already obtain those services they are unable to get from VA from private sector providers through their public and private insurance. As a result, this approach might enable those higher-income veterans with nonservice-connected disabilities already using VA services to shift all of their care to VA, while veterans who had not previously used VA services but would like to start using them would essentially be shut out of the system. This would include veterans with higher priorities for care, such as those with service-connected disabilities and low incomes. Similarly, restricting enrollment to current users might prevent VA from fulfilling its safety net mission by denying care to veterans whose economic circumstances change. Several approaches could be used to generate additional revenues to pay for expanded benefits. These include increased cost sharing, authorizing recoveries from Medicare, and allowing VA to retain funds from third-party recoveries. Increased veteran cost sharing could help offset the costs of increased demand. For example, through contracting reform, VA might be authorized to sell veterans any available health care service not covered under their current veterans’ benefits without changing existing eligibility provisions. In other words, veterans could purchase, or use their private health insurance to purchase, additional health care services from VA. Such an approach would not eliminate the problems VA physicians have in interpreting the obviate-the-need provision. But it would lessen the importance of the decision. Physicians would no longer be forced to turn away veterans needing health care services. Instead, obviate-the-need decisions would determine who would pay for needed health care services, the government or the veteran. In addition, VA could issue regulations interpreting the obviate-the-need provision. Because uninsured veterans may be unable to pay for many additional health care services, an exception could be made to help such veterans pay for additional health care services. A second approach for offsetting the costs of eligibility expansions through cost sharing could be to impose new cost-sharing requirements for existing services. For example, VA could be authorized to increase cost sharing for nursing home care—a discretionary benefit for all veterans—either through increased copayments or estate recoveries. Recoveries could be used to help pay for benefit expansions. Similarly, copayments and deductibles for hospital and outpatient care could be adjusted to be more comparable with other public and private sector programs. Cost sharing could also be increased by redefining the mandatory care group. In other words, the income levels for inclusion in the mandatory care category could be lowered or copayments imposed for nonservice-connected care provided to veterans with service-connected disabilities of 0 to 20 percent. Proposals have been made in the past few years to authorize VA recoveries from Medicare either for all Medicare-eligible veterans or for those with higher incomes. For example, S. 1563 would allow VA to bill and retain recoveries from Medicare. Such proposals, though, appear to offer little promise for offsetting the costs of eligibility expansions. First, many of the services, such as hearing aids and prescription drugs, that Medicare-eligible veterans are likely to obtain from VA are not Medicare-covered services. Second, the proposals would not require VA to offset the recoveries against its appropriation. As a result, it would not affect VA’s budget request. Authorizing VA recoveries from Medicare could, however, further jeopardize the solvency of the Medicare trust fund and increase overall federal health care costs. Such an action would essentially transfer funds between federal agencies while adding administrative costs. Allowing VA to bill and retain recoveries from Medicare would create strong incentives for VA facilities to shift their priorities toward providing care to veterans with Medicare coverage. VA facilities would essentially receive duplicate payments for care provided to higher-income Medicare beneficiaries, unless recoveries were designated to fund services or programs for which VA did not receive an appropriation. For example, if VA were authorized to sell noncovered services to veterans and did not receive an appropriation for such services, then veterans should be allowed to use their Medicare benefits to help pay for the services just as they would use their private health insurance. Proposals, such as the ones contained in S. 1345 and H.R. 1385, that would allow VA to retain a portion of recoveries from private health insurance beyond what it needs to finance its recovery program would not reduce VA’s budget request and therefore would not generate the revenues needed to offset the costs of expanded benefits. Just as allowing VA to retain Medicare recoveries would essentially result in duplicate payments unless they were earmarked for some purpose other than to pay for care covered by an appropriation, proposals to allow VA to retain a portion of its third-party recoveries would essentially result in duplicate payments. During the past 5 to 10 years, GAO, VA’s IG, the Veterans Health Administration, and others identified numerous opportunities to improve the efficiency of the VA health care system and enhance revenues from sales of services to nonveterans and care provided to veterans. Savings from such initiatives could be “reinvested” in the VA health care system to help pay for eligibility expansions. VA has historically used savings from efficiency improvements to fund new programs. For example, VA is allowing its facilities to reinvest savings achieved by consolidating administrative and clinical management of nearby facilities into providing more clinical programs. Similarly, VA allows medical centers to use savings from efficiency improvements to fund access points. Through establishment of a preadmission certification requirement similar to those used by many private health insurers, VA could reduce nonacute admissions and days of care in VA hospitals and save hundreds of millions of dollars. While such inappropriate admissions and days of care to a large extent are unrelated to problems with VA eligibility provisions, savings resulting from administrative actions to address the problem could nonetheless be targeted to pay for expanded benefits. Actions to reinvest savings from efficiency improvements would, however, limit VA’s ability to contribute to deficit reduction. The VA health care system was neither designed nor intended to be the primary source of health care services for most veterans. It was initially established to meet the special care needs of veterans injured during wartime and those wartime veterans permanently incapacitated and incapable of earning a living. Although the system has evolved since that time, even today it focuses on meeting the comprehensive health care needs of only about 465,000 of the nation’s 26.4 million veterans. In other words, its primary mission is to meet the comprehensive health care needs of veterans with service-connected disabilities rated at 50 percent or more. For other veterans, the system is primarily intended to provide treatment for their service-connected disabilities and to serve as a safety net to provide health care to veterans with limited access to health care through other public and private programs. Because 9 out of 10 veterans now have other public or private health insurance that meets their basic health care needs, few veterans today need to rely on VA as a safety net. Rather, most of them turn to private sector providers for all or most of their care, using VA either not at all or to supplement their use of private sector health care. Reforms of VA eligibility that would significantly expand veterans’ eligibility for comprehensive care in VA facilities would significantly alter VA’s health care mission and place VA in more direct competition with the private sector. To the extent veterans are given expanded benefits that are either free or have lower cost sharing than other public and private health insurance, the VA system will gain a clear competitive advantage over its private sector competitors. Coupling eligibility reform with other changes, such as improved accessibility and customer service, could heighten the increased demand for VA services. Because most veterans currently use private sector providers, any increased demand generated by eligibility expansions would come largely at the expense of those providers. For most veterans, VA eligibility reform might provide an additional option for health care services or additional services not covered under their public or private insurance. For those veterans who do not have public or private health insurance, however, eligibility reform is more important. It could improve their access to comprehensive health care services, including preventive health care services. Historically, the Congress has fully funded VA’s mandatory and discretionary care workload. The four eligibility reform bills that have been introduced could significantly increase demand for VA health care services, putting pressure on the Congress to increase VA appropriations to fully fund at least the demand generated by the 9 million to 11 million veterans added to the mandatory care category for comprehensive free outpatient services. If the Congress decides not to fully fund VA’s anticipated workload, VA would be faced with developing rationing policies that would ensure the funds appropriated are directed toward those veterans with the highest priorities for care. This would likely entail turning away many of the veterans currently using VA health care. Depending on the level of funding, those turned away could include low-income uninsured veterans. The funds needed to meet the increased demand for routine health care services could also jeopardize VA’s ability to provide specialized services, such as treatment of spinal cord injuries, not available through other programs. Eligibility reforms should focus on strengthening VA’s safety net mission while preserving its ability to provide specialized services veterans may be unable to obtain through their public and private insurance. Several approaches could be pursued to develop budget-neutral reforms that would also limit the extent to which the government competes with the private sector. These approaches generally involve placing limits on the number of veterans given expanded benefits, narrowing the range of benefits added, or increasing cost sharing to offset the costs of added benefits. Mr. Chairman, this concludes my prepared statement. We will be happy to answer any questions that you or other Members of the Committee may have. For more information on this testimony, please call Jim Linz, Assistant Director, at (202) 512-7110. Terry Saiki, Evaluator-in-Charge, also contributed to the preparation of the statement. This appendix contains a synopsis of the key provisions in the four major eligibility reform bills introduced during the past year. The Department of Veterans Affairs Improvement and Reinvention Act of 1995 (S. 1345) was introduced at the administration’s request on October 19, 1995. In addition to reforming VA health care eligibility, S. 1345 would expand VA contracting authority and amend VA housing and education benefits. The eligibility reform provisions would do the following: Previous provisions covering hospital care, outpatient care, respite care, pharmaceuticals, supplies, equipment, appliances, and other material and services would be combined into a new “health care” provision. Health care would be defined as “the most appropriate care and treatment for the patient furnished in the most appropriate setting.” All veterans would be eligible for the expanded benefits offered under the new definition of health care. The current fixed categories of eligibility would be replaced by a priority system. The highest-priority groups of veterans in the mandatory category for comprehensive care would be expanded to include veterans (1) with any compensable service-connected disability, (2) who are former prisoners of war, (3) whose discharge or release was for disabilities incurred or aggravated in the line of duty, and (4) who are receiving disability compensation. VA would be allowed to provide, subject to available funding, comprehensive health care services to lower-priority veterans. The obviate-the-need-for-hospitalization criterion for outpatient care would be eliminated. The discretionary nature of VA funding would be retained by making the availability of services subject to annual appropriations. The administration’s proposal would also expand VA contracting authority. It would allow VA to share (purchase or sell) health care resources with health plans, insurers, organizations, institutions, or any other entity or individual who furnishes any health care resource. Under current law, such sharing agreements are limited to medical schools, health care facilities, and research centers. Finally, S. 1345 would allow VA to retain a greater portion of its third-party collections. Currently, VA must return all third-party collections, less the administrative costs of collection activities, to the Treasury. Under the administration’s proposal, VA would be allowed to retain an additional 25 percent of recoveries to be distributed to its health care facilities. S. 1563 was introduced at the request of the veterans’ service organizations (VSO) on February 7, 1996. The VSOs’ highest priority, according to VSO representatives, is eligibility reform that authorizes a full range of medical services for veterans currently in the mandatory category for hospital care, and funding to ensure the availability of those services. As a practical matter, the VSOs did not attempt to include all of the eligibility reforms recommended in their 1996 Independent Budget in this year’s proposal. In the scaled-back version, S. 1563 would add catastrophically disabled veterans to the mandatory category for expand the mandatory care category (Category A) for hospital care to apply to outpatient, nursing home, domiciliary, and long-term care; allow VA to treat adult dependents of veterans, provided they reimburse VA for the cost of their care; broaden VA’s authority to provide primary and preventive health care require VA to provide prosthetic appliances and aids for veterans in the mandatory care category who are blind or hearing-impaired; authorize VA facilities to participate as Medicare providers and retain require VA to maintain current capacity in specialized services for mandatory care category veterans, including those with spinal cord dysfunction, blindness, and mental illness; and eliminate the obviate-the-need provision, making all veterans eligible for comprehensive outpatient care. Some reforms described in their 1996 Independent Budget for VA were not included in S. 1563. VSO representatives said these initiatives will be retained for future consideration. For example, the VSOs also recommended that the Congress switch VA health care funding from a discretionary to a mandatory authorize VA to provide pre- and postnatal care for women veterans, provide investment funds to improve VA’s infrastructure, and allow VA medical centers to conduct marketing activities. Introduced April 4, 1995, by Congressmen Edwards and Montgomery, the Veterans Health Care Reform Act of 1995 (H.R. 1385) would, on a temporary basis for the period ending September 30, 1999, expand the mandatory care category for comprehensive outpatient medical treatment to include all veterans in the mandatory care category for hospital care (core group) other than those with noncompensable service-connected disabilities (nursing home and dental services would remain discretionary); require VA to expand its capacity to provide outpatient care and allocate resources to its facilities in a way that would give veterans access to care that is reasonably similar regardless of where they live; include preventive health services and prosthetic appliances in the definition of services that are provided to core group veterans; include home health services in the definition of services that may be provided to core group veterans; authorize the Secretary of Veterans Affairs to use systems of patient prioritization and to set up a system of enrollment of eligible veterans; allow VA to retain a portion of third-party recoveries to expand outpatient require VA to ensure that any veteran with a service-connected disability is provided all benefits to which he or she is entitled. Like the administration’s proposal, H.R. 1385 would not shift VA funding from a discretionary to a mandatory account. That is, availability of benefits would still be dependent upon available funding—benefits would not be guaranteed. In addition, VA would be required to ensure that its capacity to provide for the specialized treatment and rehabilitative needs of disabled veterans is not reduced. In October 1995, the House approved a budget reconciliation package (H.R. 2491) that contained a Veterans’ Affairs Committee proposal—the Veterans Reconciliation Act of 1995. The bill would, among other provisions, reform eligibility for VA health care to subject provision of care to amounts provided in advance in appropriations, thus retaining VA’s discretionary funding; expand the mandatory care category for comprehensive outpatient care to include all veterans in the mandatory category for hospital care except those with noncompensable service-connected disabilities; remove the obviate-the-need criterion and other limitations on the provision of outpatient care, making all veterans eligible for comprehensive outpatient care; retain nursing home care as a discretionary benefit for all veterans; require VA to establish a system of annual patient enrollment based on priorities for enrollment contained in the bill; create a new category of priority for veterans who are catastrophically expand VA contracting and sharing authority. VA Health Care: Opportunities to Increase Efficiency and Reduce Resource Needs (GAO/T-HEHS-96-99, Mar. 8, 1996). VA Health Care: Issues Affecting Eligibility Reform (GAO/T-HEHS-95-213, July 19, 1995). VA Health Care: Challenges and Options for the Future (GAO/T-HEHS-95-147, May 9, 1995). VA Health Care: Retargeting Needed to Better Meet Veterans’ Changing Needs (GAO/HEHS-95-39, Apr. 21, 1995). VA Health Care: Barriers to VA Managed Care (GAO/HEHS-95-84R, Apr. 20, 1995). Veterans’ Health Care: Veterans’ Perceptions of VA Services and VA’s Role in Health Reform (GAO/HEHS-95-14, Dec. 23, 1994). Veterans’ Health Care: Use of VA Services by Medicare-Eligible Veterans (GAO/HEHS-95-13, Oct. 24, 1994). Veterans’ Health Care: Implications of Other Countries’ Reforms for the United States (GAO/HEHS-94-210BR, Sept. 27, 1994). Health Security Act: Analysis of Veterans’ Health Care Provisions (GAO/HEHS-94-205FS, July 15, 1994). Veterans’ Health Care: Efforts to Make VA Competitive May Create Significant Risks (GAO/T-HEHS-94-197, June 29, 1994). Veterans’ Health Care: Most Care Provided Through Non-VA Programs (GAO/HEHS-94-104BR, Apr. 25, 1994). VA Health Care: A Profile of Veterans Using VA Medical Centers in 1991 (GAO/HEHS-94-113FS, Mar. 29, 1994). VA Health Care: Restructuring Ambulatory Care System Would Improve Service to Veterans (GAO/HRD-94-4, Oct. 15, 1993). VA Health Care: Comparison of VA Benefits With Other Public and Private Programs (GAO/HRD-93-94, July 29, 1993). VA Health Care: Veterans’ Efforts to Obtain Outpatient Care From Alternative Sources (GAO/HRD-93-123, June 30, 1993). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed various proposals to reform eligibility for Department of Veterans Affairs (VA) health benefits. GAO noted that: (1) VA health care has evolved from a system primarily providing hospital care to veterans injured during wartime to a system focused on the treatment of low-income veterans with medical conditions unrelated to military service; (2) the eligibility provisions of the VA health care system are vague, provide uneven services, do not guarantee services, and cannot provide the total care that low-income veterans need; (3) while VA health care eligibility provisions should be reformed to better suit veterans' health care needs, none of the proposed legislation would be budget neutral; (4) present eligibility provisions do not cause inappropriate hospitalizations; (5) several legislative proposals to reform VA eligibility provisions would eliminate the restrictions on outpatient care and create a uniform benefit package, but inappropriate use of resources, uneven access, and some restrictions would continue to exist; (6) the proposed legislation to reform VA eligibility provisions would increase service availability, demand, and program costs; and (7) approaches for developing budget-neutral eligibility reforms include limits on covered benefits, limits on the number of veterans eligible, an increase in veteran cost-sharing, the authorization of recoveries from Medicare, VA retention of a portion of third-party recoveries, and reinvestment of savings from efficiency improvements. |
The military justice system is governed by a collection of statutes and regulations, including the Uniform Code of Military Justice, which is codified in Title 10 of the United States Code. According to the Manual for Courts-Martial, the purpose of military law is to promote justice, to assist in maintaining good order and discipline in the armed forces, to promote efficiency and effectiveness in the military establishment, and thereby to strengthen the national security of the United States. All members of the armed forces are subject to the Uniform Code of Military Justice, including the punitive articles that define specific offenses. The punitive articles include offenses similar to those found in civilian criminal law (e.g., murder, rape, wrongful use of controlled substances, larceny, and drunken driving) as well as other offenses that specifically affect good order and discipline in the military (e.g., absence without leave, disrespect toward superior commissioned officer, or dereliction of duty). When a servicemember is accused of an offense such as sexual assault, military criminal investigators, commanding officers, and military lawyers—known as judge advocates—have responsibilities related to the investigation and adjudication of the alleged criminal conduct. An investigation is usually conducted by one of the three military criminal investigative organizations—the U.S. Army Criminal Investigation Command, the Naval Criminal Investigative Service, or the Air Force Office of Special Investigations. Each organization has criminal investigators who are responsible for interviewing witnesses, alleged victims, and suspects, and gathering physical evidence. These investigators present the results of the completed investigation to the commanding officer of an accused servicemember for disposition. Military commanding officers are responsible for good order and discipline in their commands, and they have a number of judicial and administrative options at their disposal. Commanding officers have access to judge advocates who may advise throughout the process of determining an appropriate disposition for an alleged offense, but ultimately, commanding officers are accountable for disposing of allegations of offenses in a timely manner and at the lowest appropriate level of disposition using one of the following options: No action: A commanding officer may decide to take no action. Administrative action: A commanding officer may elect to take administrative actions, which include corrective measures such as counseling, admonition, reprimand, exhortation, disapproval, criticism, censure, reproach, rebuke, extra military instruction, the administrative withholding of privileges, or any combination of the above. Nonjudicial punishment: Article 15 of the Uniform Code of Military Justice allows for a number of disciplinary actions, or “nonjudicial punishments,” that are more serious than corrective measures taken in an administrative action, but less serious than a trial by court-martial. Nonjudicial punishments include admonition, reprimand, reducing a member’s grade, forfeiture of pay, adding extra duty, and imposing restrictions on freedom. Court-martial: This option provides for the most severe punishments, including death, prison time, forfeiture of pay and allowances, reduction in rank, and punitive separation from military service. Commanders may choose from three types of courts-martial— summary, special, or general. While commanders have access to judge advocates who may advise them throughout the process of determining the appropriate disposition for an alleged offense, other judge advocates serve as trial and defense counsel in both special and general courts-martial. The military services’ guidance addressing investigative procedures along with the Uniform Code of Military Justice are generally applicable to criminal activity involving servicemembers. Further, each service provides sexual assault–specific guidance as well as standard operating and reporting procedures for responding to alleged sexual assault incidents. Guidance for each military criminal investigative organization specifically provides details on how sexual assault incidents should be investigated, and stipulates that investigative personnel must respond to all reported sexual assault complaints. DOD and military service policies and procedures for investigating and adjudicating alleged sexual assault incidents also apply to combat areas of interest. DOD Directive 6495.01 notes that it is DOD’s policy to provide an immediate, trained response capability for each report of sexual assault in all locations, including deployed locations, and it charges the secretaries of the military departments with programming appropriate resources to enable the combatant commands to achieve compliance with the policies set forth in the directive. Each military service also deploys investigators and conducts sexual assault criminal investigations in combat areas of interest and investigations in multiservice environments, and these investigations often cross service lines. Given the preponderance of Army personnel among servicemembers in theater, however, most sexual assault criminal investigations involving personnel from any service are initiated by the Army. Each military service also provides legal support in combat areas of interest, but the availability of judge advocates and the conduct of criminal justice proceedings in combat areas of interest vary, according to service component and operational needs. Service policies for military operations describe ways in which legal support is provided to the deployable force, sourced either through the deployment of personnel or by personnel situated at another location. The DOD Office of the Inspector General was established by the Department of Defense Authorization Act of 1983 to, among other things, serve as the principal adviser to the Secretary of Defense on matters relating to the prevention and detection of fraud, waste, and abuse, and to be an independent organization responsible for conducting and supervising audits and investigations of the programs and operations of the department. DOD Directive 5106.01 specifies that the DOD Inspector General shall establish policy and provide guidance on all DOD activities relating to criminal investigations and law enforcement programs, which include activities of the U.S. Army Criminal Investigation Command, the Naval Criminal Investigative Service, and the Air Force Office of Special Investigations. The DOD Inspector General’s Office is divided into the following areas, each of which is headed by a deputy, assistant, or special inspector general: auditing; investigations; policy and oversight; intelligence; administration and management; communications and congressional liaison; general counsel; office of professional responsibility; special plans and operations; administrative investigations; and southwest Asia. Within OSD, the Under Secretary of Defense for Personnel and Readiness has the responsibility for developing the overall policy and guidance for the department’s sexual assault prevention and response program except for criminal investigative policy matters assigned to the DOD Inspector General. Under the Office of the Under Secretary of Defense for Personnel and Readiness, OSD’s Sexual Assault Prevention and Response Office (within the Office of the Deputy Under Secretary of Defense for Plans) serves as the department’s single point of responsibility for most sexual assault policy matters. DOD guidance defines sexual assault, for purposes of specified guidance and sexual assault prevention and response awareness training and education, as intentional sexual contact, characterized by the use of force, threats, intimidation, or abuse of authority, or by situations in which the victim does not or cannot consent. Sexual assault includes rape, forcible sodomy (oral or anal sex), and other unwanted sexual contact that is aggravated, abusive, or wrongful (to include unwanted and inappropriate sexual contact), or attempts to commit these acts. The definition generally encompasses offenses classified under Articles 120 and 125 of the Uniform Code of Military Justice. The Secretary of Defense is required by law to implement a centralized, case-level database for the collection and maintenance of information regarding sexual assaults involving members of the armed forces, and to make that database available to the Sexual Assault Prevention and Response Office. The law specifies that the database include information, if available, about the nature of the assault, the victim, the offender, and the outcome of any legal proceedings associated with the assault. In February 2010, we reported on and testified that although the office had taken preliminary steps to develop this database, it had not been implemented by the statutorily mandated deadline of January 2010. Further, we made a number of recommendations in our February 2010 report pertaining to DOD’s adherence to key system acquisition best practices when developing this database. DOD concurred with all of these recommendations. In March 2011, the Under Secretary of Defense for Personnel and Readiness provided Congress with a status report of the department’s efforts to implement the database. Specifically, the status report noted that a contract was awarded in August 2010 for the development, implementation, and maintenance of the database, and that the database was expected to be functional by August 2012. The report also highlighted the department’s adherence to key information technology management practices, and that its actions were consistent with the recommendations in our own February 2010 report. The DOD Inspector General’s Office has not carried out its responsibilities pursuant to DOD Instruction 6495.02, which was required by statute. The instruction directs that office to develop policy for the DOD criminal investigative organizations, to oversee sexual assault investigations, and to provide oversight over sexual assault training within the DOD investigative community. Specifically, the DOD Inspector General’s Office has developed some guidance on the general conduct of criminal investigations, but it has not developed a policy specifically for investigations of sexual assault incidents. Further, the DOD Inspector General’s Office is not monitoring or evaluating the services’ investigations of sexual assault and the related training of investigators. The National Defense Authorization Act for Fiscal Year 2005 required the Secretary of Defense to develop a comprehensive policy for sexual assault prevention and response that addresses, among other things, command and law enforcement personnel’s investigation of such complaints. In response to this requirement, in June 2006, OSD’s Sexual Assault Prevention and Response Office published DOD Instruction 6495.02, in which it specifies that the DOD Inspector General’s Office shall develop sexual assault–related policy for the services’ criminal investigative organizations. While the DOD Inspector General’s Office has developed some guidance on the general conduct of criminal investigations, it has not developed policy that specifically addresses sexual assault, as required by DOD’s instruction. For example, the DOD Inspector General’s Office has developed an instruction that outlines responsibilities and requirements for collecting DNA in criminal investigations and another that prescribes procedures for reporting offender criminal history data. These instructions and other guidance from the DOD Inspector General’s Office have relevance to investigations of sexual assault, but neither is tailored to the unique circumstances that are typically associated with this crime. For example, the DOD Inspector General’s instruction on DNA collection generically delineates requirements for consulting with a judge advocate before testing evidence, where evidence should be sent for testing, and that Privacy Act information must be provided to any individual providing a DNA sample. However, the instruction does not identify procedural differences associated with evidence collection in cases of sexual assault. Senior officials from the DOD Inspector General’s Office stated that when the services’ military investigative organizations notify their office of a concern regarding investigative practices, the office then takes action, which has in the past resulted in guidance being issued. The officials also confirmed, however, that there is no DOD-level policy or guidance specifically addressing how sexual assault investigations should be conducted. Absent DOD-level guidance, the services have individually developed and implemented their own guidance, and in some cases they take different approaches in conducting their investigations. Specifically, we determined that the services differed in their approaches with regard to six out of nine elements of investigative policies and procedures, which we selected based on their applicability to sexual assault investigations and the consistency with which they were discussed by agency officials. For example, the Army’s Criminal Investigation Command will assess a case as founded or unfounded—that is, whether the alleged criminal offense is substantiated by an investigation—prior to forwarding it for adjudication. In contrast, the Navy’s and Air Force’s investigative organizations told us that they do not make a similar determination because they believe that it would conflict with their role as independent fact finders. Additionally, each service has experts available for consultation during a sexual assault investigation, but only the Air Force requires its investigators to consult with such experts. See figure 1 for more examples of the variances that we identified in the military services’ investigative policies and procedures. We discussed the services’ investigative policies and procedures with senior officials in the DOD Inspector General’s Investigative Policy and Oversight Office who told us that a DOD-level policy on criminal investigations is unnecessary, since each of the service’s criminal investigative organizations has developed and implemented its own policy. These officials further stated that they do not believe the quality or the outcome of the services’ criminal investigations to be substantively affected by the differences that we identified. However, senior officials from the services’ investigative organizations told us that there is no one person in charge of the services’ criminal investigative organizations at the DOD level, and noted that it may be a problem at the DOD level because it limits, if not eliminates, the execution of centralized oversight. Without a DOD-wide investigative policy, the DOD Inspector General’s Office does not have a foundation on which it can base such a determination and help assure decision makers that sexual assault investigations are being consistently conducted. In addition to its responsibilities for developing policy, DOD Instruction 6495.02 also specifies that the DOD Inspector General’s Office shall oversee sexual assault investigations and related training within the DOD investigative community. However, the DOD Inspector General’s Office is not performing these responsibilities primarily due to its reported focus on other, higher priorities. For example, DOD reported that in fiscal year 2010, the services’ criminal investigative organizations collectively completed 2,594 investigations of alleged sexual assault. However, we found no evidence that the DOD Inspector General’s Office conducted oversight of any of these investigations—a finding with which senior officials in the Inspector General’s Office concurred. We also found that the DOD Inspector General’s Office is not conducting its designated oversight responsibilities for the services’ sexual assault–specific training programs. For example, each of the services has developed and implemented sexual assault–specific training for its respective investigators, but the DOD Inspector General’s Office has not worked with the services to assess the content or the effectiveness of the training that is being provided. Further, the DOD Inspector General’s Office has not assessed the training that is provided by the services on sexual assault investigations, such as evaluating how many agents are currently meeting a minimum standard of competency. (For a discussion of the services’ sexual assault–specific training initiatives, see a later section of this report.) In August 2010, the DOD Inspector General’s Office published its Requirements Plan for Increased Oversight Capabilities, in which it noted that proactive evaluations of the services’ criminal investigative organizations had been lacking for several years because of other, higher priorities, such as an increase in demand for Inspector General services to support the department’s overseas contingency operations. The Requirements Plan includes a general outline of program objectives and funding that the DOD Inspector General’s Office estimates are needed to augment its oversight capabilities, but it does not specify plans for conducting oversight of sexual assault investigations, including goals, implementation steps, key milestones, or performance standards. Our prior work has demonstrated that substantive planning is necessary to establish clear goals and objectives as well as performance data that are needed for gauging program progress and identifying weaknesses. However, senior officials in the DOD Inspector General’s Office told us that they had no plans to expand its oversight of the services’ investigative efforts, including those related to sexual assault, because they do not expect to receive any additional resources, given the current fiscal challenges of the federal government. Until the DOD Inspector General’s Office develops and implements an action plan, which includes a process or standards by which it can evaluate the performance of the services’ investigative organizations, it will remain limited in its ability to oversee and initiate any needed corrective action, and to help ensure consistency and accountability. Consistent with the Secretary of Defense’s priorities for sexual assault prevention and response, the military services provide various resources to support their investigations and adjudications of alleged sexual assault incidents. Specifically, the services have provided experts who advise and assist personnel in the investigation and adjudication of sexual assault incidents, as well as fiscal resources to enhance investigators’ and judge advocates’ response to such incidents. However, the services’ investigative organizations and judge advocate offices are not fully capitalizing on available opportunities to leverage each other’s expertise and limited resources. The military services’ investigative and judge advocate offices are largely organized and resourced according to their general responsibilities for investigating and adjudicating all criminal activity involving servicemembers. But each service has provided its investigators and judge advocates with additional resources that are specifically designed to enhance investigations and adjudications of alleged sexual assault incidents. In fiscal year 2008, the Secretary of Defense identified four priorities for sexual assault prevention and response programming, including one to help ensure investigator training and resourcing and another to help ensure trial counsel training and resourcing. In accordance with these priorities, the military services have provided personnel who support investigators’ and judge advocates’ handling of alleged incidents of sexual assault. Specifically, the Army, the Navy, and the Air Force have authorized additional positions within their respective investigative organizations for personnel who will focus primarily on handling sexual assault cases. See table 1 for details on the services’ efforts to augment sexual assault investigative expertise. Senior officials at each of the service’s investigative organizations provided positive perspectives on the addition of sexual assault–specific positions. For example, senior Army officials at Fort Jackson, South Carolina, told us that the civilian special investigators are especially important in that they provide continuity at the installation’s criminal investigation offices, whereas military investigators typically rotate in and out every 2 years. We met with Navy investigators in the Family and Sexual Violence Program at Camp Lejeune, North Carolina, who told us that their senior-level investigators share their expertise with junior investigators by serving as mentors, which ultimately enhances their sexual assault investigative skills. Further, the Air Force employs forensic science consultants and requires its investigators to work with a consultant immediately after being notified of a sexual assault incident. Investigators at Sheppard Air Force Base in Texas told us that the consultants have attained master’s degrees in forensic science, and that these consultants provide valuable insights on conducting sexual assault investigations. The military services’ judge advocate offices have also taken steps to enhance the expertise of counsel assigned to sexual assault cases. Specifically, each military service has created positions within its respective trial counsel office for personnel who specialize in the prosecution of sexual assault cases. For example, in fiscal year 2009, the Secretary of the Army directed that 15 special victim prosecutor positions be authorized—all of which have been filled—to enhance the Army’s focus on the litigation of sexual assault and family violence cases. Senior officials in the Army’s Judge Advocate General’s Office and at Army installations we visited told us that the personnel filling these positions are high-demand assets in the prosecution of sexual assault cases, and that the Army has authorized 8 additional special victim prosecutor positions because of the program’s success. In addition, the Army hired a total of seven civilian highly qualified experts to provide assistance and training to both trial and defense counsel. The Navy hired two civilian sexual assault litigation specialists who provide support to Navy trial counsel handling sexual assault cases at installations worldwide. The Marine Corps’ judge advocate division was denied its request for a sexual assault litigation expert in fiscal year 2011 because of funding limitations; however, senior Marine Corps judge advocate officials told us that they have access to and utilize the Navy’s experts. The Air Force established a group of 16 senior trial counsel who travel to installations to assist junior litigators in prosecuting sexual assault cases. These are positive examples of the services’ continued efforts to address sexual assault. It is too early to assess their effectiveness, however, as the services are still in the process of funding these initiatives and, as we have previously reported, performance measures for sexual assault prevention and response programs are still being developed. In addition to personnel, the services’ investigative and legal organizations have received fiscal resources, beyond their regular operating budgets, for initiatives to enhance investigations and adjudications of alleged sexual assault incidents. These funds are provided through multiple sources and vary annually relative to other programmatic priorities. According to the Army Sexual Harassment/Assault Response and Prevention Program Manager, in fiscal year 2009, the Army’s Criminal Investigation Command received $4.4 million above its general operating budget to redesign investigator training. The Naval Criminal Investigative Service received approximately $22,000 in fiscal year 2010 from the Department of the Navy’s Sexual Assault Prevention and Response Office, to send its investigators to a class, put on by its Mobile Training Team, related to sexual assault investigations. Additionally, the Naval Criminal Investigative Service funded an 8-day advanced family and sexual violence training course, which was attended by 42 investigators. Senior officials from the Air Force Office of Special Investigations told us that they utilized a portion of their $1.1 million fiscal year 2010 advanced investigations training budget—including $300,000 received from the Air Force Sexual Assault Prevention and Response Program—to fund training courses related to the investigation of sexual assault. These courses included two 2-week advanced general crimes investigations courses that covered such topics as victim sensitivity and how to process reports containing inconsistencies, as well as a special agent laboratory training course that covered advanced protocols for collecting physical and biological evidence in sexual assaults cases and other crimes of violence. Judge advocates, like military criminal investigators, have received funding from multiple sources to conduct initial and periodic refresher training on their responsibilities in responding to an alleged sexual assault and for other advanced courses designed to improve their ability to litigate sexual assault cases. For example, OSD’s Sexual Assault Prevention and Response Office provided the Navy, the Marine Corps, and the Air Force with nearly $3 million in fiscal years 2009 and 2010 to support service efforts to enhance training for trial counsel on the prosecution of sexual assault cases. Each of the services used this and other service-level funding to implement training initiatives for judge advocates handling sexual assault cases. For example, the Army judge advocate office used the $2.1 million it received from the Army’s Sexual Harassment/Assault Response and Prevention program in fiscal year 2010 for the improvement of sexual assault litigation efforts, including conducting seven conferences led by subject matter experts who trained Army prosecutors on the litigation of special victim sexual assault cases. The Navy’s judge advocate office used a portion of the $350,000 that it received from OSD’s Sexual Assault Prevention and Response Office in fiscal year 2009 to provide a course at the Naval Justice School for Navy and Marine prosecutors on handling complex sexual assault cases. In addition, the Navy’s judge advocate office used some of its general program funds to send defense counsel to the defense-specific portions of this sexual assault litigation course. The Air Force’s judge advocate office used nearly half of the $2.3 million provided to the services by OSD’s Sexual Assault Prevention and Response Office in fiscal year 2009 to develop joint training on sexual assault prosecution for each of the service’s trial counsel. Separate Air Force funds were also applied to the development of this joint training program, which includes modules on collaborating with criminal investigators, case strategy, and working with victims, among other topics. The services have taken positive steps to enhance investigations and adjudications of alleged sexual assault incidents, but they have not fully capitalized on existing opportunities to leverage each other’s expertise and limited resources. Our prior work has shown that by exploring ways to collaborate, including leveraging resources, organizations can obtain additional benefits that would not have been available if they were working separately. Recognizing the potential to achieve such benefits, the Secretary of Defense recommended, as part of the 2005 Base Realignment and Closure process, that the services’ investigative organizations colocate to Marine Corps Base Quantico. According to the justification set out by the Secretary of Defense in the Base Realignment and Closure Commission’s report, the co-location would produce operational synergies by locating entities with similar or related missions in one place. The Base Realignment and Closure Commission subsequently adopted a modified version of the Secretary’s recommendation. However, senior officials from each service’s investigative organization told us that there are currently no plans to use opportunities such as this co-location to develop joint initiatives, including advanced-level training on investigating sexual assaults, that could allow the services to better leverage each other’s expertise and limited resources to achieve the operational synergies noted by the Secretary of Defense. Further, the services reported in their fiscal year 2012 budget justifications to Congress that the co-location efforts have cost over $426 million, and produced a total of about $53 million in savings from fiscal years 2006 to 2011, which were derived, in part, through the reduction in costs to support infrastructure. An additional $5.6 million in net annual recurring savings is projected after this co-location is completed in fiscal year 2011. However, as we have previously reported, we believe that DOD’s net annual recurring savings estimates may be overstated because they include savings from eliminating military personnel positions without corresponding decreases in end strength. The low amount of savings estimated relative to the high cost of implementing the initiative underscores the importance of continued efforts by the services to maximize and extend the cost saving once the co-location is completed by September 2011. Like investigators, judge advocates perform similar responsibilities that are based on a common set of legal principles. During our review, senior officials in the judge advocate general offices told us that the services’ judge advocates regularly communicate on issues such as sexual assault and collaborate, where appropriate. For example, in fiscal year 2010, the services collaborated to develop an interactive training program that uses a simulated court-martial trial for a sexual assault offense to develop and test judge advocates’ competence at each stage of the trial. While this is a positive step toward better leveraging of each other’s expertise and resources, the services have no formal plan to help ensure that such efforts will be sustained. Without such plans for mutually leveraging resources, the efficiencies to be achieved from efforts such as a co- location will be limited. During the course of our review, service judge advocates consistently told us that a 2007 revision to Article 120 of the Uniform Code of Military Justice, the article encompassing most sexual assault crimes, has complicated the process for adjudicating sexual assault incidents. Concerns about the 2007 revision have also been raised by the 2009 Defense Task Force on Sexual Assault in the Military Services and the Joint Service Committee on Military Justice. Additionally, the Court of Appeals for the Armed Forces has recently issued opinions addressing issues with the application of Article 120. The Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005 directed the Secretary of Defense to review the Uniform Code of Military Justice and the Manual for Courts-Martial in order to determine what changes were required to improve the ability of the military justice system to address issues related to sexual assault, and to conform those authorities more closely to other federal laws and regulations that address such issues. The Secretary of Defense subsequently submitted a report, as required, on the review that included proposed revisions as well as the rationale for those revisions. Following that review, the National Defense Authorization Act for Fiscal Year 2006 amended Article 120, effective October 1, 2007. Among other things, the amendment brought certain types of sexual misconduct into the category of sexual assault, including indecent assault, indecent acts or liberties with a child, indecent exposure, and indecent acts with another, which were previously addressed by the Uniform Code of Military Justice’s General Article, Article 134. In a December 2009 report, the Defense Task Force on Sexual Assault in the Military Services recommended a review of the effectiveness of Article 120 after learning that practitioners had concerns with the revised article. According to the report, the task force noted that significant issues had evolved related to lesser included offenses as well as the Constitutionality of Article 120. The task force also reported that practitioners consistently advised its members that the new Article 120 is cumbersome and confusing, and stated that prosecutors had expressed concern that the new Article may be causing unwarranted acquittals. Although the task force did not elaborate on these issues, judge advocates consistently expressed similar concerns to us during the course of our work. For example, service judge advocates told us that there is a lack of clarity with regard to the meaning of certain terms in the amended article, which makes it more difficult to prosecute these cases. Moreover, recent opinions issued by the Court of Appeals for the Armed Forces addressed issues that were raised in our discussions with judge advocates, including constitutional issues that may arise related to the burden of proof in certain situations. Subsequently, the Joint Service Committee on Military Justice, which includes representatives from each of the military service’s judge advocate offices, completed a review in fiscal year 2010 in response to the task force’s 2009 recommendation and submitted to Congress proposed amendments to Article 120 along with the rationale for the proposed revisions. Among other changes, the revisions they proposed would have split Article 120 into three parts: rape and sexual assault of any person, rape and sexual assault of a child, and other sexual misconduct. According to the committee’s proposal, the suggested language would have simplified the statutory treatment of consent, simplified definitions overall, and reduced the number of offenses. Section 561 of a bill for the National Defense Authorization Act for Fiscal Year 2011 (S. 3454) contained language that would have amended Article 120 consistent with the committee’s proposal. However, that bill was not enacted. In April 2011, DOD submitted a new proposal for revisions to Article 120 as part of the legislative proposals provided to Congress in conjunction with the department’s fiscal year 2012 spending request. Given that sexual assault crimes undermine the core values of the military services and degrade mission readiness, the effective and efficient administration of military justice for addressing these offenses is essential to the maintenance of good order and discipline in the armed forces, and consequently contributes to the national security of the United States. The inherent complexities of administering justice in sexual assault cases requires the focused attention of DOD and service personnel in order that the investigations and adjudications are properly conducted. DOD and the services have taken a series of positive steps toward enhancing the investigations and adjudications of alleged sexual assault incidents. However, the DOD Inspector General’s Office has not instituted oversight of criminal investigations or established comprehensive guidance for conducting sexual assault investigations—both of which are requirements specified in DOD’s sexual assault prevention and response policy. If these issues are not addressed, the DOD Inspector General’s Office will not be poised to help ensure that a consistent and effective approach is being applied to sexual assault investigations across the services. Further, the current budgetary environment may jeopardize the sustainability of funding for DOD’s and the services’ initiatives to enhance investigations and adjudications of sexual assault, and until a plan is developed to leverage resources and generate operational synergies among the respective offices, DOD will not be in the best position to help support the continuation of these efforts. Finally, concerns raised by judge advocates and others related to Article 120 and their resolution will continue to be important in the ongoing debate about the need for any future revisions to the Uniform Code of Military Justice. We recommend that the Secretary of Defense take the following three actions: To provide oversight of the services’ criminal investigative organizations, direct the DOD Inspector General, in conjunction with the military services, to develop and implement a policy that specifies procedures for conducting sexual assault investigations and clear goals, objectives, and performance data for monitoring and evaluating the services’ sexual assault investigations and related training. To help ensure the most efficient use of resources for investigations and adjudications of alleged sexual assault incidents, direct the service secretaries to develop a plan for leveraging each other’s resources and expertise for investigating and adjudicating alleged sexual assault incidents, such as by consolidating training programs and sharing resources, including highly qualified experts who are used to advising criminal investigators and judge advocates. In written comments on a draft of this report, the Office of the Under Secretary of Defense (OSD) for Personnel and Readiness concurred with all three of our recommendations and provided technical comments, which we addressed where appropriate. The DOD Inspector General’s Office also provided written comments on a draft of this report in which the Inspector General concurred with the two recommendations that are relevant to its organization. OSD’s written comments are reprinted in appendix II, and the DOD Inspector General’s Office comments are reprinted in appendix III. In concurring with our first recommendation that the DOD Inspector General, in conjunction with the military services, develop and implement a policy that specifies procedures for conducting sexual assault investigations, the DOD Inspector General’s Office noted its commitment to ensuring that the necessary policies are in place. The DOD Inspector General’s Office further added that it is currently coordinating with the military services to develop overarching policy guidance on sexual assault investigations that will address the responsibilities of military commanders and the services’ criminal investigative organizations that are critical for successfully responding to sexual assault investigations. We commend the DOD Inspector General’s Office for taking immediate steps to address our recommendation, and encourage it to continue taking positive action toward its full implementation. In concurring with our second recommendation that the DOD Inspector General, in conjunction with the military services, develop and implement clear goals, objectives, and performance data for monitoring and evaluating the services’ sexual assault investigations and related training, the DOD Inspector General’s Office commented that it is currently preparing its fiscal year 2012 oversight plans, which will include initiatives that correspond to its newly developed policy on sexual assault investigations that is currently in coordination with the military services. Further, the DOD Inspector General’s Office noted that it is currently in discussions with the services to develop a peer review–type process that will provide oversight of the services’ criminal investigative organizations, including sexual assault investigations. In addition, the DOD Inspector General’s Office noted that during fiscal year 2012, it plans to initiate an evaluation of sexual assault training provided to criminal investigators within DOD. However, while the DOD Inspector General’s Office agreed with our recommendations and described actions it plans to take in response, in its comments it stated that our draft report mischaracterized its performance of its responsibilities. We disagree with this statement and believe our report accurately reflects oversight exercised by the DOD Inspector General’s Office. Our report is solely focused on the DOD Inspector General’s Office responsibilities for developing policy and conducting oversight of sexual assault investigations. Specifically, we reviewed DOD Inspector General’s Office policies related to criminal investigations, including the five it notes in its comments, and our report credits the DOD Inspector General with developing some guidance on the general conduct of criminal investigations that has relevance to investigations of sexual assault. Further, we recognize that the DOD Inspector General’s Office initiated other efforts related to sexual assault during our review, including hosting forums, that it notes in its comments, facilitated the development of standardized definitions for sexual assault investigation reporting requirements. However, as we note in our report and it concurs with in its response, the DOD Inspector General’s Office has not developed a policy or a process to monitor and evaluate sexual assault investigations and related training, as is specified in DOD guidance. Further, we disagree with the DOD Inspector General’s Office comment that investigative policies and procedures are the same for all criminal investigations, including those conducted on incidents of sexual assault. DOD has established policies specific to sexual assault incidents, such as restricted reporting, which necessitates that first responders, including criminal investigators, distinguish how they respond to sexual assault incidents. Additionally, we reiterate that Congress, in the National Defense Authorization Act for Fiscal Year 2005, directed the development of a comprehensive policy to address sexual assault–specific matters in a variety of areas, to include investigations of sexual assault complaints. Finally, the DOD Inspector General’s Office is correct in noting that it completed five evaluations from 2003 through 2011 related to sexual assault in the military; however, none of these evaluations were self- initiated but rather were conducted at the direction of others, such as Congress. For all of these reasons, we maintain that our report accurately reflects the extent to which the DOD Inspector General’s Office has performed its designated policy development and oversight responsibilities for sexual assault investigations. In concurring with our third recommendation that the service secretaries develop a plan for leveraging each other’s resources and expertise for investigating and adjudicating alleged sexual assault incidents, DOD noted that representatives from each service’s criminal investigative organization currently meet on a regular basis to share best practices, collaborate, and leverage each other’s expertise. The department further noted that as part of the co-location of the services’ criminal investigative organizations at Quantico, Virginia, the Army’s Criminal Investigation Command has volunteered to lead this working group in the development of a plan for leveraging each service’s resources and expertise for investigating sexual assaults. We commend the department for taking immediate steps in response to our recommendation, and encourage it to continue taking positive actions toward helping to ensure the most efficient use of resources for investigations and adjudications of alleged sexual assault incidents. We are sending copies of this report to interested members of Congress; the Secretary of Defense; the Under Secretary of Defense for Personnel and Readiness; the Secretaries of the Army, the Navy, and the Air Force; the Commandant of the Marine Corps; and the DOD Inspector General. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3604 or farrellb@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To determine the extent to which the Department of Defense (DOD) is conducting oversight of the military services’ investigative organizations, we reviewed and analyzed relevant Office of the Secretary of Defense (OSD) and DOD Inspector General policies, guidance, and procedures to identify department-level policy development and oversight responsibilities for the services’ military criminal investigative organizations. We also reviewed and analyzed each service’s investigative policies and procedures to identify the extent to which similarities and differences exist in their respective processes for conducting sexual assault investigations. To supplement our analyses, we interviewed senior officials in OSD, the DOD Inspector General’s Office, and the military services to gain their perspectives on responsibilities for and oversight of the military criminal investigative organizations, and the extent to which the services’ investigative policies and procedures compare. To determine the extent to which the military services provide resources for investigations and adjudications of alleged sexual assault incidents, we reviewed OSD, DOD Inspector General, and the military service investigative and legal policies to identify responsibilities and processes for providing personnel and fiscal resources to initiatives that relate to investigations and adjudications of alleged sexual assault incidents. We also obtained information on personnel and fiscal resources from OSD and the military services to determine the extent and consistency of funding that has been identified and provided to enhance investigations and adjudications of alleged sexual assault incidents. For the purposes of our report, we found that data on the military criminal investigative organizations’ status of efforts to augment sexual assault investigative expertise were sufficiently reliable to report. To supplement our analyses, we interviewed senior-level officials in OSD’s Sexual Assault Prevention and Response Office about previous and current efforts to provide the services with funding to support initiatives to enhance investigations and adjudications of alleged sexual assault incidents. We also interviewed senior officials in the DOD Inspector General’s Office and in the military services to gain their perspectives on the extent to which such initiatives are provided the resources necessary to investigate and adjudicate alleged sexual assault incidents and the impact of fiscal challenges on current and planned initiatives. To address the additional issue regarding a 2007 revision to Article 120 of the Uniform Code of Military Justice, we reviewed the prior version of Article 120 as well as the current version adopted in 2007 in order to better understand how the two versions differ. We also reviewed proposed legislative amendments to Article 120 and the accompanying analysis in the fiscal year 2010 report of the Joint Service Committee on Military Justice to further inform our understanding of the issues arising from the 2007 revision that were intended to be addressed by the proposed legislative amendments from fiscal year 2010. To supplement our analyses we interviewed senior officials from OSD and spoke with a total of 48 judge advocates and DOD civilian lawyers, between the services’ headquarters and at selected installations, to gain their perspectives on the impact of the revisions made in 2007 to the Uniform Code of Military Justice as well as their recommendations for any suggested modifications. The installations that we visited during our review were selected based on multiple criteria, including the number of sexual assaults reported at each installation, the size of its military population, its function (i.e., training base), and its geographical location. Using these criteria, we i subsequently visited the following five installations: Fort Bragg, North Carolina; Fort Jackson, South Carolina; Naval Station Norfolk, Virginia; Marine Corps Base Camp Lejeune, North Carolina; and Sheppard Air Force Base, Texas. Naval Criminal Investigative Service, Washington Navy Yard, Washington, D.C. United States Navy Office of the Judge Advocate, Washington N Yard, Washington, D.C. United States Marine Corps Office of the Judge Advocate to the Commandant, Arlington, Virginia United States Marine Corps Sexual Assault Prevention and Response Office, Quantico, Virginia Camp Lejeune, North Carolina We conducted this performance audit from April 2010 through June 2011 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and c onclusions based on our audit objectives. In addition to the contact named above, key contributors to this report include Marilyn K. Wasleski, Assistant Director; Melissa Blanco; K. Nicole Harms; Kim Mayo; Jeanett Reid; Norris Smith; Terry Richardson; Cheryl Weissman; and Elizabeth Wood. Military Personnel: DOD’s and the Coast Guard’s Sexual Assault Prevention and Response Programs Need to Be Further Strengthened. GAO-10-405T. Washington, D.C.: February 24, 2010. Military Personnel: Additional Actions Are Needed to Strengthen DOD’s and the Coast Guard’s Sexual Assault Prevention and Response Programs. GAO-10-215. Washington, D.C.: February 3, 2010. Military Personnel: Actions Needed to Strengthen Implementation and Oversight of DOD’s and the Coast Guard’s Sexual Assault Prevention and Response Programs. GAO-08-1146T. Washington, D.C.: September 10, 2008. Military Personnel: DOD’s and the Coast Guard’s Sexual Assault Prevention and Response Programs Face Implementation and Oversight Challenges. GAO-08-924. Washington, D.C.: August 29, 2008. Military Personnel: Preliminary Observations on DOD’s and the Coast Guard’s Sexual Assault Prevention and Response Programs. GAO-08-1013T. Washington, D.C.: July 31, 2008. Military Personnel: DOD and the Coast Guard Academies Have Taken Steps to Address Incidents of Sexual Harassment and Assault, but Greater Federal Oversight Is Needed. GAO-08-296. Washington, D.C.: January 17, 2008. | The crime of sexual assault has serious consequences for both the aggrieved and the accused. The severity of these consequences underscores the importance of impartially administering justice in order to promote accountability and confidence that such allegations are taken seriously. GAO was asked to address the extent to which (1) the Department of Defense (DOD) conducts oversight of the military services' investigative organizations and (2) the services provide resources for investigations and adjudications of alleged sexual assault incidents. GAO also identified an issue relating to the military's criminal code during this review. GAO analyzed relevant DOD and service policies and procedures; reviewed applicable laws, including provisions of the Uniform Code of Military Justice; and interviewed senior DOD and service officials, including a total of 48 judge advocates and DOD civilian lawyers, at the headquarters level and at five selected military installations. Pursuant to the National Defense Authorization Act for Fiscal Year 2005, the Office of the Secretary of Defense (OSD) developed a policy on sexual assault prevention and response. In June 2006, OSD published DOD Instruction 6495.02, which specifies that the DOD Inspector General's Office shall develop policy and oversee sexual assault investigations and related training for the DOD criminal investigative organizations. However, the Inspector General's Office has not performed these responsibilities, primarily because it believes it has other, higher priorities. For example, GAO found no evidence of Inspector General oversight at the service level for any of the 2,594 sexual assault investigations that DOD reported the services completed in fiscal year 2010. Without a policy and plan for conducting oversight, the Inspector General's Office will remain limited in its ability to help ensure consistency and accountability, and that training is being conducted in the most effective manner. Consistent with the Secretary of Defense's priorities for sexual assault prevention and response, each service provides various resources to support investigations and adjudications of alleged sexual assault incidents. Specifically, each service has provided personnel who advise and assist on investigations and adjudications of sexual assault incidents. Each service's investigative and legal organizations also received funding, above their operating budgets, for efforts to enhance investigations and adjudications of sexual assault. For example, in fiscal year 2009, Army investigators received $4.4 million to redesign training on sexual assault investigations. However, the services' investigative and legal organizations are not fully capitalizing on opportunities to leverage each other's expertise and limited resources. For example, the Secretary of Defense, as part of the Base Realignment and Closure process, recommended that the services' investigative organizations co-locate to achieve operational synergies. However, the services currently have no plan for using opportunities such as the co-location--a move that has cost over $426 million and reportedly saved about $53 million for infrastructure support from fiscal years 2006 through 2011--to better leverage expertise and limited resources. Judge advocates also collaborate on some initiatives, but do not have a plan for leveraging resources either. Without a plan, the services cannot help ensure that resources are sustained and efficiencies are maximized. GAO met with judge advocates who consistently expressed concerns, similar to those noted in a 2009 Defense Task Force report, that a 2007 amendment to Article 120 of the Uniform Code of Military Justice complicates sexual assault prosecutions and may be causing unwarranted acquittals. Specifically, judge advocates stated that there is a lack of clarity with regard to the meaning of certain terms in the amended article, which makes it more difficult to prosecute these cases. Further, recent opinions issued by the Court of Appeals for the Armed Forces addressed constitutional issues that may arise related to the burden of proof in certain situations. For fiscal year 2012, DOD proposed revisions to Congress intended to remedy some of these issues. GAO is recommending that DOD develop policy and provide oversight for sexual assault investigations and related training, and for the services to develop a plan to better leverage expertise and limited resources. DOD and the Inspector General concurred with the recommendations, although the Inspector General disagreed with the characterization of its performance. GAO believes its findings are accurate, as addressed more fully in the report. |
Servicemembers deployed to Afghanistan and Iraq are surviving injuries that would have been fatal in past conflicts due, in part, to advances in battlefield medicine and protective equipment. However, the severity of their injuries can result in a lengthy transition from injured servicemember to veteran. Initially, most seriously injured servicemembers are brought to Landstuhl Regional Medical Center in Germany for treatment. From there, they are usually transported to major MTFs in the United States. According to DOD officials, once stabilized and discharged from MTFs, servicemembers usually relocate closer to their homes or military bases and are treated as outpatients. At this point, the military generally begins to assess whether the servicemember will be able to remain in the military, a process that could take months to complete. Faced with the need to provide benefits and services to a new generation of veterans with disabilities, VA formed an internal task force—the Seamless Transition Task Force—in August 2003 to develop and implement policies to improve the transition of injured servicemembers back to civilian life. Although the task force’s initial priority was to ensure the continuity of medical care for injured servicemembers as they transitioned from military to VA health care, it also coordinated efforts to ensure access to all other VA benefits, including vocational rehabilitation. DOD has also supported transition assistance in various ways. For example, the VA/DOD Joint Executive Committee was established in February 2002 to promote collaboration between the two departments, including resolving obstacles to information sharing. The committee is chaired by the Deputy Secretary of Veterans Affairs and the Under Secretary of Defense for Personnel and Readiness. In addition, the Army— in cooperation with VA—established the Disabled Soldier Support System in April 2004 as an advocacy group and information clearinghouse to clarify the services available to disabled soldiers as they transition to civilian life. In addition, DOD participated at times on VA’s Seamless Transition Task Force. Separation from the military and return to civilian life often entail the exchange of individually identifiable health data between DOD and VA. The exchange of these data must comply with the HIPAA Privacy Rule, which became effective April 14, 2001. The Privacy Rule permits VA and DOD to share servicemembers’ health data under certain circumstances. VA has given priority consideration and assistance to seriously injured servicemembers returning from Afghanistan and Iraq. In a September 2003 letter, VA asked its regional offices to coordinate with staff at MTFs in their areas to ascertain the identities, medical conditions, and military status of the seriously injured OEF/OIF servicemembers. VA specifically instructed regional offices to focus on servicemembers whose disabilities were definitely or likely to result in military separation. Minimally, this included servicemembers with injuries that had been classified as “very serious,” “serious,” or in a “special category.” In this letter, VA instructed its regional offices to assign a case manager to each seriously injured servicemember who applied for disability compensation. In addition, VA noted the particular importance of early intervention for those who were seriously injured and emphasized that seriously injured servicemembers applying for vocational rehabilitation should receive the fastest possible service. Moreover, VA reminded vocational rehabilitation staff that they can initiate evaluation and counseling and, in some cases, authorize training before a servicemember was discharged. Since most seriously injured servicemembers are initially treated at major MTFs, VA has detailed staff to these facilities to identify and educate these servicemembers about VA services. These staff include VA social workers and disability compensation benefits counselors. At Walter Reed Army Medical Center, where the largest number of seriously injured servicemembers has been treated, VA’s Washington, D.C. regional office has since 2001 also provided a vocational rehabilitation counselor to work with hospitalized patients, specifically to offer and provide vocational counseling and evaluation. The counselor reported attempting to contact all patients within 48 hours of their arrival and visited them routinely thereafter to establish rapport. Her primary mission is to work with servicemembers who will need to prepare for civilian employment, although she told us that her early intervention efforts could also help servicemembers who are able to remain in the military. Staff at another regional office noted that they also advocate early intervention. These staff said that they try to contact servicemembers as soon as possible to establish rapport and provide vocational rehabilitation program information even before the servicemembers are physically ready to begin vocational rehabilitation. We previously reported on the importance of early intervention to maximize the work potential of individuals with disabilities. We reported, for example, that rehabilitation offered as close as possible to the onset of disabling impairments has the greatest likelihood of success. Despite efforts by VA’s regional offices to identify and obtain medical information on seriously injured OEF/OIF servicemembers, lack of systematic data from DOD poses a challenge. Although VA requested in the spring of 2004 that DOD provide on a systematic basis personal identifying data, medical data, and DOD’s injury classification for seriously injured servicemembers, DOD and VA have not developed a data sharing agreement. In the absence of a data sharing agreement with DOD, VA cannot reliably identify all seriously injured servicemembers or know with certainty when they are medically stabilized, when they may be undergoing evaluation for a medical discharge, or when they are discharged from the military. As a result, VA cannot provide reasonable assurance that some seriously injured servicemembers who may benefit from vocational rehabilitation services have not been overlooked. In our review of 12 VA regional offices, we found that the nature of the local relationship between VA staff and MTF staff was a key factor in the completeness and reliability of the information that the MTF provided on seriously injured servicemembers. For example, at one location, the MTF staff provided VA regional office staff with the names of new patients but no indication of the severity of their conditions or the combat theater from which they were returning. Another regional office reported receiving lists of servicemembers for whom the Army had initiated a medical separation in addition to lists of patients with information on the severity of their injuries. Some regional offices were able to capitalize on long-standing informal relationships. For example, the VA coordinator responsible for identifying and monitoring the seriously injured servicemembers at one regional office had served as an Army nurse at the local MTF and was provided all pertinent information. VA staff at the 12 regional offices generally expressed confidence that the data sources they developed enabled them to identify most seriously injured servicemembers. However, we noted that informal data sharing relationships could break down with changes in personnel at either the MTF or the VA regional office. Several VA headquarters’ officials and regional office staff we interviewed said that systematic data from DOD would provide them with a way to reliably identify and follow up with seriously injured servicemembers. Additionally, VA officials said these data would help them plan for projected increases in services for newly returning OEF/OIF servicemembers. After more than 2 years of discussion, DOD and VA have not developed a data sharing agreement. Although DOD and VA officials agree that the HIPAA Privacy Rule permits the exchange of individually identifiable health data if the individual signs a proper authorization, the departments have not pursued this as an alternative to a data sharing agreement. DOD and VA officials said the departments want to pursue options under other provisions of the Privacy Rule that may permit them to exchange data without individual authorizations. However, DOD and VA differ in their understanding of HIPAA Privacy Rule provisions that govern the sharing of individually identifiable health data for servicemembers currently receiving treatment in MTFs without an authorization, and the extent to which the Privacy Rule would permit that exchange. DOD’s and VA’s inability to resolve these differences has impeded coming to an agreement on exchanging servicemembers’ individually identifiable health data. Two examples help illustrate the different views of DOD and VA regarding the HIPAA Privacy Rule. First, the Privacy Rule permits covered entities that are also government agencies providing public benefits to disclose individually identifiable health data to each other when the programs serve the same or similar populations, and the disclosure is necessary to coordinate the covered functions of such programs or to improve administration and management related to the covered functions of the programs. VA officials have said they believe that this provision allows DOD to share servicemembers’ health data with VA because the departments serve the same or similar populations—active duty servicemembers who transition to veteran status. VA officials also said they believe that DOD and VA provide public benefits. In contrast, a DOD official who is responsible for implementation of the Privacy Rule does not agree that DOD and VA serve the same or similar populations or that DOD provides public benefits. This official said he believes that serving the same or similar populations means that servicemembers have a dual eligibility for both DOD and VA services. Although the official said that while some former servicemembers are dually eligible for DOD and VA services, not all qualify for both services simultaneously. This official also said that the services that DOD provides are not public benefits because they are unlike the examples of public benefits programs provided in the preamble to the Privacy Rule. The Privacy Rule does not define public benefits. In the second example, the Privacy Rule explicitly permits the disclosure of individually identifiable health data by DOD to VA upon the separation or discharge of a servicemember in order to determine eligibility for VA benefits. DOD views “upon the separation or discharge” as referring to the separation process that varies by servicemember, but which begins with the decision by DOD that the servicemember will separate. According to VA officials, the HIPAA Privacy Rule would allow DOD to share data sooner than the decision by DOD that the servicemember will separate. However, DOD is reluctant to provide individually identifiable health data to VA until DOD is certain that a servicemember will separate from the military. DOD is concerned that VA’s outreach to servicemembers who are still on active duty could work at cross-purposes to the military’s retention goals. According to DOD officials, it would be premature for VA to begin working with servicemembers who may eventually return to active duty. VA contends that DOD could define the specific point of separation or discharge earlier in the process. In commenting on our January 2005 report, VA said that a memorandum of understanding was then being negotiated that would allow VA to obtain from DOD the servicemember’s medical information prior to discharge from military service. VA added that its Office of General Counsel was confident that there are exceptions in the Privacy Rule that would permit military service medical information to be disclosed for VA benefits purposes and that it had pressed the case with DOD’s General Counsel. As of May 17, 2005, the memorandum of understanding between DOD and VA has not been finalized. Despite being unable to agree on an exchange of individually identifiable health data, DOD and VA are currently reviewing a draft memorandum of understanding. DOD and VA officials told us they believe that the memorandum of understanding will move the two departments closer to a data sharing agreement. However, we found that the draft memorandum of understanding restates many of the legal authorities contained in the Privacy Rule for the use and disclosure of individually identifiable health data. For example, the draft memorandum of understanding does not specify that individually identifiable health data of OEF/OIF servicemembers shall be disclosed and restates that data will be shared upon separation or discharge without further defining the specific point during the separation or discharge process when data can be shared. As a result, even if the memorandum of understanding is finalized, DOD and VA will still not have a data sharing agreement that specifies what types of individually identifiable health data can be exchanged and when the data can be shared. Mr. Chairman, this completes my prepared remarks. I will be pleased to answer any questions you or other Members of the Subcommittee may have at this time. For further information, please contact Cynthia A. Bascetta at (202) 512- 7101. Also contributing to this statement were Mary Ann Curran, Marcia Mann, Kevin Milne, and Janet Overton. Vocational Rehabilitation: VA Has Opportunities to Improve Services, but Faces Significant Challenges. GAO-05-572T. Washington, D.C.: April 20, 2005. VA Disability Benefits and Health Care: Providing Certain Services to the Seriously Injured Poses Challenges. GAO-05-444T. Washington, D.C.: March 17, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. Health Information: First-Year Experiences under the Federal Privacy Rule. GAO-04-965. Washington, D.C.: September 3, 2004. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Since the onset of Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF), the Department of Defense (DOD) reported that more than 12,000 servicemembers have been injured in combat. While many return to active duty, others with more serious injuries are likely to be discharged from the military. To ensure the continuity of medical care and access to all other Department of Veterans Affairs' (VA) benefits, such as vocational rehabilitation, VA formed its Seamless Transition Task Force. In January 2005, GAO reported that VA had given high priority to OEF/OIF servicemembers, but faced challenges in identifying, locating, and following up with seriously injured servicemembers. GAO recommended that VA and DOD reach an agreement for VA to obtain systematic data from DOD, and the departments concurred. However, DOD raised privacy concerns. GAO was asked to review VA's efforts to expedite vocational rehabilitation services to seriously injured servicemembers and to determine the status of an agreement between DOD and VA to share health data. GAO relied on its prior work; interviewed VA and DOD officials; and reviewed the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the HIPAA Privacy Rule, which govern the sharing of individually identifiable health data. While VA has taken steps to expedite services to seriously injured servicemembers, VA does not have systematic data from DOD on seriously injured servicemembers who may need VA vocational rehabilitation and other benefits. As a result, VA has had to rely on its regional offices to develop informal data sharing arrangements with local military treatment facility (MTF) staff to identify servicemembers who may need vocational rehabilitation services. However, VA staff have no official data source from DOD from which to confirm the completeness and reliability of the data they obtain. Furthermore, they cannot provide reasonable assurance that some seriously injured servicemembers who may have benefited from vocational rehabilitation services have not been overlooked. Although several VA headquarters officials and regional office staff GAO interviewed said that systematic data from DOD would provide them with a way to reliably identify and follow up with seriously injured servicemembers, DOD and VA have not developed a data sharing agreement. Additionally, VA officials said these data would help VA plan for projected increases in the need for services for newly returning OEF/OIF servicemembers. VA has requested that DOD provide systematic data on seriously injured servicemembers who may need vocational rehabilitation. DOD and VA have been working on a data sharing agreement for over 2 years, but have not reached an agreement. DOD and VA differ in their understanding of HIPAA Privacy Rule provisions that govern the sharing of individually identifiable health data for servicemembers currently receiving treatment at MTFs, and the extent to which the Privacy Rule would permit that exchange. DOD's and VA's inability to resolve these differences has impeded coming to an agreement on exchanging seriously injured servicemembers' individually identifiable health data. Despite being unable to agree on an exchange of individually identifiable health data, DOD and VA are reviewing a draft memorandum of understanding, which the departments believe will move them closer to a data sharing agreement. However, GAO found that the draft memorandum restates many of the legal authorities contained in the Privacy Rule for the use and disclosure of individually identifiable health data. As a result, even if the memorandum of understanding is finalized, DOD and VA will still have to agree on what types of individually identifiable health data can be exchanged and when the data can be shared. DOD and VA generally agreed with GAO's findings. |
To increase the involvement of religious organizations in the delivery of social services, the Congress included charitable choice provisions in the legislation for several federal programs. These provisions were designed to remove legal or perceived barriers that religious organizations might face in contracting with the federal government. First enacted in 1996, charitable choice provisions apply to administrators, service providers, and recipients of TANF and WTW funds, as established through PRWORA. Subsequently, the Congress included charitable choice provisions in the 1998 reauthorization of the CSBG program and the amendments to the Public Health Services Act in 2000 affecting the SAPT block grant program. Funding levels for programs with charitable choice provisions vary considerably, with TANF having the highest level of funding (see table 1). These programs allocate funds in a variety of ways. TANF, CSBG, and SAPT are block grants, which are distributed in lump sums to states. WTW has two funding streams, one of which is comprised of state formula grants that are mostly passed on to localities and the other representing a smaller portion of funds called national competitive grants, which the Department of Labor awarded directly to local applicants. Most federal funding for these programs is administered by state or local government entities, which have the ability to contract with social service providers, including religious organizations. In addition to establishing that FBOs can compete for public funds while retaining their religious nature, charitable choice provisions are intended to safeguard the interests of the various parties involved in financial agreements to provide services (see table 2). While charitable choice provisions vary somewhat by program, they all share common themes of protecting religious autonomy among service providers, safeguarding the interests of beneficiaries of federally funded services, and ensuring that all contracting agencies, including religious organizations, are held financially accountable. Overall, FBOs contracted for a small proportion of the government funding available to nongovernmental contractors under the four programs we examined. Contracts with FBOs accounted for 8 percent (or about $80 million) of the $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities in 2001, and 2 percent (or about $16 million) of the $712 million Welfare-to-Work competitive grant funds in fiscal years 1998 and 1999. National data are not available on the proportion of contracted funds FBOs received for CSBG, SAPT, and Welfare-to-Work formula grants. However, state data indicate that FBOs received a small proportion of CSBG and SAPT funds in the five states we visited. All FBOs that we visited had tax-exempt status and most were incorporated separately from religious institutions. In addition, a majority had established contracts with the government before the passage of charitable choice provisions in legislation; most were affiliated with Christian denominations; and most contracted for TANF funds. Under the contracts we examined, FBOs provided an array of services in line with the key uses of each program’s funds and sometimes provided additional services such as mentoring or fatherhood training. Contracting with FBOs constituted a relatively small proportion of all contracting with nongovernmental entities using federal and state TANF funds in 2001, according to our national survey. TANF contracting occurs only at the state level in 24 states, only at the local level in 5 states, at both levels in 20 other states, and in the District of Columbia. TANF contracting does not occur in South Dakota. The majority of the approximately $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities nationwide went to secular nonprofit organizations, as shown in figure 1. In contrast, contracts with FBOs accounted for 8 percent of the contracted funds. While FBOs received a small proportion of federal and state TANF funds contracted out in 2001 at the state level, this proportion varied considerably across states, as shown in table 3. New Jersey spent over 32 percent of these funds on contracts with FBOs. Nine states and the District of Columbia spent more than 15 percent of these federal and state TANF funds on contracts with FBOs. In contrast, 23 states awarded to FBOs less than 5 percent of the federal and state TANF funds they contracted out to nongovernmental organizations. While table 3 depicts contracting by state governments, it does not include information on contracting by local entities. In states such as California, New York, and Texas, TANF contracting occurs predominately at the local level. Our national survey of TANF contracting identified more than $500 million in local government contracts with nongovernmental entities. About 8 percent of these funds were with FBOs. In addition, national data show that a small proportion of WTW competitive grant funds went to FBOs. According to Labor, 6 of 191 contracts for these funds went to FBOs in fiscal years 1998 and 1999; these contracts totaled $16.2 million, or approximately 2 percent of WTW competitive grant funds in those years. National data are not available to indicate the magnitude of contracting with FBOs in other charitable choice programs we examined. Labor did not have information about the proportion of WTW formula grants that went to FBOs. States administer these grant funds through local entities. In addition, HHS has not compiled national data on the level of contracting with FBOs using CSBG and SAPT funds. Although national information is not available, in the five states we visited we found that FBOs received 9 percent or less of SAPT funds contracted out by states. In addition, FBOs represented between 2 and 20 percent of the organizations licensed or certified by these five states to provide substance abuse treatment services, as shown in table 4. In addition, in the five states we visited, FBOs received a small proportion of the overall CSBG funds passed through by states. States allocate these funds to “eligible entities,” primarily community action agencies (CAAs), which include mostly private, nonprofit organizations but also some public agencies. None of the eligible entities in the five states we visited were FBOs. However, some of them subcontracted with other providers, including FBOs, for services. In Texas and Washington, FBOs received more than half of these subcontracted funds, as shown in table 5. All of the FBOs we visited had tax-exempt status; most were incorporated separately from religious institutions; and a majority of them had a fairly long history of contracting with the government. While 31 of the 35 FBO contractors we visited had been established to be independent of religious institutions, all of them had tax-exempt status under section 501(c)(3) of the Internal Revenue Code. Several of these FBOs told us that they needed this status to compete for nongovernmental sources of funding, such as funding from private foundations. Some FBOs noted that this status established them as a legal entity separate from a church so that the church would be protected from liability for the services the FBO offered. Moreover, some FBO officials told us that 501(c)(3) status gave their program added credibility and an established presence in the community. Of the 35 FBO contractors we visited, 21 had contracted with the government before the passage of charitable choice legislation in the relevant programs. One FBO had provided services through government contracts since 1913. The FBOs we selected for interviews in the five states we visited varied in size and structure but shared some commonalities. While some FBOs were very small, operating on a budget of less than $200,000, others had large annual budgets, as high as $60 million. Some of the FBOs we visited operated independently; some were multidenominational coalitions of churches; and others were affiliated with a national religious organization, such as Catholic Charities, the Association of Jewish Family & Children’s Services, or the Salvation Army. Twenty-nine of the 35 FBOs were affiliated with the Christian faith and included various Christian denominations, for example, Baptist, Methodist, and Lutheran. Finally, about two-thirds of these FBOs contracted for TANF-funded services. FBOs we visited contracted for services that matched the key uses of each program’s funds and sometimes included additional features. While more FBOs provided services closer to the key uses of TANF program funds, such as job preparation, several of the FBOs contracting for TANF services included fatherhood programs or forms of mentoring in their programs. FBOs that contracted for WTW funds mostly provided job training and placement; one also helped clients find daycare services. FBOs contracting for SAPT funds provided prevention and treatment of substance abuse. The two FBOs that contracted for CSBG funds offered services that included parent education, case management for families with a variety of needs, and medical services. While charitable choice has created opportunities for FBOs, several factors continue to constrain some FBOs from contracting with the government. These factors include FBOs’ limited awareness of funding opportunities, limited administrative and financial capacity, inexperience with government contracting, and beliefs about the separation of church and state. However, most of these limitations are not unique to FBOs but are common to small, inexperienced organizations seeking to enter into contracts with government. Although most officials in the states we visited reported no legal barriers to prevent religious organizations from partnering with government, some officials noted that their history of a strong separation of church and state might lead all parties to be cautious about collaboration. Government agencies in the states we visited differed in their approaches to identification and removal of constraints that can limit financial contracting between FBOs and government. Most states we visited have broadened access to information and provided assistance for FBOs, while others have been less active in identifying and addressing constraints. Federal agencies have also taken steps to address constraints by establishing funding for small faith-based and community organizations to develop or expand model social service programs. Small FBOs are generally unaware of funding opportunities unless they have past experience with government, according to some FBO and government officials we interviewed. Notices about funding opportunities are sent to current provider mailing lists, to newspapers, and sometimes to agency Web sites. Because state and local governments are not required to promote a broader awareness of funding opportunities for new providers under current charitable choice provisions, government agencies in less active states have not taken steps to disseminate information about funding opportunities to FBOs. As a result, potential service providers that are not on current notification lists, including FBOs, may remain unaware of upcoming funding opportunities while experienced providers have advance notice. Moreover, small, inexperienced FBOs are disadvantaged by their limited administrative capacity, according to many government and FBO officials we interviewed. Small FBO providers often lack the administrative resources necessary to deal with the complex paperwork requirements of government contracting. Local program officials said that some new FBO providers may have never submitted a budget, or may overestimate their capacity to provide services, or may have difficulty with reporting requirements. Some small FBOs we interviewed rely on one person—who may have other duties—or a small number of staff and volunteers, to perform administrative tasks. Government officials told us that small faith- based contractors inexperienced in government contracting often required administrative and technical assistance. Similarly, FBO officials have expressed concerns about the financial constraints of government contracting. Some FBO officials we interviewed reported experiencing cash flow problems resulting from start-up costs and payment delays. In some cases, their churches helped with start-up funds, or other expenses, including overhead and indirect assistance. Furthermore, in a March 2001 survey conducted by the Georgia Faith- Based Liaison, religious leaders reported that while they were interested in government contracting, they had concerns regarding their limited financial capacity to manage publicly funded programs. These same leaders also expressed concerns about their financial capacity if they were to offer child-care or social services for welfare clients because of the risks associated with payment delays. Most state and local officials in the states we visited reported that no legal barriers exist to prevent FBOs from contracting with the government in programs with charitable choice provisions. However, some officials noted that perceptions about the separation of church and state might cause both FBO and government officials to be cautious about entering into contracts. One state lawmaker in Georgia identified the state’s constitution as one source of this perception, noting that it contains language forbidding the funding of religious organizations with state funds. Because of confusion over whether the state constitution also applied to federal funds, Georgia adopted a law that specified that charitable choice allowed religious organizations to receive federal funding. Most government officials we interviewed told us that state licensure or certification requirements for substance abuse treatment providers do not restrict religious organizations from participating in publicly funded treatment programs. However, in all of the states we visited, substance abuse treatment providers are required to be licensed or certified in order to be eligible for publicly funded contracts. Government officials noted that because the health and safety requirements attached to licensing can be costly, they might pose a barrier to small FBOs that want to be licensed to offer this service. To address this, lawmakers in the state of Washington proposed easing licensing requirements for FBO substance abuse treatment providers. However, this proposal was not approved because of concerns that this would lower standards for FBO providers. Government and FBO officials we interviewed in several states reported that some FBOs prefer not to partner with government for various reasons. For example, some faith-based providers do not want to separate their religion from their delivery of services. In a recent survey conducted by Oklahoma’s Office of Faith-Based and Community Initiative to identify barriers to collaboration, religious leaders reported that they were concerned about potential erosion of their religious mission, government intrusion into affairs of the congregation, and excessive bureaucracy. While states we visited differed in their approaches, some states have taken more active strategies toward addressing factors that constrain FBOs from government contracting. Some states, such as Texas and Virginia, established task forces to advise the governor or legislature about actions for improving government collaboration with FBOs. To promote awareness and facilitate collaborations with FBOs, 20 states have appointed faith-based liaisons since the enactment of charitable choice provisions in the current law. Four of the five states we visited directed outreach activities to engage religious leaders and government officials in discussions of the perceived barriers to collaboration and to promote awareness of funding opportunities. Some states took steps to strengthen the administrative capacity of FBOs by providing informational opportunities and developing educational material for FBOs unfamiliar with government contracting. Indiana, Virginia, and Texas conducted informational sessions and workshops for FBOs. In addition, Virginia and Indiana created educational handbooks dedicated to new faith-based social service providers with information on topics such as applying for government funding, writing grants, and forming a nonprofit, tax-exempt 501(c)(3) organization. Some state and local officials we interviewed told us that they offer assistance and administrative information to any small, new provider during the pre- contracting phase. Other states, which we did not visit, reported that they created separate funding for their faith-based initiatives. New Jersey set up its own Office of Faith-Based and Community Initiative and funded it using only state funds, according to the New Jersey faith-based liaison. This office began awarding grants for services such as day care, youth mentoring, and substance abuse treatment to FBOs in 1998 and plans to award $2.5 million in grants this year to faith-based providers. North Carolina developed a “Communities of Faith Initiatives,” which set aside $2.45 million in TANF funds for its Faith-Demonstration awards in 1999 and 2000 to contract with various FBOs for job retention and follow- up demonstration pilots. Federal agencies have also acted to identify and address constraints to government collaborations with FBOs. President Bush issued two executive orders in January 2001, establishing the White House Office of Faith-Based and Community Initiatives and Centers for Faith-Based and Community Initiatives in five federal agencies. These agencies have reported on barriers to collaboration with FBOs and outlined recommendations to address some of the barriers. Moreover, a Compassion Capital Fund of $30 million was approved in the fiscal year 2002 budget as part of the Labor, HHS, and Education appropriations.The funds are to be used for grants to charitable organizations to emulate model social service programs and encourage research on the best practices of social services organizations. In addition, Labor established another funding source to enhance collaborations with faith-based and community providers. Labor’s Employment and Training Administration announced on April 17, 2002, the availability of grant funding geared toward helping faith-based and community-based organizations participate in the workforce development system. In the five states we visited, understanding and implementation of charitable choice safeguards differed, and the incidence of problems involving safeguards is unknown. A few of the safeguard provisions specified in federal law are subject to interpretation, and federal agencies have issued limited guidance on how to interpret them. As a result, some government and FBO officials expressed confusion concerning two matters: (1) allowable activities under the prohibition on the use of federal funds for religious instruction or proselytizing and (2) FBOs’ ability to hire on the basis of faith. State and local government entities also differed in how they interpret the charitable choice safeguards and their approaches to communicating them to FBOs. Officials in the states we visited reported receiving few complaints from FBO clients. These officials relied on complaints and grievance procedures to identify discrimination or proselytizing, and in some cases FBOs and clients may not be aware of the charitable choice safeguards. Therefore, violations of the safeguard requirements may go unreported or undetected. In the 6 years since charitable choice provisions were passed as part of PRWORA, federal agencies have issued limited guidance to state agencies concerning charitable choice safeguards—such as the prohibition on the use of federal funds for religious instruction or proselytizing—and how they should be implemented. Even though HHS has recently created a charitable choice Web site outlining most of the safeguards and has sponsored workshops featuring charitable choice issues, it has not issued guidance to states on the meaning of the provisions designed to safeguard parties involved in government contracting. According to an HHS official, although they have drafted guidance for charitable choice provisions as they apply to substance abuse prevention and treatment programs, this document has not been released. HHS officials told us that the agency did not write regulatory language concerning charitable choice and TANF because PRWORA specifically limits HHS from regulating the conduct of states under TANF, except as expressly provided in the law. While PRWORA includes charitable choice provisions, the law does not indicate that HHS may prescribe how states must implement these provisions. With respect to CSBG funds, HHS’s Office of Community Services has distributed an information memorandum to states communicating the safeguards as they are listed in the CSBG law, but this memorandum does not offer guidance on how states should interpret the safeguard provisions. Finally, Labor’s solicitation of grant applications for WTW competitive grants specifically mentioned that FBOs were eligible to apply for the funds, but Labor did not issue guidance concerning charitable choice safeguards. Labor reported that in the case of WTW formula grants, the only information it gave to states was to note charitable choice provisions in the planning guidance it issued initially for the program. Most state and local officials we interviewed knew that charitable choice provisions were meant to allow FBOs to participate in the contracting process on the same basis as other organizations and understood that the law prohibits the use of public funds for religious worship, instruction, or proselytizing; however, they often differed in their understanding of allowable religious activities. Several state and local officials reported that prayer was not allowed in the delivery of publicly funded social services, while many FBO officials said that voluntary prayer was permissible during such services. PRWORA and other laws with charitable choice provisions do not define what constitutes proselytizing or religious worship and federal guidance concerning this matter has not been issued to state and local government entities. Without guidance from HHS, consistency in interpretations is unlikely. Some state, local, and FBO officials we interviewed were unaware of the charitable choice safeguard allowing religious organizations to retain limited exception to federal employment discrimination law. This safeguard exempts religious organizations from the prohibition against discrimination on the basis of religion in employment decisions, even when they receive federal funds. For example, even though the law allows FBOs to make hiring decisions on the basis of faith, one government official said that the boilerplate language in the agency’s contracts with service providers specifically indicates that providers are not allowed to discriminate in employment decisions on the basis of religion. Other state and local officials we interviewed were aware of this safeguard, but some perceived it to be in conflict with local antidiscrimination laws. In particular, one local agency official said that up to 17 percent of the local population consisted of sexual minorities and expressed concern that they would be discriminated against in both the hiring and the delivery of services. In contrast, almost all FBO officials we interviewed said that they do not consider faith when making hiring decisions for any of their organizations’ positions. In addition, all FBO officials we interviewed said they do not consider the faith of the client in the delivery of their services. Some states were more active than others in communicating charitable choice safeguards to the various parties involved in contracting. For example, the state of Virginia enacted legislation to include all charitable choice provisions in Virginia’s procurement law. These provisions were included in its technical assistance handbook for faith- and community- based organizations and used as a curriculum for educating over 1,000 representatives from faith- and community-based groups on charitable choice safeguards, such as the FBOs’ right to display religious symbols. Virginia also distributed a statement that local agencies under Virginia procurement law must give to all clients informing them of their right to an alternative (nonreligious) provider under charitable choice. Indiana’s Family and Social Services Administration implemented a similar practice. States also communicated the safeguards by including various charitable choice provisions in contracts or requests for proposals (RFP). State and local government contracting entities in Indiana, Virginia, and Texas included information in their TANF RFPs specifically stating that FBOs were eligible to apply for federal funds. The Indiana Family and Social Services Administration’s Indiana Manpower Placement and Comprehensive Training Program and the Texas Department of Human Services included all charitable choice safeguards in their contracts with TANF service providers. Georgia has recently passed legislation to implement charitable choice provisions; however, both Georgia and Washington do not currently include any charitable choice language in their TANF contracts or RFPs. Washington state officials said that after reviewing the charitable choice statutory provisions, they decided that no action was required because they already contracted with FBOs. Government officials said that in practice, safeguards were most often verbally communicated, many times through technical assistance workshops or bidders’ conferences. However, most of the FBOs we interviewed said that the contracting agency had not explained the provisions to them. In addition, few local and FBO officials we interviewed recalled receiving any guidance on the safeguards, informal or otherwise, from state or local officials, respectively. In the five states we visited, government officials reported few problems concerning FBO use of federal funds for proselytizing, discrimination against clients, or client requests for alternative (nonreligious) providers; however, the incidence of violations of these safeguard requirements is unknown. FBOs we interviewed did not report any intrusive government behavior that interfered with their ability to retain their religious nature under charitable choice. These FBOs often displayed religious symbols and none said that government officials restricted this ability under charitable choice by asking them to remove religious icons. In Texas, one lawsuit was filed against an FBO for allegedly using public funds to purchase bibles for a charitable choice program, and the case was dismissed in federal court. However, almost all of the government and FBO officials we interviewed said that they had not received any complaints from clients about the religious nature of an FBO. Officials in the five states we visited also said that few clients had asked for an alternative (nonreligious) provider, one of the charitable choice protections afforded to clients who object to receiving services from a religious organization. However, only two of the five states we visited, Indiana and Virginia, issued written guidance to inform clients that they had this right to an alternative (nonreligious) provider, and these two states only recently issued such guidance. Texas includes such information in its TANF contracts, but requires that the provider communicate this information to the client. Failure to communicate information about this safeguard to clients raises the possibility that some clients who may prefer to receive services from a nonreligious provider may not be aware of their right to do so. The majority of state and local agencies relied on complaint-based systems to identify violations of the charitable choice safeguard requirements. Agency officials typically monitored financial and programmatic aspects of the services. A few officials said that any “red flags” would show up during regular programmatic monitoring, and that such indications would be the basis for further investigation. Nonetheless, it is not clear whether there are violations of the safeguard requirements that go unreported or undetected because clients and FBOs may not be aware of the safeguard provisions. FBOs are held accountable for performance in the same way as other organizations that contract with the government, according to state and local officials in the five states we visited. Most officials said that all contractors are held accountable on the basis of the same standards, such as those contained in the contract language. None of the officials said that FBOs are held to a different standard, either higher or lower, compared to other contractors. Most agencies responsible for monitoring contractors said that they monitored all contracting organizations in the same way, whether faith-based or not. None of the state and local officials we interviewed said that they monitored FBOs differently from other organizations. Monitoring activities included program audits, financial audits, and regular performance reports from FBOs. Although FBOs are held accountable for performance in the same way as non-FBOs, comparative information on contractor performance is unavailable for several reasons. One reason is that cost-reimbursement contracts, used by many of the agencies in the five states visited, pay contractors on the basis of the allowable costs they incur in providing services, rather than performance outcomes—the results expected to follow from a service. In contrast, performance-based contracts, which were used by some of the agencies visited, pay contractors on the basis of the degree to which the services performed meet the outcomes set forth in the contract. Examples of such performance outcomes include the percentages of clients that obtain or retain employment for a specified period of time. However, even when contracts specified expected outcomes, some state and local officials said that comparative information on contractor performance was unavailable. In the five states, specified performance outcomes sometimes varied with each contractor individually, often because contractors either provided different services or the same services to different populations. In Indiana, for example, TANF contractors proposed their performance outcomes as part of the bidding process on the basis of the local agency’s needs. While specified performance outcomes sometimes differed on the basis of the services provided and the populations served, none of the state and local officials told us that these performance outcomes varied according to whether the contractor was faith based. While contractors shared the same specified performance outcomes in a few cases, state and local officials had not compared the performance of FBOs to that of other contractors. Many officials told us that they did not track the performance of FBOs as a group at all. For example, one state- level agency tracked substance abuse treatment outcomes by providers but had not identified which contractors were FBOs. Most state and local officials that provided their opinion believed that their FBO service providers performed as well as or better than other organizations overall, even though they did not provide data regarding FBO performance. Research efforts are currently under way to provide information on the performance of FBOs in delivering social services. Researchers at Indiana University-Purdue University Indianapolis are conducting a 3-year evaluation comparing the performance of FBOs and non-FBOs in Indiana, Massachusetts, and North Carolina. Researchers expect to complete the study in 2003. In addition, in February 2002, The Pew Charitable Trusts awarded a $6.3 million grant to the Rockefeller Institute of Government, based at the State University of New York in Albany, to study the capacity and effectiveness of FBOs in providing social services and other issues. While HHS and Labor have taken steps to increase awareness of funding opportunities for religious and community organizations, state and local government officials and FBO officials continue to differ in their understanding of charitable choice rules, particularly regarding specific safeguards designed to protect the various parties involved in financial arrangements, including FBOs and clients. In addition, clients are sometimes not being informed about the safeguards that are specifically designed to protect them. This is a problem because government entities generally rely on complaints from clients to enforce such safeguards. When all parties are not fully aware of their rights and responsibilities under charitable choice provisions, violations of these rights may go undetected and unreported. While HHS officials said that they interpret PRWORA to mean that the agency does not have the authority to issue regulations on charitable choice for TANF programs, HHS does have the authority to issue other forms of guidance to states for TANF programs. Additional guidance to clarify the safeguards and suggest ways in which they can be implemented would promote greater consistency in the way that government agencies meet their responsibilities in implementing charitable choice provisions. Without guidance from HHS, consistency in the interpretation of charitable choice provisions is unlikely. Because the WTW funds were not reauthorized and all funds have been distributed to grantees, the issuance of guidance by Labor to states is no longer needed. In order to promote greater consistency of interpretation and implementation of charitable choice provisions, we recommend that the Secretary of HHS issue guidance to the appropriate state and local agencies administering TANF, CSBG, and SAPT programs on charitable choice safeguards, including the safeguard prohibiting the use of federal funds for religious worship, instruction, or proselytizing and the safeguard concerning a client’s right to an alternative (nonreligious) provider. In particular, this guidance should offer clarification concerning allowable activities that a religious organization may engage in while retaining its religious nature. We provided a draft of this report to HHS and Labor for their review. HHS agreed with our recommendation and said that it is in the process of developing and issuing guidance to the appropriate state and local agencies administering these programs. HHS also provided detailed information on how it plans to use the $30 million Compassion Capital Fund, which is intended to assist FBOs and community-based organizations. HHS’s comments are reprinted in appendix II. Labor had no formal comments. HHS and Labor also provided technical comments that we incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, the Secretary of Labor, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7215. Other contacts and staff acknowledgments are listed in appendix III. To obtain specific information about how charitable choice has been implemented, we visited 5 states—Georgia, Indiana, Texas, Virginia, and Washington. We selected these states to obtain a range in the levels of both state government activities with regard to faith-based initiatives and contracting with faith-based organizations, as well as geographic dispersion. In addition, we did telephone interviews with faith-based liaisons established in 15 states (these were all of the liaisons that had been established as of September 2001). To identify what is known about the extent and nature of faith-based organization (FBO) contracting, we compiled information from several sources. We analyzed results from our national survey of Temporary Assistance for Needy Families (TANF) contracting of all 50 states, the District of Columbia, and the 10 counties with the largest federal TANF- funding allocations in each of the 13 states that locally administer their TANF programs. In addition, we interviewed state and local program officials that administer TANF, Welfare-to-Work (WTW), Community Services Block Grant (CSBG), and Substance Abuse Prevention and Treatment (SAPT) funded programs in the states we visited. Finally, we analyzed documents and data provided to us by federal, state, and local officials. To identify the extent of FBO contracting in the WTW program, we obtained national information from the Department of Labor, which oversees this program. To identify the extent of FBO contracting in the SAPT block grant programs in the 5 states visited, we contacted state officials responsible for these programs to obtain data on certified substance abuse treatment providers eligible to receive federal funds and contracting under this program. To identify the extent of FBO contracting in the CSBG programs in these states, we contacted state officials responsible for CSBG funded programs to obtain data on FBO contracting and subcontracting. To identify the nature of services provided in the four programs, we contacted federal, state and local officials overseeing these programs. In addition, we visited FBOs that contracted with the government and some that did not have contracts. We also reviewed relevant documents related to the contracting process. To obtain information on the implementation of charitable choice, including factors that constrain FBOs in contracting with the government, implementing safeguard provisions, and the performance of FBOs, we met with officials at the Departments of Health and Human Services and Labor in Washington, D.C., that oversee the TANF, WTW, CSBG, and SAPT programs. We conducted telephone interviews with faith-based liaisons in 15 states and on-site interviews with state and local officials in various locations in Georgia, Indiana, Texas, Virginia, and Washington. To obtain the perspective of FBOs, we also interviewed FBO officials that have had contracts with the government under these programs, as well as some that do not have contracts with the government. In addition, we interviewed researchers that have conducted related studies on charitable choice implementation and the relative performance of FBOs. We also reviewed audit reports for the two federal agencies that oversee these programs. Finally, we analyzed documents that we obtained from federal, state, and local officials, including contracts, guidance, and communications regarding charitable choice implementation. In addition to the above contacts, Mary E. Abdella, Richard P. Burkard, Jennifer A. Eichberger, Randall C. Fasnacht, and Nico Sloss made important contributions to this report. Charitable Choice: Overview of Research Findings on Implementation. GAO-02-337. Washington, D.C.: January 18, 2002. Regulatory Programs: Balancing Federal and State Responsibilities for Standard Setting and Implementation. GAO-02-495. Washington, D.C.: March 20, 2002. Welfare Reform: Federal Oversight of State and Local Contracting Can Be Strengthened. GAO-02-661. Washington, D.C.: June 11, 2002. Welfare Reform: States Provide TANF-Funded Services to Many Low- Income Families Who Do Not Receive Cash Assistance. GAO-02-564. Washington, D.C.: April 5, 2002. Welfare Reform: More Coordinated Federal Effort Could Help States and Localities Move TANF Recipients With Impairments Toward Employment. GAO-02-37. Washington, D.C.: October 31, 2001. Welfare Reform: Progress in Meeting Work-Focused TANF Goals. GAO-01- 522T. Washington, D.C.: March 15, 2001. Welfare Reform: Moving Hard-to-Employ Recipients into the Workforce. GAO-01-368. Washington, D.C.: March 15, 2001. Welfare Reform: Data Available to Assess TANF’s Progress. GAO-01-298. Washington, D.C.: February 28, 2001. Drug Abuse: Research Shows Treatment Is Effective, but Benefits May Be Overstated. GAO/HEHS-98-72. Washington, D.C.: March 27, 1998. | The federal government spends billions of dollars annually to provide services to the needy directly, or through contracts with a large network of social service providers. Faith-based organizations (FBO), such as churches and religiously affiliated entities, are a part of this network and have a long history of providing social services to needy families and individuals. In the past, religious organizations were required to secularize their services and premises, so that their social service activities were distinctly separate from their religious activities, as a condition of receiving public funds. Beginning with the passage of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, Congress enacted "charitable choice" provisions, which authorized religious organizations to compete on the same basis as other organizations for federal funding under certain programs without having to alter their religious character or governance. The statutory provisions cover several programs, including Temporary Assistance for Needy Families (TANF) and Welfare to Work. Similar provisions also apply to the Community Services Block Grant and the substance abuse prevention and treatment programs. GAO found that faith-based organizations receive a small proportion of the government funding provided to nongovernmental contractors. Contracts with faith-based organizations accounted for 8 percent of the $1 billion in federal and state TANF funds spent by state governments on contracts with nongovernmental entities in 2001. Although charitable choice was intended to allow FBOs to contract with government in these programs, several factors continue to constrain the ability of small FBOs to contract with the government. These factors include FBO's lack of awareness of funding opportunities, limited administrative and financial capacity, inexperience with government contracting, and beliefs about the separation of church and state. State and local officials differed in their understanding and implementation of certain charitable choice safeguards, such as the prohibition on the use of federal funds for religious worship or instruction; however, the incidence of problems involving safeguards is unknown. Faith-based organizations are held accountable for performance in the same way as other organizations contracting with the government. However, little information is available to compare the performance of FBOs to that of other organizations. |
In 1994, the Attorney General announced plans for the Southwest Border Strategy, an enforcement initiative designed to strengthen enforcement of the nation’s immigration laws and to shut down the traditional corridors for the flow of illegal immigration along the southwest border. The strategy called for the former Immigration and Naturalization Service (INS) to incrementally increase control of the border in four phases with the goal of making it increasingly difficult and costly for migrants to attempt illegal entry so that fewer individuals would try. The strategy called for adding resources along the southwest border by first concentrating personnel and technology in those sectors with the highest levels of illegal immigration activity (as measured by apprehensions) and by then moving to the areas with the least activity. Additional Border Patrol resources were initially allocated in the San Diego, California, and El Paso, Texas, sectors. The strategy assumed that as the urban areas were controlled, the migrant traffic would shift to more remote areas where the Border Patrol would be able to more easily detect and apprehend migrants entering illegally. The strategy also assumed that natural barriers including rivers, such as the Rio Grande in Texas, the mountains east of San Diego, and the desert in Arizona would act as deterrents to illegal entry (see fig. 1). As we reported in 2001, INS’ analysis of apprehensions data indicated that the increased enforcement efforts in the San Diego and El Paso sectors that began in 1994 ultimately resulted in the redirection of migrant flows to eastern California and the Sonoran Desert of Arizona. However, INS did not anticipate the sizable number of migrants that would continue to attempt to enter the United States through this harsh terrain. Studies of migrant deaths along the southwest border at the time concluded that, while migrants had always faced danger crossing the border and many died before INS began the Southwest Border Strategy, following the implementation of the strategy, there was an increase in border-crossing deaths resulting from exposure to either extreme heat or cold. In response to concerns about the number of migrants who are injured or die while attempting to cross the border, the INS implemented the Border Safety Initiative (BSI) and a number of related programs beginning in June 1998. These initiatives were implemented in conjunction with the Border Patrol’s ongoing enforcement efforts; the Border Patrol views the BSI and related efforts to prevent deaths as complementary to its primary mission of enforcing the law and securing the border. The primary objectives of the BSI are to reduce injuries among migrants and to prevent migrant deaths in the southwest border region. Many migrants suffer severe dehydration and heat exhaustion as a result of attempting to cross the desert where temperatures can exceed 115 degrees in the summer. Agents provide assistance to migrants who are stranded and may supply food, water, and medical care to migrants who become injured or lost in the course of attempting to cross the border. As part of the BSI’s efforts to prevent migrant deaths, several of the Border Patrol sectors in the BSI target zone have rescue beacons installed in those areas of the desert considered to be especially dangerous for migrants attempting to cross the border. Each beacon has a button that migrants can push to activate a sensor, thus alerting nearby Border Patrol agents that they are in need of help. Each sector also has a number of specialized search and rescue units known as Border Patrol Search, Trauma, and Rescue (BORSTAR) teams. BORSTAR agents have specialized training in a number of areas including medical skills, technical rescue, navigation, communication, swiftwater rescue, and air operations in order to prepare them to carry out emergency search and rescue operations. BORSTAR units conduct search and rescue operations as part of the Border Patrol’s ongoing efforts to enforce and secure the border. As of October 2005, the Border Patrol had deployed 164 BORSTAR agents within its nine Border Patrol sectors along the southwest border. The Interior Repatriation Program (IRP) and Lateral Repatriation Program (LRP) are additional initiatives designed by the Border Patrol to prevent deaths and to discourage migrants from crossing the border in dangerous areas of the desert. The IRP was implemented in 2004 in conjunction with the Mexican government with the goal of removing migrants from those areas considered to be smuggling corridors in an effort to break the cycle of illegal immigration among those migrants who make repeated attempts to cross the border following apprehension. The program transports migrants who are apprehended in the Tucson and Yuma Sectors, and who volunteer for the program, to their hometowns in the interior of Mexico, rather than deporting them to points along the Arizona border where they may be more likely to attempt to cross again. Similarly, the LRP was implemented when the United States was unable to negotiate an agreement to return migrants to the interior of Mexico with the Mexican government in September 2003. Migrants apprehended in Arizona were instead transported to ports of entry in Texas in an effort to discourage them from attempting multiple crossings in the desert. In response to the escalating problems with illegal immigration in Arizona, the Border Patrol also implemented the Arizona Border Control Initiative (ABCI) in 2004 as a multi-disciplinary initiative with the goal of coordinating federal, state, and local authorities to control the Arizona border. The ABCI strategy focused on confronting illegal immigration along the western part of the Arizona desert before it reached the United States. Components of the program included a media campaign warning migrants of the dangers associated with crossing the border and increased infrastructure and manpower along the Arizona border. While not intended primarily as a safety initiative, the enhanced infrastructure and increased manpower associated with the ABCI also allowed Border Patrol officers to better track and rescue migrants and to prevent deaths. Additional components of the program include roving patrols, camp details, and air support, and included increased assistance with highway patrols from state, local, and tribal authorities. The Border Patrol has also implemented a number of additional efforts to discourage migrants from attempting to cross the border as part of the BSI’s prevention component. Prevention efforts have included broadcasting public service announcements in Mexico about the risks involved in hiring smugglers and posting signs in high-risk areas to warn potential crossers of the dangers at the border. Because many migrants attempting to enter the United States illegally may not carry identification, the BSI also attempts to identify those who have died while crossing the border. Border Patrol officers work in conjunction with Mexican Consulates in the region in order to identify migrants who may have been reported missing by friends or family. In 2000, the BSI also began formally tracking and recording data on migrant rescues and deaths through the establishment of a database known as the Border Safety Initiative Tracking System (BSITS). BSI data are used by the Border Patrol for tracking numbers and locations of deaths and rescues, identifying trends and high-risk areas, allocating resources for BSI projects, and measuring the effectiveness of various programs and projects that are related to the BSI. The database includes information such as cause and location of death as well as the decedent’s gender and nationality. In order to ensure consistent tracking and recording of incidents along the southwest border, the BSI has developed a formal, written methodology that outlines the roles and responsibilities of each BSI sector coordinator in collecting and recording data on migrant deaths and rescues. The methodology also outlines definitions for the types of incidents that should be recorded in the BSITS database. The methodology defines a BSI-related death as a death involving an undocumented migrant in furtherance of illegal entry within the BSI target zone, or deaths occurring outside the target zone when the Border Patrol was directly involved. The methodology includes detailed instructions regarding the time frame for reporting incidents, protocols for entering and updating information recorded in BSITS, and guidelines for coding incidents using appropriate rescue and cause of death categories. In order to ensure that all migrant border-crossing deaths in the target zone are reported, the methodology also specifies that BSI sector coordinators should establish contact with local medical examiners or county coroners as well as Mexican Consulates in the region about those deaths where the Border Patrol was not involved in order to record the deaths in the BSITS database. A number of groups in addition to the Border Patrol have also attempted to track incidents of border-crossing deaths. Advocacy groups, media outlets, medical examiners’ offices in some border counties, researchers at the CDC, and the Mexican government are among the organizations that have collected and reported data on border-crossing deaths, but each uses a different methodology to count and record deaths. All agree that a border-crossing death involves a migrant who dies in the course of attempting to cross illegally into the United States. However, each may operationalize the definition differently and rely on a variety of sources of information for making determinations about which deaths to include in their counts. For example, the “Victoria 19”—an incident in which 19 migrants who were smuggled in the back of a tractor-trailer were all found to have suffocated near Victoria, Texas, in 2002—would not be included in the Border Patrol’s counts of migrant border-crossing deaths because it occurred outside the BSI target zone and there was no direct Border Patrol involvement in the case. By contrast, some advocacy groups that track and record border-crossing deaths include the Victoria 19 in their totals. Because the incident involved migrants who were in transit across the border into the United States, they consider it a border-crossing death, even though it occurred outside the Border Patrol’s identified BSI target zone. In making decisions about whether or not to count the death of an unidentified person as a border-crossing death, Border Patrol officials and others may rely on professional judgment of circumstantial evidence. This may also result in differing counts of deaths from one group to the next. For example, data on border-crossing deaths maintained by the Pima County Medical Examiner’s office for the Tucson area have been cited by the media in news reports. Some cases of border-crossing deaths may involve unidentified bodies that were discovered in the desert; these cases can often include skeletal remains or decomposed bodies. In determining whether to count these incidents as border-crossing deaths, the Pima County Medical Examiner’s office uses information about where a body is found—for example, along a known migrant corridor—as well as other circumstantial evidence such as the decedent’s clothing or personal effects that may indicate a country of origin. The Pima County Medical Examiner’s office reported that it records all cases of migrant deaths including a few cases involving migrants who die of natural causes such as heart attacks or appendicitis, noting that, if there is evidence that the person died while in transit between Mexico and the United States, the office will count it as a border-crossing death regardless of the cause. However, the Pima County Medical Examiner’s office places some limitations on which cases it records as border-crossing deaths. For example, the office attempts to exclude any cases involving illegal immigrants who had established residency in the United States from its counts of border-crossing deaths in order to distinguish deaths occurring among illegal immigrants who had been living and working in the United States for some time from migrants who died in the course of attempting to cross the border. Using another method to measure migrant border-crossing deaths, researchers at the CDC designed a study to track and record migrant border-crossing deaths occurring in U.S. border counties in Arizona, New Mexico, and Texas between 2002 and 2003. They requested that medical examiners in these states provide them with information about cases that met a number of standardized criteria. The researchers then reviewed the death certificates and other information about these cases in order to describe trends in border-crossing deaths. They asked medical examiners to include only those cases involving decedents who were found in one of several selected U.S. counties along the U.S. border with Mexico, whose immigration status was determined to be unauthorized, and who were determined to have died during transit from Mexico into the United States within 30 days of their arrival in the country. According to their methodology, an unauthorized decedent was identified based upon one or more of the following criteria: a person who was identified as not being a legal resident or an authorized entrant into the United States, a person who was identified as a resident of another country based upon reports by family, friends, or officials, or a person who was identified as being a resident of another country based upon analysis of circumstantial evidence found with the decedent. Such circumstantial evidence included tattoos, items found on or near the body, personal items found in bags, clothes, and documents including birth and marriage certificates. Decedents were not included in the study if they were known to have resided illegally in the United States for more than a month before their death, if they were determined not to have died while crossing the border, or if they had died after being treated in a U.S. border hospital. Table 1 illustrates the counts recorded by some of the groups attempting to track and record border-crossing deaths in Pima County, Arizona, between 2002 and 2005. Our analysis of the BSI and NCHS data shows consistent trends in the numbers, locations, causes, and characteristics of deaths over time. Consistent with reported trends in prior studies of border-crossing deaths, our analysis of both data sources shows an increase in the overall numbers of deaths occurring along the southwest border between 1998 and 2005 following a decline between 1990 and 1994. Our analysis of the NCHS data shows that the number of deaths doubled from the mid-1990s through 2003, and our analysis of the BSI data shows that the majority of the increase in deaths that occurred between 1998 and 2005 was concentrated within the Border Patrol’s Tucson Sector. Consistent with the increase in Tucson, the number of border-crossing deaths due to heat exposure also steadily increased beginning in 1998. While the majority of deaths have occurred among men, according to our analysis of the BSI data, deaths among women increased from 9 percent of all deaths in 1998 to 21 percent of all deaths in 2005. Further, increases in deaths among women in the Tucson Sector accounted for the majority of the overall increase in deaths among women in all sectors. The increase in the number of deaths in the Tucson Sector between 1998 and 2005 occurred despite the fact that the number of apprehensions of illegal immigrants recorded by the Border Patrol in the Tucson Sector had declined following a peak in 2000. To the extent that apprehensions are correlated with the number of attempted crossings, the increase in deaths in the Tucson Sector indicates that the desert is a particularly difficult region for migrants attempting illegal entry. Our analysis of the BSI data as well as our analysis of the NCHS data reveals trends that are consistent with trends identified in previous studies by CIR examining the numbers, locations, and causes of border-crossing deaths over time. All three sources of data show that trends in migrant deaths follow a somewhat U-shaped curve as deaths within the BSI target zone increased beginning in the mid-1990s following a period of decline between 1990 and 1994 (see fig. 2). We used NCHS data—which are based on death certificates filed by local coroners and medical examiners throughout the country and include records of all deaths that occur within the United States, regardless of the decedent’s country of origin—as an independent data source to corroborate trends identified in the BSI data. Additionally, the trends in the NCHS data between 1990 and 1998 are also consistent with the trends in border-crossing deaths reported by Karl Eschbach and his colleagues at the Center for Immigration Research in their analysis of state-level vital registry data. Differences in the total numbers of deaths in the NCHS and CIR data arise from the differences in the methodologies used by each. Our analysis of the NCHS data shows that deaths declined in the San Diego and El Centro Sectors between 1990 and 1994 and that over this period, deaths from traffic fatalities and homicide also declined. This pattern represents a major shift in the causes of migrant border-crossing deaths, as traffic fatalities were the leading cause of migrant border-crossing deaths during the early 1990s, while from the late 1990s onward, heat exposure was the leading cause of death. Additionally, according to our analysis of the NCHS data, homicides decreased from 24 percent of all deaths in 1990 to 9 percent in 2003. Our analysis of the BSI data also shows that heat exposure was the leading cause of death from 1998 to 2005. The increase in deaths due to heat exposure over the last 15 years is consistent with our previous report that found evidence that migrant traffic shifted from urban areas like San Diego and El Paso into the desert following the implementation of the Southwest Border Strategy in 1994. Our analysis of the BSI data shows that the total number of border- crossing deaths increased from 254 in 1998 to 334 in 2003 and then increased to 472 in 2005. Similarly, our analysis of the NCHS data shows that the number of deaths increased from 219 in 1998 to 365 in 2003. Corresponding with the increases in deaths that occurred between 1998 and 2005, border-crossing deaths also became increasingly concentrated within the Tucson Sector—a region that corresponds with Arizona’s portion of the Sonoran Desert. For example, our analysis of the BSI data shows that the Tucson Sector’s share of all border-crossing deaths increased tenfold, from 4.3 percent of all deaths in 1998 to 45.8 percent in 2005 (see fig. 3), so that by 2005, of the 472 deaths that occurred across all nine southwest sectors, 216 occurred within the Tucson Sector. Our analysis of the NCHS data shows a similar trend, in that the Tucson Sector's share of border-crossing deaths increased at least threefold between 1998 and 2003. The total number of deaths in the eight other Border Patrol sectors remained relatively constant over this period. Further, the increase in deaths occurring within the Tucson Sector accounted for the majority of the increase in deaths along the southwest border. For example, our analysis of the NCHS data indicates that the increase in deaths in the Tucson Sector from 1990 to 2003 accounted for more than 78 percent of the total increase in border-crossing deaths along the entire southwest border. Across all sectors during these years, the total number of border-crossing deaths increased by 195, and of that increase, 153 deaths occurred in the Tucson Sector. Our analysis of the BSI data shows a similar result: between 1998 and 2005, deaths across all sectors increased by 218, and the Tucson Sector accounted for 205—or 94 percent—of the increase. The increase in deaths in the Tucson Sector is also consistent with the shifting of migrant traffic from urban areas in San Diego and El Paso into the desert following the implementation of the Southwest Border Strategy. The increase in deaths in the Tucson Sector occurred after the number of deaths occurring within the San Diego Sector declined, beginning in the early 1990s (see fig. 8 in app. II). In 1990, the San Diego Sector accounted for over one-third of all border-crossing deaths. By 2003, the San Diego Sector accounted for only 8 percent of all deaths. While much of the migrant traffic appears to have shifted to sectors east of San Diego like Tucson, a similar shift does not appear to have occurred in the sectors east of El Paso. Border Patrol officials have noted that there are few population centers on the Mexican side of the border in those regions that might serve as a starting point for migrants intending to cross. Similarly, on the U.S. side of the border, sectors like Marfa in western Texas are more sparsely populated. Border Patrol officials have speculated that fewer migrants attempt to cross in these areas because they largely consist of small towns and communities. Consequently, migrants may have to walk longer distances to reach a population center and may face an increased risk of being apprehended as a result of being noticed by the local population or Border Patrol agents. As the number of deaths occurring within the desert in and around the Tucson Sector increased, so too did the number of deaths due to heat exposure. While there has been an overall increase in the number of heat exposure deaths between 1994 and 2005, there have been some fluctuations between years. These fluctuations may be due to factors such as temperature changes from one year to the next as higher desert temperatures in some summers may result in an increase in migrant deaths. Our analysis of both the BSI and NCHS data shows increases in the total percentage of border-crossing deaths due to heat exposure over time. For example, by 2001, heat exposure deaths in the BSI data accounted for more than one-third of all deaths. Our analysis of the NCHS data also shows that by 2001 heat exposure deaths accounted for more than 30 percent of all border-crossing deaths, an increase from about 4 percent in 1990 (see fig. 4). As the number of deaths due to heat exposure increased, the number of deaths due to traffic-related fatalities, homicide, and drowning either remained relatively constant or declined (see fig. 5). For example, our analysis of the NCHS data shows that traffic fatalities declined from more than half of all border-crossing deaths in the early 1990s to less than 30 percent of deaths by 2003. Our analysis of the BSI data shows similar trends, with deaths due to exposure increasing from 107 to 185 while deaths due to motor vehicle accidents, homicide, and drowning decreased slightly from 109 to 103 between 1998 and 2005. Our analysis of the NCHS data also shows that homicides have also declined slightly, accounting for 41 border-crossing deaths in 1990, and 33 deaths in 2003. Despite the decline in homicides, Border Patrol officials have noted an increase in border-related violence among smugglers and migrants including assault and robbery, though officials stated that few incidents have resulted in deaths thus far. The risk associated with attempting to cross the border illegally also appears to have increased between 1998 and 2004. While the number of migrant border-crossing deaths approximately doubled over this period, estimates of undocumented migration into the United States—whether based on U.S. census data or based on the number of Border Patrol apprehensions of migrants attempting illegal entries—do not show a corresponding increase. For example, estimates of illegal entries into the United States indicate that from 1998 through 2004, the estimated number of such entries has declined by 16 percent. Similarly, the number of apprehensions of persons attempting illegal entry has declined by 25 percent over this same period. At the same time, our analysis of the BSI data shows that the number of border-crossing deaths increased by about 29 percent from 254 in 1998 to 328 in 2004. (See app. I for a discussion of our methodology.) An examination of the increase in the number of deaths in relation to declines in the estimated number of illegal entries suggests that the risk associated with crossing the border has increased in recent years. This apparent increase in risk associated with attempting to cross the border illegally also appears to be concentrated in the Tucson Sector. The increase in the number of border-crossing deaths from 1998 through 2005 was generally independent of changes in the number of apprehensions of migrants attempting illegal entries within the sector, especially during the decline in apprehensions that occurred between 2000 and 2002 (see fig. 6). In other sectors, the number of apprehensions generally correlated with the number of deaths: as apprehensions increased, deaths show a corresponding increase, and conversely, as apprehensions declined, deaths generally also declined, although the amount of change in deaths and apprehensions between years differed (see fig. 7). While there are limitations to using the number of apprehensions as a measure of attempted illegal entries into the United States, we previously reported that changes in apprehensions can provide some evidence of shifting illegal migration patterns. However, to the extent that apprehensions can be used as an indication of attempted illegal entries into the United States, unlike other estimates of illegal entries, these data have the advantage of being sector-specific and, therefore, allow for comparisons between sectors in estimating attempted illegal entries and deaths. In the Tucson Sector, apprehensions increased from 1998 to 2000 and then generally declined from 2000 to 2005, with some year-to-year fluctuations. While apprehensions generally declined, the number of border-crossing deaths in the Tucson sector continued to increase over the same period. To the extent that an increased number of apprehensions generally can be assumed to represent an increased number of migrants attempting illegal entry, the inverse relationship between apprehensions and deaths in Tucson suggests that deaths have increased despite the fact that there has not been a corresponding increase in the number of people attempting to cross in that sector. The reasons for this phenomenon are unclear. There are a number of factors that may make the desert in and around Tucson a particularly dangerous region for migrants to navigate, including the difficulty of the terrain, extreme summer temperatures, and the increased use of smugglers in the sector. While there is evidence that increasing numbers of migrants have employed smugglers to help them cross the border illegally across all nine southwest Border Patrol sectors in recent years, smuggling may be especially dangerous in the Tucson Sector. Border Patrol officials reported that migrants who are unable to keep up with smugglers may be left behind in extreme desert temperatures without sufficient food or water. Alternatively, the inverse relationship between apprehensions and deaths in the Tucson Sector could arise if apprehending migrants has become more difficult in Tucson than in other sectors. This could result from a number of factors such as changes in the number of agents assigned to patrol the sector or the number of migrants who are able to evade apprehension by attempting to cross in particularly remote areas of the sector. According to our analysis of the NCHS data, males comprised more than 78 percent of the border-crossing deaths occurring between 1990 and 2003, and persons between 15 and 44 years of age comprised 79 percent of all deaths. The trends over time in these respective shares of deaths were relatively constant with some minor, year-to-year fluctuations. Our analysis of the BSI data shows similar trends between 1998 and 2005, with males accounting for 83 percent of all deaths, and persons between the ages of 15 and 44 comprising 88 percent of all deaths. This was true across all sectors with trends remaining relatively constant across years. While deaths among women were consistently much lower than men, there was an increase in the overall number of female deaths that occurred between 1998 and 2005—the number of female deaths increased from 22 to 90, or from 9 percent to 21 percent of all deaths. Our analysis of the BSI data shows that, between 1998 and 2005, the increase in deaths among females in the Tucson Sector accounted for 57 percent of the total increase in deaths among women across all sectors. Similarly, our analysis of the NCHS data shows that from 1990 to 2003, the increase in deaths among females in the Tucson Sector accounted for 96 percent of the total increase in deaths among women across all sectors. The BSI’s methodology for collecting data on border-crossing deaths provides a framework for gathering and recording data on the number of migrant deaths that occur in each sector. While the Border Patrol has taken steps to improve the collection of its data over time, differences remain among the nine BSI sector coordinators in how each has implemented the methodology, and these differences could result in incomplete counts of border-crossing deaths in any given year. Additionally, because of inherent uncertainties associated with determining whether some migrant deaths are border-crossing deaths, an exact count of all deaths may not be possible to obtain. The BSI methodology specifies that each sector coordinator should track all migrant deaths occurring within the sector, including those deaths that may have first come to the attention of local authorities by obtaining and sharing information with county coroners or medical examiners. However, BSI sector coordinators have the latitude to decide how to implement this outreach. Some coordinators reported regularly scheduled contact with local authorities, while others stated that communication was informal and infrequent. Some coordinators also reported that the nature and methods for communicating with local authorities had changed from one year to the next. For example, local medical officials in one county where a relatively large number of deaths occurred reported that Border Patrol officials in the Tucson Sector only began contacting them in 2005 to request information on border-crossing deaths. As a result, the BSI data prior to that year may not have included records of those border-crossing deaths that were discovered by local authorities but that did not come to the attention of Border Patrol officials. To the extent that they may not include data on all border-crossing deaths recorded by local officials, the BSI data may represent an undercount of the total number of border- crossing deaths in that sector. These undercounts may affect the Border Patrol’s ability to understand the scale of the problem in each sector and also impact its ability to continue to make accurate resource allocations along the southwest border. Since January 2005, the National BSI Coordinator has taken steps to further clarify the methods that sector coordinators should use to collaborate with local officials in collecting BSI data. However, the revised BSI methodology does not specify the frequency with which sector coordinators are to conduct this outreach nor does it outline the methods that coordinators should use to share information about migrant deaths with county coroners or local medical examiners. While all coordinators reported some degree of contact with local authorities, communication remains informal in some sectors. As a result, Border Patrol officials in these sectors may not learn about all cases of migrant deaths, particularly in smaller counties where border-crossing deaths occur with less frequency. Border Patrol officials in those sectors reporting informal or infrequent communication stated that they did not believe that these omissions would likely have a significant impact on the total number of deaths recorded in the BSITS database. While our analysis of the NCHS data confirms these sectors have had relatively few deaths in recent years, those trends have the potential to change in the future. For example, our analysis of the BSI data shows only 11 deaths in the Tucson Sector in 1998. However, as migration shifted from the San Diego Sector to the Tucson Sector following the implementation of the Southwest Border Strategy, the number of deaths in Tucson increased significantly. By 2005, Tucson accounted for nearly half of all deaths recorded across all nine sectors, with a total of 216 deaths. Since the current BSI methodology gives each sector coordinator the latitude to determine how to approach communication with local authorities about border-crossing deaths, differences between sectors in implementing the BSI methodology may ultimately affect the Border Patrol’s counts of border-crossing deaths in the future. In addition, the nature and frequency of each sector’s contact with local officials could potentially change each time a new sector coordinator is assigned. Another factor that may affect the extent to which the Border Patrol records the precise number of border-crossing deaths is the uncertainty that arises in those cases involving bodies discovered in the desert or other remote areas. In some of these instances both Border Patrol agents and local medical examiners must use their professional judgment in determining whether circumstantial evidence is sufficient to classify a decedent as a migrant who died while in furtherance of an illegal entry. Both Border Patrol officials and local medical examiners with whom we spoke reported relying on such evidence as the type of clothing worn by the decedent, whether or not the person was carrying water jugs (as evidence that the person intended to travel some distance on foot), as well as any personal documents or identification that might indicate country of origin. Border Patrol officials and others also reported that, in many cases where the decedent had no identification or only skeletal remains were found, they may conclude that the decedent was a migrant attempting illegal entry because the remains were found in a remote area that was a known migrant-crossing corridor. Further, determining when a migrant has arrived at his or her destination and is no longer in furtherance of an illegal entry can involve making judgments about the length of time a decedent was in the United States at the time of death. In most cases of border-crossing deaths, when decedents are found on known border-crossing trails or the deaths were reported by other migrants attempting illegal entry, such determinations can be made with some degree of certainty. However, in other circumstances, the determination about how long a migrant had been in the United States may be more difficult. For example, Border Patrol officials reported cases of migrants who worked on a farm for a period of a few weeks or even a month after arriving in the United States—to earn funds to complete their migration—only to die while en route to their final destination. Also, in cases involving skeletal remains, the determination regarding whether to record the case as a border-crossing death may be more difficult. Border Patrol officials and others generally reported that they rarely encountered ambiguous cases where there was little or no circumstantial evidence that provided some indication that the decedent was a migrant who died while trying to cross the border. However, all reported that, in the absence of being able to confirm the decedent’s identity, they must use their best judgment to make an informed decision about whether the death should be considered a border-crossing death. Finally, the fact that a number of bodies may remain undiscovered in the desert also raises doubts about the accuracy of counts of migrant deaths. While local medical officials who track border-crossing deaths reported that they do not believe that there are a large number of undiscovered bodies that would add significantly to counts of border-crossing deaths, the total number of bodies that have not been found is ultimately unknown. A number of measurement challenges and data limitations inhibit a comprehensive evaluation of federal efforts to prevent border-crossing deaths. In particular, because multiple factors may affect the numbers and locations of migrant deaths, the effectiveness of the Border Patrol’s efforts to prevent such deaths cannot be measured only by changes in the number of deaths over time. Factors such as the number of people attempting to cross the border in any given year, weather conditions, and the use of smugglers may all affect the number and location of migrant deaths from one year to the next. Similarly, clear cause and effect relationships between migrant crossings, the Border Patrol’s enforcement efforts, and prevention initiatives such as the BSI are difficult to determine. A decline in deaths might incorrectly be associated with BSI activity. Some migrants may be deterred by the Border Patrol’s enforcement efforts and not attempt to cross at all, while others may attempt to cross in more dangerous areas in an effort to avoid apprehension. In addition, because Border Patrol agents typically carry out search and rescue activities related to the BSI at the same time they carry out enforcement and apprehension functions, it is difficult to isolate the impact that prevention efforts may have had on the number of deaths. Because multiple factors beyond the efforts of the BSI may potentially affect the number of border-crossing deaths in any given year, the influence of each would need to be taken into account and measured in relation to the number of migrant deaths in order to accurately assess the impact of the BSI. Measuring the effectiveness of the BSI in reducing border-crossing deaths would require a comparison of changes in the number of migrant deaths with changes in other causal factors—such as the Border Patrol’s enforcement efforts, the number of migrants attempting to cross the border illegally, and weather conditions, as well as changes in how and where the BSI is implemented over time. Without correcting for these factors, cause and effect relationships are difficult to determine. For example, changes in the Border Patrol’s enforcement efforts might lead to shifts in the locations where migrants attempt to cross. If migrants attempt to cross in more dangerous areas of the desert in order to avoid detection, this may lead to an increase in the number of deaths. In this scenario, the BSI may in fact have prevented deaths through its search and rescue operations, even though the number of deaths rose as a result of more migrants crossing in the harsh desert terrain. Alternatively, increased enforcement efforts may result in migrants being apprehended before they are in danger or in need of rescue. Similarly, a number of factors may also affect the number of migrants that attempt to cross the border. For example, the dynamics of how many people attempt to cross the border each year may be driven by the relative strength of the U.S. labor market in relation to the Mexican labor market. In addition, the number of migrants that make repeated attempts to cross the border until they are successful may also change over time. Previous research suggests that increased enforcement and harsh conditions have made crossing the border more difficult; consequently, many migrants now pay smugglers to help them cross. The increased difficulty and expense in crossing may also result in fewer migrants making repeated attempts to cross the border. Additionally, those who succeed in crossing may choose to stay permanently in the United States rather than crossing back and forth for seasonal employment as was the case in years past. If detailed data were available on the extent of the BSI’s efforts by sector, it would be possible to more clearly isolate the program’s effects on trends in deaths, while controlling for other factors that may affect deaths such as increased enforcement efforts or weather fluctuations. However, the Border Patrol does not maintain detailed data on where the BSI was used over time that would be needed to conduct such an evaluation. Specifically, the Border Patrol does not maintain historical data on the number of hours agents dedicated exclusively to BSI activities or historical data on apprehensions made by those agents who were operating in their search and rescue capacity at the time of apprehension. These data would provide necessary information about where the BSI was used over time and allow for more precise measurements of the BSI’s implementation across sectors. Because the Border Patrol’s primary function is enforcement, agents typically carry out search and rescue operations simultaneously with ongoing enforcement activities. As a result, the extent to which the Border Patrol can isolate and record the number of line hours and resources dedicated exclusively to BSI-related activities is limited. Border Patrol has claimed that the Interior Repatriation Program (IRP) resulted in a decrease in migrant deaths and that the decrease in deaths was due, in part, to a lower recidivism rate among program participants when compared with those migrants who did not participate in the program. Border Patrol’s claims that the IRP contributed to reductions in deaths were based upon a decline in the number of exposure deaths recorded in the BSI data between 2003 and 2004. However, this simple correlation does not constitute sufficient evidence of a causal effect of the IRP on deaths. First, because participation in the program is voluntary, it is not possible to determine the program’s impact on recidivism rates and deaths with certainty. Those migrants who choose to be repatriated to their hometowns in the interior of Mexico may be less motivated to attempt reentry than those who elect not to participate in the program, instead choosing to be returned to an entry point along the border. These migrants may opt out of the program specifically because they intend to try to cross the border again in the hopes of avoiding detection on their next attempt. Further, in the second year of the IRP, the number of deaths increased. If changes in the number of deaths were again used as the only indication of the program’s effectiveness, the implication could be that the IRP caused a corresponding increase in deaths between 2004 and 2005. However, as we previously discussed, multiple factors in addition to the Border Patrol’s efforts may affect the number of deaths in any given year. For example, increased temperatures in the summer of 2005 may have contributed to an increase in deaths when compared with the number of deaths recorded for the same time frame in 2004. A recent House of Representatives Appropriations Committee report suggests that the Arizona Border Control Initiative (ABCI) was responsible for 27 fewer deaths in the Tucson Sector between March 16, 2004, and September 30, 2004—a 26-percent reduction in such deaths when compared with the same location and time frame in 2003 prior to the ABCI’s implementation. However, as we previously discussed, a number of other factors such as changes in desert temperatures may also affect the number of deaths from one year to the next. Like the Border Patrol’s conclusions about the IRP, measuring changes in the number of deaths between 2004 and 2005, without considering other factors, could imply that the program resulted in an increase in deaths in 2005. Border Patrol officials acknowledged that attributing reductions in exposure deaths to the ABCI and IRP in 2004 was an overly simplistic correlation and that many factors in addition to enforcement operations may contribute to the number of deaths in any given year. Officials pointed to the fact that, in 2005, BORSTAR patrols began targeting illegal immigration corridors that were experiencing high death rates. They reported that one result of BORSTAR’s operations was that rescues of migrants in distress significantly increased. However, officials also reported that, because BORSTAR agents were operating in high-risk areas, they may have discovered more bodies in the course of their patrols, also contributing to an increase in Border Patrol’s total counts of deaths. Additionally, Border Patrol officials recognized that their data collection methodologies may also affect conclusions about the cause and effect relationships between their efforts and migrant deaths. Officials stated that, because they improved their methodology for collecting data on deaths starting in 2005, deaths recorded by local coroners that were not routinely included in their 2004 counts may have also contributed to an increase in the number of deaths they reported for the Tucson Sector in 2005. Although the BSI data have some limitations and may undercount the exact number of border-crossing deaths, the overall trends shown in the data are corroborated by trends in both the NCHS data as well as the state- level vital registry data reported by CIR. The consistency in trends identified in all three sources of data, as well as our assessment of the BSI methodology, indicates that the BSI data can be used to provide valuable information on trends in the numbers, locations, causes, and characteristics of migrant border-crossing deaths over time. These trends are particularly important for better understanding the scale of the problem of migrant deaths and can provide useful information for making key resource allocation decisions. Although our analysis of the BSI data shows trends in border-crossing deaths that are consistent with trends derived from other, independent sources of data, we also note that not all BSI sector coordinators consistently implemented the BSI methodology, and these differences can contribute to incomplete counts of deaths. Some sectors have only informal and infrequent communication with local authorities, while others have regularly scheduled contacts with local medical examiners or coroners about migrant deaths that may have occurred in the sector. Because both the NCHS and BSI data indicate that the problem of migrant border-crossing deaths has been growing in recent years, it is important to continue to improve the available data about these deaths by refining methods for tracking and recording deaths, including procedures for communicating with local authorities in order to share information about all potential cases of border-crossing deaths that occur within the BSI target zone. The inconsistencies in the implementation of the BSI methodology highlight opportunities to improve the quality of the Border Patrol’s data on border-crossing deaths. Although there have been relatively few deaths in the two sectors in which BSI coordinators use informal methods to contact local authorities, these trends have the potential to change. If patterns of undocumented migration were to shift, as occurred in the Tucson Sector between 1998 and 2005, these informal methods for contacting local officials could result in larger numbers of unreported deaths. Similarly, since BSI sector coordinators currently have the latitude to determine how they approach communication with local officials, personnel changes could also result in changes in how each sector implements the BSI methodology from one year to the next and consequently affect counts of deaths. Finally, the Border Patrol and others should be cautious about believing assertions about the effectiveness of its prevention efforts, given the difficulties involved in measuring the effects of such efforts. Claims about cause and effect relationships are limited by the fact that multiple factors affect the number of migrant border-crossing deaths from one year to the next. While we recognize that the Border Patrol’s ability to measure BSI activities separately from ongoing enforcement functions may be limited, unless explicit controls are introduced to take into account the effects of these factors, the effectiveness of prevention efforts cannot be demonstrated. In order to improve the consistency across Border Patrol sectors in the implementation of the BSI methodology and the completeness of data on deaths in any given year, we recommend that the Commissioner of Customs and Border Protection take steps to ensure that BSI sector coordinators follow a consistent protocol for collecting and recording information about border-crossing deaths and that all coordinators follow established procedures for maintaining and documenting regular contacts with local authorities to obtain timely information about all border- crossing deaths within the BSI target zone. In order to better demonstrate the effectiveness of the Border Patrol’s efforts to reduce migrant deaths, we recommend that the Commissioner of Customs and Border Protection assess the feasibility and cost- effectiveness of using multivariate statistical approaches to enhance estimates of impacts of the initiatives. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of the report. At that time, we will then provide copies of the report to other interested Congressional parties, the Secretary of Homeland Security, the Secretary of Health and Human Services, the Secretary of State, and the Assistant Attorney General for Administration for the Department of Justice, and will make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-2758 or ekstrandl@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. This appendix describes our scope and methodology used in responding to the three objectives addressed in this report: (1) How do the Border Patrol’s data on trends in the numbers, locations, causes, and characteristics of border-crossing deaths compare to other sources of data on these types of deaths? (2) What differences, if any, are there in how the Border Patrol has implemented the BSI methodology across its sectors? (3) To what extent do existing data allow for an evaluation of the effectiveness of the BSI and other Border Patrol efforts to prevent border- crossing deaths? We assessed the reliability of BSI and NCHS data and reviewed the methods used by CIR for identifying cases of border-crossing deaths in the state vital registry data. BSITS is a client-server database that serves as a central repository for collecting, managing, and disseminating migrant incident data in support of the BSI including the volume and types of rescues and the number and types of migrant deaths that occur in each of the nine Southwest Border Patrol sectors. Specifically, BSITS records the number of deaths and rescues, followed by type, disposition, location (through GPS coordinates), and information on the subject or victim. In order to ensure data integrity, BSITS tracks record creation at the sector and user level. The BSI does not allow records created outside the user’s sector to be modified in BSITS. The system is monitored by a system security administrator who monitors all user login and usage in order to maintain a security audit trail. Access permissions to the system are managed by the system security administrator through a security management tool, and users may only log into the system using a secure user ID and password, which is stored in encrypted binary format. Additionally, BSITS is subject to a number of requirements that have been established for all sensitive DHS automated data processing systems: it is required to develop internal security procedures to restrict access of critical data items to only those access types required by users; to develop audit procedures to meet control, reporting, and retention period requirements for operational and management reports; to allow for application audit trails to dynamically audit retrieval access to designated critical data; to use standard tables for requesting or validating data fields; to verify processes for additions, deletions, or upgrades of critical data; and to be able to identify all audit information by user identification, network terminal identification, date, time, and data accessed or changed. The Border Patrol provided us an electronic spreadsheet consisting of one record, or entry, per incident in the BSITS database for all incidents, including both rescues and deaths, recorded in the system from the program’s inception in 1998 through December 21, 2005. In order to protect the confidentiality of the information, the Border Patrol omitted names from the data. In order to accurately interpret the data, we reviewed definition tables provided by Border Patrol for each of the variables in the database, system administration manuals, and a copy of the query used to produce the data for our request. After completing preliminary analysis of the data, we asked the Border Patrol to confirm the number of subjects on which data was provided, to clarify the meaning and values of several key fields in the database, and to provide additional information about any missing or out of range values. To further assess the reliability of the BSI data, we reviewed the written BSI methodology for tracking and recording deaths for logic and consistency and interviewed Border Patrol officials in Washington, D.C., as well as each of the nine BSI sector coordinators in the field who have responsibility for implementing the methodology and inputting data into BSITS. To determine the extent to which the methodology has been implemented consistently across sectors and over time, we asked officials about established methodologies for tracking and recording deaths in BSITS, any changes to those methodologies that may have occurred over time, and any methods Border Patrol officials have used at both the national and local level to assess whether the BSI methodology has been implemented fully and consistently across sectors. NCHS collects and disseminates information on national vital statistics through the National Vital Statistics System. The data are collected through contracts between NCHS and vital registration systems operated in the various jurisdictions responsible for the registration of vital events including births, deaths, marriages, divorces, and fetal deaths. The authority for the registration of these events resides individually with each of the 50 states, 2 cities (Washington, D.C., and New York, N.Y.) and 5 territories (Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands). The death certificate is the source for state and national mortality statistics, and NCHS provides standard forms for the collection of the data and model procedures to ensure the uniform registration of deaths. NCHS also produces training and instructional material as well as an automated mortality medical data system for coding and classifying cause of death information from death certificates. The NCHS data include records of all death certificates filed in the United States regardless of the decedent’s country of origin. In order to assure the objectivity of its statistical and analytic information products, i.e., that they are accurate, reliable, and unbiased, NCHS obtains these data through accepted statistical theory and practice. NCHS statistical and analytic information products are derived using generally acceptable statistical practices and methodologies, which enable responsible statisticians and analysts outside NCHS to replicate the NCHS statistical methods and obtain results consistent with those obtained by NCHS. NCHS assures the security of its statistical and analytic information products through the enforcement of rigorous controls that protect against unauthorized access to the data, revision or corruption of the data, or unauthorized use of the data. Some of the major controls used at NCHS include access control, user authentication, encryption, access monitoring, provision of unalterable electronic content, and audit trails. Dissemination of data also follows generally recognized guidelines in terms of defining acceptable standards regarding minimum response rates, maximum standard errors, cell size suppression, quality of coding, and other processing operations. NCHS also maintains staff expertise in areas such as concept development, survey planning and design (including questionnaire development and testing), data collection, data processing and editing, data analysis, evaluation procedures, and methods of dissemination. We based our data request to NCHS on several key fields in the death certificate including residence, birthplace, and cause of death in order to identify likely cases of border-crossing deaths. The CDC Medical Examiners and Coroner Handbook on Death Registration provides detailed instructions on the registration of deaths and guidance on completing the U.S. Standard Certificate of Death. According to the handbook, the residence of a decedent (state, county, city, and street address) is the place where the decedent’s household is located, the place where the decedent actually resided, or where the decedent lived and slept most of the time. If the decedent was not a resident of the United States, the country of residence should be entered into the residence field of the death certificate. If the decedent’s residence is not known, “unknown” is entered into the residence field. The guidance also specifies that, for decedents who were not born in the United States, the country of birth should be entered into the death certificate, regardless of whether the person was a U.S. citizen at the time of death. CDC’s specifications further state that the underlying cause of death listed on the death certificate should be the disease or injury that initiated the chain of events that led directly and inevitably to death. The underlying cause of death is defined as “the disease or injury which initiated the train of morbid events leading directly to death, or the circumstances of the accident or violence which produced the fatal injury.” Reported causes of death are then translated into codes through a classification structure outlined in the International Classification of Diseases (ICD) developed by the World Health Organization. The ICD is used to classify diseases and other health problems recorded on many types of health and vital records including death certificates and hospital records. In 1999, a revision of the ICD was implemented. The International Statistical Classification of Diseases and Related Health Problems, Tenth Revision (ICD-10), established revised codes for classifying mortality data and revised rules for selecting the underlying cause of death. ICD-10 replaced classification codes and rules outlined in the previous version of the manual, the International Classification of Diseases, Ninth Revision (ICD-9). The codes outlined in the 9th revision (ICD-9) apply to all deaths registered between 1979 and 1998, while the 10th revision (ICD-10) applies to all deaths from 1999 to the present. In order to identify migrant deaths recorded in the NCHS main mortality file—which contains records of all deaths occurring in the United States— we requested that NCHS provide us with aggregate, county-level data on migrant border-crossing deaths by applying a set of specifications to the data in the main mortality file. Our specifications included the following: (1) a death must have occurred within 1 of the 45 counties in the BSI target zone; (2) the death must have occurred in years beginning with 1990 and going through 2003, the most recent year for which NCHS data were available at the time we did our work; and (3) deaths must be limited to decedents who were foreign born, had a place of residence outside the United States at the time of death, and died from one of the causes of death that we associated with border-crossing deaths. We provided NCHS a list of causes of death from the codes contained in the ICD codes— which, as described above, are used to classify the underlying cause of death reported on the death certificate by public health officials such as medical examiners and county coroners—and asked that NCHS officials select those cases that matched one of the underlying causes of death on our list. By requesting data over the period from 1990 to 2003, we identified both ICD-9 and ICD-10 codes. We selected cause of death codes that were associated with migrant border-crossing deaths used in the CIR studies, the causes of migrant deaths identified by the Border Patrol, as well as causes most commonly used by county medical examiners, advocacy groups, and academic researchers. These include dehydration, heat exposure, drowning, cold exposure, homicide, and traffic accidents among others. Our data specifications also requested that NCHS provide us with separate counts of decedents with unknown places of birth. NCHS provided separate datasets for each year. The datasets also contained counts of migrant deaths by age group and gender. After receiving the data from NCHS, we reviewed the programming code as well as the statistical output in order to verify that the results matched our initial specifications. Because the place of residence listed on the death certificate is not necessarily the same as the decedent’s home state, voting residence, mailing residence, or legal residence, our counts of border-crossing deaths may include some decedents who were either legal visitors or legal residents of the United States but who were residing in another country when they legally crossed the border and subsequently died. Additionally, NCHS officials reported that if a body is discovered and the body is unable to be identified, the person may be assumed to be a U.S. resident. As a result, our counts may have excluded unidentified migrants who were presumed to be U.S. residents by public health officials completing the death certificate. Similarly, we requested that NCHS only provide data on those cases where the underlying cause of death was a death commonly associated with border-crossing. Focusing on the underlying cause of death could result in undercounts of border-crossing deaths; cases could be missed if the commonly associated causes are not reported when appropriate or if they are reported incorrectly out of sequence. For example, heat exhaustion may precipitate a heart attack. If heat exhaustion is not reported at all or if it is not reported correctly as the cause of the heart attack, then the heart attack would be coded as the underlying cause, and the case would be excluded because the NCHS data did not include heart attacks in the list of commonly associated causes of border-crossing deaths. Alternatively, the NCHS data could also represent an overcount of deaths if cause of death categories were defined too broadly and resulted in the inclusion of deaths that were not directly related to border-crossing. In order to determine the reliability of the NCHS data for identifying trends in deaths, we interviewed NCHS officials responsible for maintaining vital registry mortality data and reviewed published NCHS guidance on the completion of death certificates. We conducted interviews with NCHS researchers, academic experts, and county medical examiners familiar with the vital registry data about the data’s strengths and limitations for accurately capturing data on border-crossing deaths. We also reviewed NCHS documentation about the methods for collecting and analyzing death certificate data in preparing the main mortality files. In order to understand the methods and data compiled by CIR, we conducted interviews with Karl Eschbach, the lead author of the studies, about his methods for collecting and analyzing the data and also conducted a GAO internal review of CIR methods. We analyzed specific data elements in the BSI data that were relevant to our analysis of border-crossing deaths. These included the number of deaths, the types or causes of death—such as exposure to heat/cold, motor vehicle accidents, drowning, and others—the location of deaths including the county, sector, and GPS coordinates, and demographic information on the decedent including age, gender, and country of origin. We imported the data from the spreadsheet provided by the Border Patrol into a statistical software package and analyzed counts of BSI-related deaths by year, sector, and cause of death for fiscal years 1998 through 2005. Based on discussions with Border Patrol officials and the criteria outlined in Border Patrol’s 2005 BSI Methodology Manual, we identified border-crossing deaths as those deaths occurring within the 45 counties in the BSI target zone and only included those entries designated by Border Patrol as migrants who were in furtherance of an illegal entry at the time of death. We also analyzed counts for characteristics of decedents including gender and age. Our analysis of the BSI data is based only on those deaths included in BSITS as of December 21, 2005. We selected cases from fiscal year 1998 through fiscal year 2005 in which border-crossing deaths were recorded as having occurred within one of the 45 counties in the BSI target zone while the decedent was in the furtherance of an illegal entry into the United States. Our methodology is consistent with the BSI definition of a border- crossing death, but it differs from the methodology that Border Patrol uses to calculate the total number of border-crossing deaths that occur each year. According to Border Patrol officials, the Border Patrol generates its reported annual death totals by selecting those cases recorded in the BSITS database that occurred within any one of the Border Patrol stations located within the BSI target zone or outside of the target zone if Border Patrol was directly involved in the incident. In our analysis of the BSI data, we only included deaths occurring within one of the 45 BSI counties and did not select deaths that may have occurred outside of the target zone. As a result, our total counts may not match the total numbers reported by the Border Patrol. Additionally, our sector-level counts of border-crossing deaths may also differ from Border Patrol’s. Border Patrol classifies deaths into sectors based on the Border Patrol station that recorded the death. Using the criteria outlined in the 2005 BSI Methodology Manual, we instead used data regarding the county in which the death occurred to classify deaths into sectors. Furthermore, 3 of the 45 counties in the BSI target zone straddle the dividing line between two different Border Patrol sectors. In these cases, our analysis may have identified deaths in these counties as occurring in one sector, while the Border Patrol’s reports may have counted the deaths as occurring in another sector. These differences in methods of classification primarily affect reported totals for the El Centro and Yuma sectors. To understand how the distributions of causes of migrant border-crossing deaths compare to the general population, we analyzed relevant BSI and NCHS data on the numbers and causes of death. From NCHS we requested aggregate, county-level datasets for the years from 1990 through 2003 of the number of U.S. residents who died each year in the 45 counties in the BSI target zone and the numbers who died from the causes of death we used to identify border-crossing deaths. We followed procedures similar to those we followed in requesting and obtaining the NCHS data on migrant deaths. We also compared counts of U.S. resident deaths by year, sector, and county, including the total numbers and causes of death with migrant border-crossing deaths between 1990 and 2003. To assess whether the apparent risk associated with migrant border- crossing deaths has changed over time, we compared data on border- crossing deaths to data on the estimated number of illegal entries reported in a published study by Jeffrey Passel at the Pew Hispanic Center as well as to data on the number of apprehensions recorded by Border Patrol. Passel’s estimates are based upon the residual methodology. We used data on apprehensions that the Border Patrol provided us. We calculated the percentage change over the period from 1998 through 2004 in the estimated number of undocumented entries, the number of apprehensions, and the number of border-crossing deaths, and we compared these percentage changes to determine if the change in the number of deaths over this period exceeded the change in the estimated number of undocumented entries and the number of apprehensions (see table 2). Because data are not available on the actual number of migrants that illegally attempt to cross the border in any given year, we used estimates of the number of border-crossers or undocumented migrants that enter the United States each year. We previously reported on some of the data limitations involved in estimating the illegal immigrant population as well as the strengths and weaknesses of the available methods for estimating the flow of illegal migrants across the border. We reviewed a number of models that have been developed in recent years by researchers and academic experts working in the arena of immigration issues. We conducted an analysis of each model and assessed the methods used by each in order to draw a conclusion about the most reliable estimates of illegal entries. Robert Warren and Jeffrey Passel employ a method for estimating the number of unauthorized migrants using both data from the decennial Census and counts from alternate government sources, such as DHS. This method counts the number of foreign born individuals in the United States, as enumerated in the Census or the Current Population Survey (CPS), and then subtracts the number who have become naturalized or who are legal resident aliens, which was obtained from the alternate government source. The difference should be the number of undocumented aliens. Because this method involves subtraction, it is sometimes called the “residual method.” Using a method similar to this one, Passel estimated that there were 10.3 million unauthorized migrants in the United States in 2004. Using annual applications of this method, he estimated that between 400,000 and 700,000 unauthorized migrants have entered the United States each year since 1992. A drawback to using this methodology for measuring the number of unauthorized migrants at risk for border-crossing deaths is that Census Bureau data, such as the CPS, only count migrants who have been in the United States for a sufficient amount of time for government census takers to locate them. Migrants who only come to the United States for a short period of time and then return to their home country would be less likely to be included in this count. Further, this methodology cannot be used to measure different rates of crossing by sector since the migrants may live in different areas from where they crossed the border. Ultimately, this method would not only count those individuals who crossed the border illegally, but also those individuals whose status changed from authorized to unauthorized, due to a visa expiring, for example. An alternate method for estimating the total number of illegal border crossings is to calculate entries based on the number of apprehensions recorded by the Border Patrol. From 1994 through 2004, Border Patrol records indicate that between 0.9 and 1.7 million migrants were apprehended in the nine southwest Border Patrol sectors each year, peaking in 2000. However, apprehensions are partially determined by the level of Border Patrol enforcement activity. Therefore, even if the level of migration remained the same, the number of apprehensions might fluctuate if the level of enforcement changes. More specifically, apprehensions are not a direct measure of successful undocumented migration, but rather they are an indication of unsuccessful undocumented migration. Unlike the residual method, because the Border Patrol maintains records of apprehensions by sector, this method can be used to estimate entries by sector. Border Patrol data indicate that, from 1992 to the present, there was a large shift in apprehensions from the San Diego Sector to the Tucson Sector. In addition, the number of apprehensions is not the same as the number of apprehended migrants, since many migrants attempt to cross the border a number of times until they are able to cross successfully. Katharine M. Donato reports survey evidence that shows that many migrants will continue to attempt to cross the border until they are able to get through undetected. Another method for estimating undocumented migration uses the number of people who have been apprehended previously to translate apprehensions into an estimate of the number of undocumented migrants crossing into the country. A version of this method is employed by Thomas J. Espenshade in his 1995 study examining the use of INS data to measure the flow of undocumented migration. Espenshade shows that the ratio of apprehensions and undocumented flow is equal to the odds of being apprehended on any given attempt to enter the United States illegally. It follows then that the flow of undocumented migrants can be calculated by dividing the number of apprehensions by those odds. Espenshade estimates that the estimated gross volume of undocumented migration generally exceeded the level of apprehensions by 2.2 in the period between 1977 and 1988. While this factor varies over time, Espenshade concludes that the two series track each other well, as the linear correlation between them is 0.90. However, there are some questions about using Espenshade’s model to estimate the current number of illegal crossings. For one, the specific factor may be different today; Espenshade’s figures are based on calculations over an 11-year period, beginning almost 30 years ago. As noted previously, the geographic pattern of migration was much different then, with a larger number of crossings occurring in the San Diego area, whereas today a more significant number of crossings occur in the desert area of Arizona. Moreover, Gordon Hanson and Antonio Spilimbergo have empirically demonstrated that as the level of border security increases, a greater number of unauthorized migrants will be apprehended. Either of these factors—a differential pattern of crossing or an increased level of Border Patrol enforcement—may affect the ability of the Border Patrol to apprehend migrants, thus affecting the extent to which Espenshade’s estimate of 2.2 crossings per apprehension can be accurately applied to current circumstances. In addition, a key assumption of Espenshade’s model is that migrants will attempt to enter repeatedly until they are successful, even if all entries were attempted within a single month. However, the plausibility of this assumption is unclear; for example, it may not be reasonable to assume that a migrant will attempt to cross the border as many as 7 times in a given month. Additionally, there are a number of other factors that may make the assumption even less plausible today than it was in the period of Espenshade’s study. Border Patrol apprehension data indicate that increasing numbers of migrants are attempting to cross in the Tucson Sector. However, due to high temperatures and rugged terrain, the desert is often more difficult for migrants to navigate than urban areas. As a result, increasing numbers of migrants hire smugglers, or “coyotes,” to help them cross. This is a large expense, and it is not clear that the coyotes refund the money if the crossing is not successful. In addition, the Border Patrol has started returning migrants to the interior of Mexico through the IRP in order to deter repeat attempts. Given the amount of time it might take a migrant to travel from the interior of the country back to the border, it seems likely that a migrant would be able to make fewer attempted crossings within a single month. In order to determine the extent to which existing data allow for an evaluation of the effectiveness of the BSI and related Border Patrol efforts, we interviewed Border Patrol officials in Washington, D.C., about how they measure the BSI including any information on established performance goals and measures. We requested any available information on BSI resources, personnel, and equipment in order to determine the extent to which the Border Patrol tracks and records information on resources in relation to established performance goals and measures. We also reviewed a number of other federal data sources on the Border Patrol’s program goals and outcome measures including documents published by the Office of Management and Budget and CBP’s annual budget submission. We reviewed and analyzed available information from the Border Patrol on program outcomes including a study on the BSI conducted in July 2004 that examined the efforts of the BSI to reduce the overall number of migrant deaths, the effectiveness of individual components of the BSI to deter crossings, and the effect of specially trained BORSTAR units, as well as the Lateral Repatriation Program, on the number of deaths. In an effort to better measure the impact of the BSI, the Border Patrol commissioned researchers at Rutgers University to evaluate the efforts of the program. As one of its objectives, the study examined the effectiveness of specialized BORSTAR agents in reducing migrant deaths when compared with Border Patrol line agents. BORSTAR agents are often deployed to high-threat areas or areas more likely to have deaths and rescues. Rather than attempt to estimate the effect of the BORSTAR agents on the number of deaths in a sector where they are deployed, the study estimates the effect of an agent’s BORSTAR training on whether an intervention results in a death or a rescue of a migrant. The researchers applied a multivariate logistic regression that corrects for the migrant’s age, gender, and the number of accompanying migrants. Using existing data provided by the Border Patrol, they found that the probability of a death is 88 percent less when a BORSTAR agent responds, as opposed to a non-BORSTAR Border Patrol agent. The study’s findings present an argument for BORSTAR’s effectiveness. If BORSTAR agents have training that allows them to better treat injuries, it follows that more rescued migrants will survive. However, it is unclear whether findings from this analysis can be used as an evaluation of the BSI as a whole without additional research. BORSTAR agents are only one component of the BSI with a total of 164 BORSTAR agents deployed in the 9 sectors along the southwest border as of October 2005. In order to understand the effectiveness of the program as a whole, it would be necessary to examine the impact of other components of the program including the use of rescue beacons, the impact of the media campaign to discourage migrants from attempting to cross the border illegally, and the effectiveness of other non-BORSTAR Border Patrol agents that may rescue migrants in need of assistance. In 2005, the Border Patrol issued a report on the outcomes of the Interior Repatriation Program (IRP), an effort initiated as part of the ABCI. The Border Patrol reports that the IRP was intended to break the ties between migrants attempting to cross the border and the smuggling organizations that move people across the border. Program participants are migrants who are apprehended while attempting to illegally cross the border; the IRP offers them the option to be voluntarily repatriated to their hometown, rather than being returned to a land port of entry along the border where they might be more likely to attempt to cross again. The program claimed a number of successes including a decrease in the total number of exposure related deaths between 2003 and 2004 in Arizona, as well as a lower recidivism rate among program participants. However, exposure related deaths in the Tucson and Yuma Sectors actually increased between 2004 and 2005. While the Border Patrol claims that the IRP was responsible for reducing the number of deaths in Arizona between 2003 and 2004, they do not similarly tie the increase in deaths between 2004 and 2005 to the program. Rather, Border Patrol officials point out that increased desert temperatures and improved data collection methods may have contributed to the increase in recorded deaths. Similarly, they state that increased numbers of deployed BORSTAR agents may have increased the likelihood that agents would find deceased migrants in the course of their patrols. Factors discussed in this report point out that changes in the number of deaths alone cannot serve as a reliable indicator for the success of the BSI or the IRP. As the Border Patrol correctly notes, any number of factors beyond the efforts of the Border Patrol may affect the number of deaths from one year to the next. Just as the increase in recorded deaths between 2004 and 2005 may have been affected by any one of a number of factors including increased temperatures, increased patrols, or improved data collection, the decline in deaths between 2003 and 2004 may have also been affected by a number of factors independent of the IRP. Similarly, the report points to the decreased recidivism rate among program participants, noting that the reentry rate was lower among program participants than illegal aliens that were returned to land border ports of entry. However, currently participation in the IRP is voluntary, and those migrants who elect to participate may be less likely to attempt to cross the border again. Conversely, those migrants who intend to continue to attempt to cross until they are successful may be less likely to participate in the IRP. In addition to the contact named above, William J. Sabol, Samantha Goodman, Benjamin Bolitzer, Chad M. Gorman, David Alexander, Amy Bernstein, Frances Cook, Ignacio Yanes, Jerry Seigler, Christopher Ferencik, and Stephen Rossman made key contributions to this report. | Reports in recent years have indicated that increasing numbers of migrants attempting to enter the United States illegally die while crossing the southwest border. The Border Patrol implemented the Border Safety Initiative (BSI) in 1998 with the intention of reducing injuries and preventing deaths among migrants that attempt to cross the border illegally. GAO assessed: (1) Trends in the numbers, locations, causes, and characteristics of border-crossing deaths. (2) Differences among the Border Patrol sectors in implementing the BSI methodology. (3) The extent to which existing data allow for an evaluation of the effectiveness of the BSI and other efforts to prevent border-crossing deaths. GAO's analysis of data from the BSI, the National Center for Health Statistics (NCHS), and studies of state vital registries shows consistent trends in the numbers, locations, causes, and characteristics of migrant border-crossing deaths that occurred along the southwest border between 1985 and 2005. Since 1995, the number of border-crossing deaths increased and by 2005 had more than doubled. This increase in deaths occurred despite the fact that, according to published estimates, there was not a corresponding increase in the number of illegal entries. Further, GAO's analysis also shows that more than three-fourths of the doubling in deaths along the southwest border since 1995 can be attributed to increases in deaths occurring in the Arizona desert. Differences among the BSI sector coordinators in collecting and recording data on border-crossing deaths may have resulted in the BSI data understating the number of deaths in some regions. Despite these differences, our analysis of the BSI data shows trends that are consistent with trends identified in the NCHS and state vital registry data. However, the Border Patrol needs to continue to improve its methods for collecting data in order to accurately record deaths as changes occur in the locations where migrants attempt to cross the border--and consequently where migrants die. Improved data collection would allow the Border Patrol to continue to use the data for making accurate planning and resource allocation decisions. Comprehensive evaluations of the BSI and other efforts by the Border Patrol to prevent border-crossing deaths are challenged by data and measurement limitations. However, the Border Patrol has not addressed these limitations to sufficiently support its assertions about the effectiveness of some of its efforts to reduce border-crossing deaths. For instance, it has not used multivariate statistical methods to control for the influences of measurable variables that could affect deaths, such as changes in the number of migrants attempting to cross the border. |
Research points to teacher quality as an important school-level factor influencing student learning and ultimately preparing children for their futures as citizens and workers in a knowledge-based economy. However, efforts to improve the quality of teachers face several challenges. One challenge is a lack of consensus about what makes teachers effective. Even though research demonstrates that some teachers affect their students’ academic growth more than other teachers, research has not categorically identified the specific indicators of teacher quality, such as the characteristics, classroom practices, and qualifications that are most likely to improve student learning. Some researchers have shown that with the exception of a few factors, they cannot state, with a strong degree of certainty and consistency, which aspects of teacher quality matter most for student learning. Another challenge is the high attrition rates and shortages of teachers, especially in high-poverty areas. For example, almost half of teachers leave the profession in the first 5 years of teaching, and there is an anticipated surge in retirements of teachers from the baby boom generation. Moreover, research has shown that many students, especially those in high-poverty and high-minority schools, have teachers who have limited knowledge of the subjects they teach. In addition, there are concerns that graduates of teacher education programs are inadequately prepared to teach to high standards and that once teachers are in the classroom, training to help remedy this situation is sporadic and uncoordinated. While many teachers follow a traditional career path of preparation followed by ongoing professional development, there are also alternative career paths. Many prospective teachers receive their undergraduate degrees through teacher preparation programs administered by institutions of higher education. Traditional teaching preparation programs typically include field-based experience, courses in specific subject matter, and strategies of instruction or pedagogy. Within institutions of higher education, these prospective teachers generally learn subject matter content in schools of arts and sciences and learn pedagogy in schools of education. Under this traditional approach, prospective teachers must complete all their certification requirements before beginning to teach. Teachers may also gain certification through alternative routes designed for prospective teachers who have been out of the job market (e.g., stay-at-home mothers) or have a career in a different field and who hold at least an undergraduate degree. Alternative route candidates receive training needed to meet the certification requirements of other teachers while teaching in the classroom. Generally, after completing a traditional or alternative teacher preparation program, teachers in the classroom participate in ongoing training or professional development. Training for new and veteran teachers may differ, with some states and school districts providing mentoring or induction programs for new teachers. Induction for new teachers may include district- or school- level orientation sessions, special in-service training, mentoring by an experienced teacher, and classroom observation. See figure 1 for an illustration of the various steps in the career path for teachers. Entities at the local, state, and federal levels each play a role in the preparation and ongoing professional development training of teachers. The roles and responsibilities of these entities sometimes overlap (see table 1). For example, about half of alternative teacher certification programs are administered by institutions of higher education, and school districts, state educational agencies (SEA), and other entities can also offer alternative routes to certification. State agencies for higher education (SAHE)—also referred to as the board of regents or the department, commission, or council for postsecondary or higher education—can also play a role in teacher quality. These agencies oversee state institutions of higher education where most teachers are trained. SAHEs generally approve of new academic programs at institutions of higher education and some may have budgetary authority. School districts, institutions of higher education, and states collect and report data, which include tracking teachers’ professional development hours, maintaining records of certified teachers, tracking student test scores and graduation rates, as well as producing teacher supply and demand studies. These and other data are intended to inform efforts such as improving schools, reducing student achievement gaps, and tracking the highly qualified status of all teachers. To make better use of these data, many states are putting in place longitudinal data systems that link data, such as student test scores and enrollment patterns, of individuals or groups of students over time. In addition, many states are using or have interest in using growth models—a term that refers to a variety of methods for tracking changes in a variable over time—to measure progress for schools and for student groups or individual students. For example, one type of model (known as a value-added model) measures students’ gains from previous test scores. GAO has reported that states with a longitudinal data system will be better positioned to implement a growth model than they would have been without it. The federal government plays an important role in education. Education’s mission is, among other things, to ensure equal access to education and promote educational excellence throughout the nation by supporting state and local educational improvement efforts, as well as improving coordination and management of federal education programs. For example, Education provides financial assistance through various formula and competitive grant programs. Formula grants allocate federal funds to states or school districts in accordance with a distribution formula prescribed by statute or administrative regulation. Competitive grants are awarded through a competitive process, whereby grant applications are reviewed according to published selection criteria and legislative and regulatory requirements established for the program. Education has discretion to determine which applications best address the program requirements and are thus worthy of funding. In addition, Education monitors and conducts activities related to the particular program and grantees receiving these funds. Education has eight principal offices responsible for specific program areas. These principal offices award and manage all grant programs for that program area. In addition, each principal office contains several program offices that administer the day- to-day activities of one or more grant programs, such as those authorized in Title I of ESEA (see table 2). Thirty-two program offices manage about 150 grant programs departmentwide. A goal of ESEA is improving student achievement so that all students will be proficient in math and reading by 2014. To accomplish this goal, Education has established a series of strategic objectives that include improving teacher quality. To assess its progress in meeting this objective, Education has established performance measures in its strategic plan. These measures all relate to having highly qualified teachers in core academic classes at elementary and secondary schools, including low- and high-poverty schools. These measures are also included in Education’s annual performance plan. These plans are intended to provide a direct linkage between an agency’s longer-term goals (as defined in the strategic plan) and what its managers and staff are doing on a day-to-day basis. A number of federal laws govern teacher quality. With the 2001 reauthorization of ESEA, which requires public school teachers to be highly qualified in every core academic subject they teach, the federal government established specific criteria for teachers. Title I of ESEA requires every state and school district receiving Title I funds to develop and submit a plan for how it intends to meet the teacher qualification requirements, which is part of a broader plan outlining how it will meet other requirements of the act such as those requiring challenging academic content and student achievement standards. In addition, the state plan must establish each district’s and school’s annual measurable objectives for increasing the number of teachers meeting qualification requirements and receiving high-quality professional development with the goal of ensuring that all teachers met the requirements by the end of the 2005-2006 school year. While there is evidence that most teachers meet their states’ requirements to be considered highly qualified, schools and school districts with high student poverty rates have generally had particular difficulty attracting and retaining highly qualified teachers; as a result, their students are often assigned to teachers with less experience, education, and skills than those who teach other students. As GAO has reported, Title II of ESEA provides states and districts with funding to help them implement various initiatives for raising teacher and principal qualifications. In addition, other federal laws that authorize programs intended to influence teacher quality include the following: The Individuals with Disabilities Education Act is the primary federal law addressing the educational needs of students with disabilities. The act, as amended, cross-references the ESEA “highly qualified” teacher definition, but unlike ESEA, this act requires that all special education teachers—not just those teaching core subjects—must meet certain requirements. The Higher Education Act (HEA), as amended by the Higher Education Opportunity Act, authorizes most of Education’s programs targeted to postsecondary education. Specifically, the act established discretionary grants to prepare prospective teachers and accountability requirements for teacher preparation programs and states. For example, it requires annual reporting on the quality of traditional and alternative teacher preparation programs, including the efforts of institutions of higher education to increase the number of prospective teachers teaching in high-need areas and being responsive to the needs of school districts. The Education Sciences Reform Act is intended to strengthen the principal education research, statistics, and evaluation activities of Education. Within Education, it established the Institute of Education Sciences, which has a mission to provide reliable information about the condition and progress of education in the United States, educational practices that support learning and improve achievement, and the effectiveness of federal and other education programs. Over a third of the programs that Education administers support efforts to improve teacher quality. Many of these statutorily authorized programs supporting teacher quality are intended to specifically support teacher quality activities, such as professional development training for teachers already serving in the classroom; the remaining programs support teacher quality activities but do so in pursuit of other program purposes or goals. Education officials said they have taken some steps to share information among the multiple offices administering these programs and have established and completed broader collaborative efforts on occasion. In fiscal year 2009, Education administered 56 statutorily authorized programs that support efforts to improve teacher quality. Of these 56 programs, Education allocated about $4.1 billion to 23 programs that have, as a specific purpose, improving teacher quality, including increasing the number of highly qualified teachers in the classroom. The remaining 33 programs do not have the primary purpose of improving teacher quality and focus on other program goals or purposes, such as increasing student access to institutions of higher education. Nevertheless, these programs allow or require some portion of program funding to be used for teacher quality activities. Education officials said that they do not collect specific data on the amount of funding going to teacher quality activities for most of these programs. Appendixes II and III provide information about each of the programs. Of the 23 programs that specifically focus on improving teacher quality, a majority of the funds (approximately $3 billion) are concentrated in one program, the Improving Teacher Quality State Grant program. This formula grant is allocated primarily to school districts and may be used for a wide variety of activities to improve teacher quality, such as providing funding for teacher preparation, training for teachers already in the classroom, and recruitment. In addition, states may retain approximately 5 percent of these program funds to support teacher quality efforts— generally split evenly between state educational agencies (to support state-level teacher initiatives) and state agencies for higher education (to support partnerships between institutions of higher education and high- need school districts that work to provide training to teachers already teaching in the classroom). As shown in figure 2, 16 of the 23 programs specifically focused on teacher quality each received less than $50 million. Nearly all of these programs are competitive grants, and each has its own policies, applications, award competitions, reporting requirements, and, in some cases, federal evaluations. Furthermore, these programs are focused to support specific activities, such as improving teachers’ knowledge and understanding of American history, recruiting midcareer professionals to teaching, or training existing teachers in music, dance, and drama. As illustrated in table 3, most of the 23 programs allow funds to be used for professional development training for teachers already in the classroom, but many allow grantees to use funding for a range of activities throughout a teacher’s career path, such as teacher preparation, teacher recruitment or retention, certification or licensure, and induction or mentoring. The remaining 33 programs allow or require portions of their funds to be used for teacher quality activities, but their primary focus is not on improving the quality of teachers. Education does not routinely track spending on teacher quality activities for nearly all of these programs. Specifically, only 3 of these 33 programs have collected information about the portion of funds spent on teacher-related activities. For example, according to Education, ESEA Title I, Part A, which provides support to programs designed to address the needs of educationally disadvantaged children, also provided approximately $1.9 billion (or about 8 percent of Title I, Part A funds) for spending on training for existing teachers in fiscal year 2009. According to Education, between fiscal years 2000 and 2008, the Fund for the Improvement of Postsecondary Education- Comprehensive Program—a program supporting innovative reform projects for improving the quality of postsecondary education and increasing student access—awarded about $82 million in grants for teacher quality-related activities. For example, in fiscal year 2007 Western Oregon University received a grant totaling $685,685 to support a statewide collaboration of institutions of higher education to build the capacity of elementary grades math and science instruction. Education officials said the department does not collect data on expenditures for most other programs in this category. In addition to the funds provided through the regular fiscal year 2009 appropriations for Education, the American Recovery and Reinvestment Act of 2009 (the Recovery Act) provides additional funds to several of these 56 teacher quality programs for fiscal year 2009. For example, $200 million in Recovery Act funds was provided to the Teacher Incentive Fund, which is a competitive grant program intended to help states and school districts design performance-based teacher compensation systems that incorporate student performance as a factor in assessing the effectiveness of practicing teachers. Moreover, the Recovery Act requires that the Secretary of Education set aside $5 billion for State Incentive Grants, referred to by Education as the Reach for the Top program, and the establishment of an Innovation Fund. Education is providing most of this $5 billion of funding to states for efforts that could include making improvements in evaluating teacher effectiveness as well as ensuring that all students have access to highly qualified and effective teachers. Appendix II contains information on the 23 programs receiving Recovery Act funds. According to Education officials, the multiple offices administering the 23 programs specifically focused on teacher quality coordinate with one another, and on occasion the department has established and completed broader collaborative efforts. Federal support for teacher quality is dispersed across a wide array of grant programs in Education, with nine program offices responsible for administering them (see table 4). Education’s program office officials said their offices take some steps to coordinate with one another, such as participating in informal discussions to share ideas, attending and presenting at one another’s conferences, and reviewing one another’s draft grant announcements. In addition, officials said that they have formed task groups to address broader issues and phase them out once their tasks are complete. For example, in early 2003, Education formed a teacher quality policy group under the auspices of the Office of the Undersecretary of Education to coordinate multiple offices’ efforts related to ESEA implementation of the highly qualified teacher requirements. Nevertheless, in the past, GAO’s and Education’s Inspector General’s findings have shown that Education’s programs could better plan and coordinate to, among other things, leverage expertise and resources as well as guide consideration of different options for addressing potential problems among the current configuration of programs. While Education’s collaborative efforts have occurred intermittently, several Education officials told us that they see value in routinely working together to exchange information across the program offices. Officials we spoke with noted that this type of sustained coordination required support and attention from senior departmental officials, such as formalizing the responsibilities and roles of a working group and its members. Given that the Recovery Act provides funds to improve teacher effectiveness, Education officials said that this presents an opportunity to coordinate Education’s resources to improve teacher quality. Specifically, Education officials said that they recently have initiated coordination efforts to address the Recovery Act requirements related to teachers by forming a team made up of representatives from several program offices and led by the Secretary’s advisors. Education officials said that although several teacher quality programs support similar activities, differing statutory requirements can hamper coordination among the programs. Specifically, some officials said that statutory barriers, such as programs with differing definitions for similar populations of grantees, create an impediment to coordination. For example, Education officials told us that the Mathematics and Science Partnerships grant and the Improving Teacher Quality State (Title II, Part A) Grant to institutions of higher education both require partnerships that include a “high-need” school district. However, while the Title II, Part A program’s authorizing legislation contains a specific statutory definition of a high-need school district, the Mathematics and Science Partnerships program allows states to define this term. This may hinder states’ ability to coordinate resources among these initiatives because in most states far fewer school districts meet the Title II, Part A definition than meet the definition that the state develops for the Mathematics and Science Partnerships program. Education has not described in its annual performance plan how it will coordinate various crosscutting teacher quality activities supporting its goal of improving student achievement. Our previous work has identified using strategic and annual plans as a practice that can help enhance and sustain collaboration. As indicated in Education’s strategic plan required by the Government Performance and Results Act (GPRA), one of Education’s primary goals is improving student achievement so that all students will be proficient in math and reading by 2014. To accomplish this goal, it has established improving teacher quality as a strategic objective. However, the annual performance plan neither describes how Education coordinates or will coordinate its teacher quality efforts nor identifies barriers to such coordination. GPRA offers a structured means for identifying multiple programs—within and outside the agency—that are to contribute to the same or similar goals and for describing coordination efforts to ensure that goals are consistent and program efforts are mutually reinforcing. As GAO has previously reported, agencies can strengthen their commitment to work collaboratively by articulating their efforts in formal documents, such as in a planning document. We have also reported that uncoordinated program efforts can waste scarce funds, confuse and frustrate program customers, and limit the overall effectiveness of the federal effort. Officials we spoke with in four principal offices overseeing some of the teacher quality improvement programs said that they use a variety of methods and sources of information throughout the life of the grant process to gain insight into the performance of grantees and to target monitoring assistance accordingly. To help ensure grantee accountability for using teacher quality program resources, monitoring begins with pre- award planning, training, and guidance to potential grantees and continues through all phases of the award and postaward processes (i.e., a so-called cradle-to-grave approach). For example, for the Teaching American History program, program officials said they provide guidance to applicants and grantees about how to develop performance measures related to program goals so that Education can obtain credible information on funded project outcomes from grantees. For competitive grant programs, officials in the relevant principal offices we spoke with said they review grantees’ annual performance reports to assess whether grantees’ activities are consistent with planned objectives, with Office of Innovation and Improvement officials saying they use a standard form to guide their review. Furthermore, staff from the Office of Elementary and Secondary Education visit each state at least once every 3 years to monitor state efforts to meet the teacher qualification requirements and states’ administration of ESEA Title II, Part A Improving Teacher Quality State Grants. In 2008, the Office of Elementary and Secondary Education conducted monitoring visits to 18 states and Puerto Rico, including 2 of our 3 site visit states and provided written monitoring reports on Education’s Web site about these states’ implementation of the ESEA teacher qualification requirements. For example, Education found instances in 2 of our site visit states of grants being awarded by state agencies for higher education that included an ineligible partnership. In 2009 Education officials said they plan to conduct monitoring visits to 15 other states through June as part of the department’s goal to monitor each state every 3 years. In addition, Office of Special Education and Rehabilitative Services officials said they use the results of telephone conversations with grantees, technical assistance meetings, and conferences to understand grantee activities. In addition to these methods of targeting teacher quality program grantees, senior Education officials said that Education is beginning to implement risk management mechanisms to help program offices, including those administering teacher quality programs, better identify and target grantees not in compliance with grant requirements or not meeting performance goals. Senior Education officials said that applying risk management in Education is a relatively new endeavor and that responsibility rests with individual program offices for identifying risks confronting each program and for using risk indicators. These officials said Education’s risk management approaches will continue to evolve as processes mature and lessons are learned. Given that this endeavor is relatively new and that principal and program offices tailor their monitoring to the particular teacher quality program or grantee involved, we found that some of the program offices are further along in developing risk indicators than others. For example, the Office of Postsecondary Education has developed an electronic grants monitoring system using risk-based criteria for its competitive grants. Officials we spoke with in some of the other program offices that administer teacher quality programs had not developed formal risk-based criteria or electronic systems; however, as described previously, they have a means for identifying and targeting grantees that may be at risk of noncompliance with grant requirements or not meeting performance goals. Education is beginning to implement mechanisms intended to enhance as well as coordinate these efforts, such as sharing information about grantees. To coordinate a departmentwide risk-based management strategy, as well as assist program offices with their monitoring efforts, Education created the Risk Management Service. This office provides services to program offices, such as responding to their inquiries about policy interpretations and monitoring grants. Some program office officials we spoke with said that the Risk Management Service alerts them about grantees that are having problems managing other Education grants. As part of this effort, senior Education officials described plans for standardizing departmentwide systems for sharing information about grantees’ management of federal funds and performance. For example, Education is developing an automated process for enhancing its review of the findings of financial audits, called single audits, within their programs. As has been done in the past, this information is shared with teacher quality program managers and others in the department. Education officials we spoke with who are in several of the offices overseeing teacher quality programs said they review single-audit results, as required, to determine whether entities receiving an Education grant may have compliance or financial management issues. In addition, officials also said that Education is in the process of developing a departmentwide electronic tool to help program offices improve efforts to quantify, evaluate, and report on grantee risk. In addition to providing grants for teacher quality, Education has conducted evaluations for some of its 23 teacher quality programs, although little is known about the effectiveness of these programs. Moreover, Education awards grants to researchers for original research on teacher quality programs and interventions. Information from the evaluation and research is provided mainly through various vehicles on the Internet, and Education directs research and assistance to states and school districts through a system of regional and national providers. Education officials reported that these regional and national providers coordinate to provide this assistance to states and school districts. Education conducts various types of evaluations, such as process or implementation, outcome, and impact, which are intended to inform policymakers, program managers, and educators about program operations, how well programs are working, and which programs or interventions are having the greatest impact. Officials said that these evaluations are done in response to congressional mandates, requests from Education’s program offices or management, or proposals developed by the Institute of Education Sciences. While evaluations have been done or are under way for about two-fifths of the teacher quality programs, little is known about the extent to which most programs are achieving their desired results. Among the 23 programs focusing specifically on teacher quality, Education reported that it has awarded contracts, totaling about $36.5 million, to evaluate 9 federal programs, of which 6 have been completed (see table 5). Three of the completed evaluations—those for the Early Reading First program, Teacher Quality Partnership Grants, and one of two evaluations of the Mathematics and Science Partnerships program—provide information about how a program focused on teacher quality is directly affecting student achievement or how program outcomes could be indirectly affecting student achievement through their effect on teacher quality. For example, the impact evaluation of the Early Reading First program found that providing scientifically based materials and professional development to teachers had a statistically significant impact on children’s ability to recognize letters of the alphabet and to associate letters with their sounds, but it did not have a statistically discernable impact on other aspects of children’s reading or listening skills. The outcome evaluation of the Teacher Quality Partnership Grants found that funded partnerships that included colleges of education, schools of arts and sciences, and school districts led to changes in teacher preparation programs and the development of professional development programs for veteran teachers. The three remaining completed evaluations, which include a second evaluation for the Mathematics and Science Partnerships program, are process evaluations that provide information about program operations, but they do not directly address how the program is affecting student achievement through improved teacher quality. The three evaluations under way are impact or outcome evaluations. Education officials said that for the remaining 14 programs that do not have an evaluation under way, evaluations are not planned over the next 3 years. Of these 14 programs, 2 were initially funded in fiscal year 2008 and another 1 in 2005, but the other 11 have been operating for at least 7 years and have never been evaluated. According to Education officials, some programs may be difficult to evaluate. In some cases federal funds are combined with state and local funds, such as under the Improving Teacher Quality State Grants (Title II, Part A) program, making it difficult to isolate the impact of federal funds. While the Improving Teacher Quality State Grants program has not been evaluated, Education has examined the implementation of teacher quality provisions in the ESEA, primarily those related to the teacher qualification requirements. Moreover, Education officials said that several of the teacher quality programs are small in terms of their funding levels and as a result, have few program-associated funds for evaluation. However, as we have reported in the past, evaluations can be designed to consider the size of the program and the costs associated with measuring outcomes and collecting data. In addition to the federal program evaluations shown in table 5, Education evaluates specific interventions intended to improve teacher quality. For example, Education has conducted or has under way evaluations on teacher induction programs, teacher preparation programs, and reading and mathematics professional development and software programs. Specifically, Education completed studies on the impact of professional development on teacher practices and student achievement in early reading as well as on teachers trained through different routes to certification. Moreover, Education and the National Academy of Sciences completed another study on the National Board for Professional Standards, which offers advanced-level certification to teachers. Further, Education officials said that they have 5 other studies under way, such as a study on moving high-performing teachers to low-performing schools. Interventions such as teacher induction programs and professional development are funded under a broad array of teacher quality programs, such as the Improving Teacher Quality State Grants, the Teacher Quality Partnership Grants, the Transition to Teaching program, and Mathematics and Science Partnerships. Education officials overseeing evaluations said that to inform staff in program offices working on related issues, they provide briefings on the results of pertinent evaluations. These briefings include discussions about how the evaluation might be useful for program improvement. In addition to evaluating federal programs, Education also awards grants to researchers to conduct studies related to teacher quality ranging from assessing the effectiveness of reading and mathematics programs to measuring the relationship between teacher content knowledge and student achievement. For example, Education sponsors scientifically rigorous research on strategies for improving the performance of classroom teachers, 1 of 13 research areas established by Education’s Institute of Education Sciences (IES). Between 2003 and 2009, Education awarded almost $160 million in grants to research institutions for 69 studies focused on teacher quality. (See app. IV more information about these studies.) Education disseminates results from its research to educators and policymakers mainly through the Internet and a system of regional and national providers. Overall, while SEAs reported that the assistance was more useful than SAHEs reported, the results of our survey and discussions with state officials suggest that most of these services are targeted to SEAs and school districts rather than higher education entities. For example, one of the primary Internet vehicles for disseminating research—the What Works Clearinghouse—was identified by officials in 24 of the 48 SEAs as moderately to extremely useful, but only by officials in 15 of the 47 SAHEs that responded to our survey as moderately to extremely useful, as shown in figure 3. Overseen by IES, the What Works Clearinghouse provides educators, policymakers, researchers, and other users with information on what IES considers the best evidence on the effectiveness of specific interventions. For example, IES officials told us that the results of research are synthesized into Practice Guides to make them more usable to practitioners. Current Practice Guides provide information in areas such as reducing behavior problems in the classroom and encouraging girls in math and science. Education also disseminates research through another Internet vehicle, the Doing What Works Web site, which is intended to help teachers make use of effective teaching practices. Most of the content of Doing What Works is based on information provided through the What Works Clearinghouse, such as classroom practices that are distilled from research contained in the Practice Guides; the site is overseen by the Office of Planning, Evaluation and Policy Development. Only 16 of the 48 SEA and 10 of 47 SAHE officials who responded to our respective surveys identified the Doing What Works Internet site as moderately to extremely useful. According to an Education official, these views may reflect the fact that the site is relatively new, and Education has not widely publicized it. Education provides research and research-related assistance on teacher quality through regional and national service providers, which work directly with states and school districts. Regional services are provided through the 10 Regional Educational Laboratories (REL) and 16 Regional Comprehensive Centers; national services are provided through the National Comprehensive Center for Teacher Quality. The RELs provide policymakers and educators with technical assistance, training, and research that are based on findings from scientifically valid research. The RELs distill and explain research as well as conduct research to identify effective programs and to address classroom issues facing the states, school districts, schools, and policymakers within their respective regions. Among the 48 SEA officials who responded to our survey, 30 reported that the RELs are moderately to extremely useful, and 17 of the 47 SAHE officials who responded to our survey reported that the RELs are moderately to extremely useful. Education’s 16 Regional Comprehensive Centers assist SEAs within their regions to implement ESEA and to build SEA capacity to help their districts and schools meet student achievement goals. Unlike the RELs, the Regional Comprehensive Centers do not conduct research, but they do identify and synthesize existing research to help SEA officials understand what information is available to improve their schools and student achievement, according to Education officials. Among the 48 SEA officials who responded to our survey, 33 reported Regional Comprehensive Centers’ assistance as moderately to extremely useful, while only 6 of the 47 SAHE officials who responded to our survey said that the Regional Comprehensive Centers were moderately to extremely useful. The National Comprehensive Center for Teacher Quality (one of five National Content Centers supported by the Office of Elementary and Secondary Education) assists the 16 Regional Comprehensive Centers by providing technical assistance in conjunction with their work with the states. Like the Regional Comprehensive Centers, the National Comprehensive Center for Teacher Quality does not conduct original research but provides technical assistance as well as synthesizes and disseminates scientifically based research on effective practice and research-based products on teacher quality. Regional and national providers coordinate among themselves and with each other to assist states and districts to improve teacher quality. For example, REL officials said that RELs coordinate among themselves to prevent unnecessary duplication of activities among the regions, as required by their funding agreements with Education. The REL Mid- Atlantic is responsible for ensuring that there is coordination among the 10 RELs. In this role, it manages a REL Web site, which includes information on past and ongoing projects, and it holds regular meetings among the RELs. Regional Comprehensive Center officials also reported that they share information among themselves but on a more informal basis than the RELs. One comprehensive center director reported that the comprehensive center network has several mechanisms for discussing work with states, including semiannual director meetings and conferences that are attended by the staff and directors from the various Regional Comprehensive Centers. RELs, Regional Comprehensive Centers, and the National Comprehensive Center on Teacher Quality also coordinate with each other as needed. For example, an official with the National Comprehensive Center on Teacher Quality told us that officials often coordinate with the Regional Comprehensive Centers and the SEAs to provide expertise on teacher quality issues. In addition, Education officials said that RELs and the Regional Comprehensive Centers coordinate as needed to address common concerns as well. For example, in one region the Regional Comprehensive Center brought together the REL and the National Comprehensive Center for Teacher Quality to conduct a study of the distribution of highly qualified teachers in one state, as well as the policies, practices, and conditions that affect that distribution. In this effort, the REL used its expertise in research to provide support on research design and data analysis; the National Comprehensive Center for Teacher Quality, while not involved directly with the research, developed surveys and interview protocols for the study; and the Regional Comprehensive Center coordinated the project and piloted the data collection instruments. State agency officials cited limited resources and incompatible data systems as the greatest challenges to their collaborative efforts within the state to improve teacher quality. Resistance to change, sustained commitment, and state governance structure also affected their efforts to collaborate. While state officials reported some challenges, they also reported successes in their efforts to collaborate within their states across a wide array of teacher quality areas. Nevertheless, they also cite a need for more collaboration, specifically to address training for existing teachers. To help address some of these challenges, Education provides financial support and other forms of assistance to some states. State officials reported through our surveys (see fig. 4) and state site visits that state budget cuts and reduced staff levels at their agencies inhibit teacher quality collaborative efforts. Collaborative efforts require a commitment of resources, staff, and time, and state officials report that reduced staffing levels have limited the available time that they can commit to collaborating, and it is difficult to be continuously involved. One state official told us that staff are focused on fulfilling state and federal requirements and have little time to address other teacher quality initiatives. State officials also reported that incompatible data systems across the educational information system, such as those containing student-level, teacher-level, and postsecondary data, pose challenges to collaboration on teacher quality efforts. State officials said that some of their objectives for data systems are to link student and teacher data, or to link data from the K-12 education system and the postsecondary education system, to inform and measure teacher quality policy efforts. For example, state officials and experts we spoke with said longitudinal data systems can be used to measure teacher effectiveness through value-added models that estimate existing teachers’ contributions to student learning, and that these models may also allow states to determine which teacher preparation programs produce graduates whose students have the strongest academic growth. For example, Louisiana officials said that although it has taken several years, they have developed a value-added model, based on longitudinal data, that allows them to evaluate the extent to which graduates from teacher preparation programs improve student learning in the classroom. However, experts, a state official, and an Education report cautioned about using student and teacher data in value-added models for reasons such as methodological concerns and an overemphasis on student test scores to the exclusion of other teacher factors that may positively affect students and schools. Moreover, senior officials from Education and state agencies we spoke with said that some key education stakeholders have reservations about linking student and teacher data to measure teacher effectiveness and/or the implications for privacy. Nevertheless, several states reported that statewide longitudinal data for the K-12 through higher education systems can increase collaboration by enhancing feedback loops between the K-12 and higher education systems. This information could, for example, help state agencies address professional development for teachers in the classroom as well as the effectiveness of teacher preparation programs for prospective teachers. In addition to citing limited resources and incompatible data systems, state agency officials reported that several other factors, such as resistance to change, sustaining commitment, and state governance structures pose challenges to their collaborative efforts to improve teacher quality in their states. For example, state officials reported that different agencies and institutions are resistant to change as a result of long-held beliefs or difficulty in valuing new approaches to improving teacher quality. In one instance, state officials also told us that it is hard to maintain a sustained commitment to address teacher preparation issues because of the volume of state initiatives focused on improving student achievement. Another state official reported that the K-12 and postsecondary systems have separate governance systems, a factor that, given the different missions of each agency, limits how the two interact on education policy. Other state officials said the number of entities playing a role in teacher quality policy limits the state agencies’ ability to collaborate on statewide teacher quality initiatives because the state agency must facilitate feedback from a multitude of stakeholders, which can be a time consuming process. Although states face challenges to collaboration, state officials responding to our surveys and during site visits stressed the importance of these efforts and said that more collaboration is needed, especially to improve professional development training for existing teachers. Our survey results illustrate that states’ teacher quality policy efforts cut across many interrelated areas within the K-12 and postsecondary systems, such as preservice preparation, recruitment, mentoring and induction, teacher assessments for licensure/certification, and continued learning for veteran teachers. State officials reported that improving teacher quality is best achieved through several interrelated initiatives that involve the various stakeholders within the two systems. In our survey, 22 of 48 SEA officials and 34 of 47 SAHE officials cited a great to very great need for more collaboration on teacher quality issues. Although state officials who provided written responses cited a range of teacher quality issues for which more collaboration was needed, including teacher preparation and retention, 16 SEA officials and 21 SAHE officials specifically cited training for existing teachers as a need. In an effort to further enhance collaboration within the education system, several states have established coordinating bodies to address state education issues, including teacher quality improvement. According to our survey results, these coordinating bodies (often referred to as P-16 or P-20 bodies)—which are intended to create a seamless education system from prekindergarten through the postsecondary system through comprehensive education initiatives—have been generally effective at fostering an integrated approach to teacher quality within states that reported having a coordinating body. For example, one state official reported that the state coordinating body facilitates open communication among state agencies. Nevertheless, state officials reported through our surveys that these coordinating bodies also face challenges to enhancing collaboration, including having limited resources and needing to set priorities and allocate roles and responsibilities. In their review of state coordinating bodies, the Education Commission of the States reported that for these coordinating bodies to be successful, they must commit to long-term reform, include representatives from key stakeholder groups, coordinate initiatives at the state level, and integrate reform into other ongoing efforts. Education administers a grant program designed to help states develop longitudinal data systems and provides some assistance related to these efforts. The State Longitudinal Data Systems grant program is aimed at enhancing SEAs’ ability to develop statewide longitudinal data systems. These systems are intended to efficiently manage and analyze education data (including individual student records) to address federal reporting, accountability, and other requirements such as those related to ESEA. One of the program’s allowable activities is to expand existing data systems to include teacher data and to link K-12 and higher education data systems. (As shown in app. III, the State Longitudinal Data Systems grant program is 1 of 33 programs that allow or require portions of funding to be used for teacher quality activities, but does so in pursuit of other program purposes or goals.) In our review of applications of states that received grant awards in 2006 or 2007, we found that most states are seeking to link student and teacher data or to link the K-12 and higher education data systems. For fiscal years 2006, 2007, and 2009, 41 states and the District of Columbia were awarded at least one grant ranging from about $1.5 million to $9.0 million. In fiscal year 2009, Congress appropriated $65 million to support the State Longitudinal Data Systems grant program, about a $17 million increase over the fiscal year 2008 level. Establishing a longitudinal data system that links prekindergarten through 12th grade and higher education data systems is one of the assurances that states must make to be eligible to receive their portion of the Recovery Act’s State Fiscal Stabilization Fund. Specifically, Education is asking states to report their progress toward implementing a statewide data system that includes the 12 elements described in the America COMPETES Act (Pub. L. No. 110-69), one of which is the matching of student data with individual teacher data. Education has provided preliminary guidance on the specific information that states must provide in their applications for funding through the State Fiscal Stabilization Fund. Another $250 million is provided for the State Longitudinal Data Systems grant program in the Recovery Act that could help states defray costs associated with these efforts. Education also facilitates information sharing and provides assistance with and research results on state data systems to state officials through technical assistance related to the State Longitudinal Data Systems grant program as well as through a network of regional and national providers that we described previously. Education’s Web site contains information on a variety of topics related to data system development and management. Further, Education has hosted grantee conferences that have included panels on topics ranging from data privacy to how states can leverage one another’s experiences with these data systems. In addition, a 2007 REL Midwest report outlined how states within its region use data systems and the promising practices of and challenges confronting these states, concluding that opportunities exist to capitalize on states’ commitment to developing longitudinal data systems by thinking about these issues more comprehensively and systematically. In March 2009, the REL Midwest and National Comprehensive Center on Teacher Quality cosponsored a live webcast to discuss and disseminate ongoing research on utilizing data systems in teacher evaluation models. In addition to grant funds provided by the State Longitudinal Data System Grant program, state officials told us that conferences, training, and technical assistance from the REL network would assist states in addressing their data system challenges. In addition to providing the specific funding and assistance for data systems, Education also provides funding to support partnerships within states to address teacher quality. Some of these programs are intended to support accountability for teacher preparation programs at institutions of higher education or to improve teacher preparation programs by requiring partnerships, mainly between school districts and institutions of higher education. Of the 23 programs directed at improving teacher quality that we discussed previously, 8 fund projects specifically requiring partnerships. For example, according to state and university officials in New Jersey, Teacher Quality Enhancement grants have funded efforts to recruit high school students who are interested in pursing teaching in high- need school districts and designing teacher preparation programs for middle school students based on strong content knowledge. These types of efforts are accomplished through consortia, such as partnerships among universities and their respective teacher preparation programs and liberal arts and sciences departments as well as school districts. State and university officials in our site visit states said that these partnership grants generally facilitate useful collaboration among the grant partners. However, one state official told us that outside of federal- and state-funded partnerships between some school districts and institutions of higher education, there are limited opportunities for collaboration between K-12 and higher education. These officials also said the partnerships are sometimes difficult to sustain after the grants have expired. Moreover, another state official and an expert we spoke with explained that these partnership grants do not support a systemic collaboration between the K- 12 and higher education systems because the grants involve only a select few institutions in partnerships. Providing all children with qualified teachers is a focus of federal policy, and this goal is reflected in Education’s strategic and annual performance plans. To help accomplish this goal, Education distributes billions of federal dollars and provides research and other assistance for teacher quality activities through multiple offices and statutorily authorized programs. While Education has engaged in some coordination to share information and expertise within the department, and from time to time has established and completed broader collaborative efforts, coordination among all the relevant offices does not occur on a regular basis. The success of Education’s mission and the achievement of its goals for improving teacher quality and ultimately for increasing student achievement depend in part on how well it manages its wide array of programs and initiatives with regard to funding, assistance, and other priorities, as well as its evaluation and research efforts. Also, the Recovery Act, with its large infusion of onetime funds, as well as its provisions encouraging states, school districts, and institutions of higher education to make improvements in assessing teacher effectiveness and in distributing qualified and effective teachers equitably, creates an opportunity for the department to leverage new resources with existing structures in a way to improve teacher quality and effectiveness. However, this wide array of programs, initiatives, and structures also creates a challenge for the department. In the absence of a written departmentwide strategy for integrating its wide array of teacher quality programs and efforts, Education’s offices may not be aligned in their actions to achieve Education’s long-term goal of improving teacher quality. A departmental strategy for collaboration could help states overcome their barriers to improving teacher quality through facilitating compatible data systems as well as encouraging systemic collaboration between state K-12 and higher education institutions and detailing the role each plays in the success of the other. Without clearly articulated strategies and sustained collaborative activities, Education may be missing important opportunities to leverage its financial and other resources, align its activities and processes, as well as develop joint strategies to assist states, districts, and institutions of higher education in improving teacher quality. To ensure that departmental goals to improve teacher quality are achieved and that the department’s many related efforts are mutually reinforcing, we recommend that the Secretary of Education establish and implement a strategy for sustained coordination among existing departmental offices and programs. A key purpose of this coordination would be to facilitate information and resource sharing as well as strengthening linkages among teacher quality improvement efforts to help states, school districts, and institutions of higher education in their initiatives to improve teacher quality. We provided a draft of this report to Education for review and comment. Education’s comments are reproduced in appendix V. In its comments, Education agreed that coordination is beneficial, but it favors short-term coordination focused on discrete issues or problems. Education will review the advisability of forming a cross-program committee, but it would first want to ensure that such a group would lead to improvements in the way Education coordinates its approach to teacher quality and the way states and school districts promote teacher quality. Education officials pointed out that these efforts do not always prove useful and said that efforts to coordinate program implementation cannot fully eliminate barriers to program alignment. While we agree with Education that these efforts have not always been useful and they face numerous barriers and challenges, we nonetheless believe that it is important for the department to develop a strategy for sustained coordination. As it develops a coordination strategy, Education should use its knowledge of past efforts and existing barriers to put in place the conditions necessary for addressing these and other challenges. For example, in their comments Education officials highlighted a barrier from this report of some teacher quality programs having inconsistent legislative definitions and requirements. As part of establishing and implementing a strategy for sustained coordination, Education could consider identifying these specific definitional barriers and others and develop a strategy for addressing them. Successful strategic and annual planning involve identifying goals and challenges facing an agency and detailing how an agency intends to achieve these goals and address these challenges. As we mention in the report, these efforts should include information on how program officials will coordinate and plan crosscutting efforts with other related programs. We encourage Education to formalize its coordination efforts by incorporating them into its planning efforts. Because responsibilities for improving teacher quality are shared among multiple offices, we believe taking a more systematic approach than what has occurred will ensure that different offices routinely become involved in sharing information and resources as well as facilitating linkages among teacher quality improvement efforts. We acknowledged Education’s effort to bring together different offices to work together on discrete issues or problems related to teacher quality and we modified the report to reflect Education’s recent coordination effort to address the Recovery Act requirements related to teachers. Education also provided technical comments that we incorporated into the report as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time we will send copies of this report to the Secretary of Education, relevant congressional committees, and other interested parties. In addition, this report will also be available at no charge on GAO’s Web site at http://www.gao.gov/. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix VI. To address the objectives of this study, we used a variety of methods. To document the extent to which Education funds and coordinates teacher quality programs, we interviewed Education officials as well as reviewed Education documents and relevant laws. To understand how Education funds and supports research efforts to improve teacher quality, we interviewed officials from a selection of relevant Education-funded research and related assistance providers and at the regional and national levels. To understand the challenges to collaboration within states, we conducted two national surveys—one was sent to state educational agency (SEA) officials in the 50 states and the District of Columbia and a separate survey was sent to state agency for higher education (SAHE) officials in 48 states plus the District of Columbia. We did not send a SAHE survey to New York or Michigan because (1) in New York the executive official of higher education is also responsible for directing kindergarten through 12th grade education and (2) in Michigan there is no state agency or officer with governance authority over higher education. In addition, we conducted site visits in 3 states to understand further the state perspective as well as that of school districts and institutions of higher education. In addition, we interviewed national experts on the various areas of teacher quality. We conducted our work between February 2008 and July 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To determine the extent that Education funds and coordinates teacher quality programs, we first identified relevant programs from the Guide to U.S. Department of Education Programs 2008 and classified these programs into two groups based on these differences: (1) programs designed to support teacher quality improvement, and (2) programs that may support teacher quality improvement but do so in pursuit of other goals or purposes. For the first group, or “primary programs,” we reviewed the program description for each program, identifying those with a purpose of improving teaching in the classroom for elementary and secondary schools. The description statement of these programs included terms such as professional development, teacher training, teacher preparation, teacher retention, teacher certification, improving teaching through scientifically based research and curriculum development. In addition, we identified the second group of programs—which have a purpose other than improving teacher quality—through a review of the descriptions of the types of projects funded in Education’s Program Guide to determine that training teachers or improving instructional programs was an allowable activity. After identifying the respective group of programs, Education officials reviewed the list of programs to verify that we had identified the relevant programs and categorized each program correctly. To understand Education’s efforts and requirements for coordinating the 23 programs that we identified as primarily focusing on teacher quality, we reviewed relevant federal laws, performance and accountability reports, and other documentation to identify requirements for coordinating its programs. In addition, we interviewed officials for the offices that oversee these programs to determine whether and how they coordinate their programs to improve teacher quality. These interviews included officials from the Office of Elementary and Secondary Education, the Office of Innovation and Improvement, the Office of Postsecondary Education, the Office of Special Education and Rehabilitative Services, and the Office of English Language Acquisition. We also interviewed officials in Education’s Office of Inspector General (OIG) and reviewed relevant OIG reports on Education’s efforts to coordinate programs. To understand how Education monitors states and districts that receive formula and discretionary grants on teacher quality we reviewed relevant federal laws, nonregulatory guidance, policy and procedure manuals, monitoring checklists, and monitoring reports or letters to grantees, as well as outside evaluations or audits such as OIG and GAO reports. In addition, to determine the process and procedures for monitoring these programs, we conducted interviews with the relevant officials from each of the five program offices overseeing each of these programs, including officials from the Office of Elementary and Secondary Education, Office of Innovation and Improvement, Office of Postsecondary Education, and Office of Special Education and Rehabilitation Services as well as OIG, and the Office of Risk Management Service in the Secretary of Education’s office. Finally, to gather information about Education’s monitoring, we interviewed state and district officials during our site visits. To gather information on Education’s evaluation of federal programs, research on teacher quality, and research-related assistance provided to states and districts, we interviewed relevant Education officials as well as state and district officials during our site visits, and reviewed documents and responses to questions on research-related assistance in the survey. To obtain information on Education’s evaluation and research efforts as well as dissemination practices, we interviewed relevant officials from Education’s Institute of Education Sciences, the Office of Elementary and Secondary Education, and the Office of Planning Evaluation and Policy Development, as well as submitted written follow-up questions to these offices. In addition, we reviewed documented information available on the evaluations conducted on federal programs on teacher quality and on completed and ongoing research on teacher quality practices and interventions. To learn about the research-related assistance provided directly to states, we interviewed officials from the three Regional Educational Laboratories and Regional Comprehensive Centers that provide assistance to our three site visit states. We also interviewed officials from the National Comprehensive Center on Teacher Quality. In addition, during our site visits we asked state and district officials about the kinds of assistance that they receive directly from Education, the Regional Educational Laboratories, Regional Comprehensive Centers, and the National Comprehensive Center on Teacher Quality. Finally, in our surveys, we asked state respondents about the usefulness of the Regional Educational Laboratories, the Regional Comprehensive Centers, the National Comprehensive Center on Teacher Quality, the Institute of Education Sciences studies, as well as the What Works Clearinghouse and Doing What Works Internet sites. To understand the challenges facing state agencies’ in their efforts to collaborate within their states on efforts to improve teacher quality, we used two approaches—two state surveys and site visits to three states. First we designed and administered two identical Web-based surveys— one that was sent to SEA officials in all 50 states and the District of Columbia and a second to SAHE officials in 48 states and the District of Columbia. We did not send a SAHE survey to New York or Michigan because (1) in New York the executive official of higher education is also responsible for directing kindergarten through 12th grade education and (2) in Michigan there is no state agency or officer with governance authority over higher education. The surveys were conducted between August and November 2008. Questionnaires were completed by SEA officials in 48 states for a response rate of 94 percent, and SAHE officials in 47 states for a response rate of 96 percent. The surveys posed a combination of questions that allowed for open- ended and closed-ended responses. They included questions about state efforts including (1) state agency initiatives across a wide range of teacher quality areas, (2) state agencies’ collaborative activities within their state, (3) the role of a state coordinating body (where applicable) in teacher quality initiatives, and (4) the usefulness of grant funds and technical assistance provided by Education. The surveys were conducted using self-administered electronic questionnaires posted on the World Wide Web. We sent e-mail notifications to all 51 SEA officials and 49 SAHE officials beginning on September 15, 2008. To encourage respondents to complete the questionnaire, we sent an e-mail message to prompt each nonrespondent each week after the initial e-mail, on September 22, 2008, and October 1, 2008. We also contacted officials by telephone to further increase our response rate. We closed both surveys on November 23, 2008. Some of the survey questions were open-ended, allowing respondents an opportunity to provide thoughts and opinions in their own words. To categorize and summarize these responses, we performed a systematic content analysis of a select number of open-ended questions. Two GAO staff independently coded the responses. All initial disagreements regarding placement into categories were discussed and reconciled. Agreement regarding each placement was reached again between at least two analysts. The numbers of responses in each content category were then summarized and tallied. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors, such as variations in how respondents interpret questions and their willingness to offer accurate responses. We took a number of steps to minimize nonsampling errors. For example, a social science survey specialist designed the questionnaires in collaboration with GAO staff with subject matter expertise. During survey development, we received feedback from three external peer reviewers and Education officials. The questionnaires also underwent a peer review by a second GAO survey specialist. Each draft instrument was then pretested two times with appropriate officials in New Mexico, Wisconsin, and West Virginia to ensure that the questions and information provided to respondents were relevant, clearly stated, and easy to comprehend. The pretesting took place during July and August 2008. Since these were Web- based surveys, respondents entered their answers directly into electronic questionnaires. This eliminated the need to have data keyed into databases, thus removing an additional source of error. Finally, to further minimize errors, computer programs used to analyze the survey data were independently verified by a second GAO data analyst to ensure the accuracy of this work. While we did not fully validate specific information that states reported through our survey, we took several steps to ensure that the information was sufficiently reliable for the purposes of this report. For example, we contacted state officials via phone and e-mail to follow up on obvious inconsistencies, errors, or incomplete answers. We also performed computer analyses to identify inconsistencies in responses and other indications of error. On the basis of our checks, we believe our survey data are sufficient for the purposes of this report. The surveys and a complete tabulation of aggregated results can be viewed at GAO-09-594SP. We also conducted site visits to three states—Louisiana, New Jersey, and Oregon. These states were selected based on their having initiatives that focus on teacher quality, such as coordinating bodies that are intended to bridge the K-12 and higher education systems, and on diversity in terms of geographic location, population, and amount of federal teacher quality program funding. In each state we met with SEA and SAHE officials, and to understand the local perspective, we met with officials in at least one school district and two universities. In addition, we interviewed experts on teacher quality, including those at the American Institutes for Research, Education Trust, Congressional Research Service, and the University of Pennsylvania. We also reviewed several studies on teacher quality funding and activities. Fiscal year 2009 appropriations (Dollars in thousands) Awards made to state educational agencies (SEA) that, in turn, make formula subgrants to school districts. State agencies for higher education (SAHE) also receive a formula grant that, in turn, is awarded competitively to partnerships that must include at least one institution of higher education (IHE) and its division that prepares teachers and principals, a school of arts and sciences, and a high-need school district. To increase academic achievement by improving teacher and principal quality. SEAs. To improve student achievement through use of technology in elementary and secondary schools and to help all students become technologically literate by the end of the eighth grade and, through the integration of technology with both teacher training and curriculum development, establishing research-based instructional methods that can be widely implemented. Awards are made to SEAs. Partnerships of school districts and IHEs may apply to states for subgrants. Partnership must include, at a minimum, an engineering, mathematics, or science department of an IHE, and a high-need school district. To increase the academic achievement of students in mathematics and science by enhancing the content knowledge, teaching skills, and instruction practices of classroom teachers. School districts applying in partnership with one or more of the following: IHEs, nonprofit history or humanities organizations, libraries, or museums. To raise student achievement by improving teachers’ knowledge and understanding of and appreciation for traditional U.S. history. 118,952 Fiscal year 2009 appropriations (Dollars in thousands) School districts eligible for a Reading First subgrant and public or private organizations or agencies located in a community served by an eligible district may apply. Supports local efforts to enhance the early language, literacy, and prereading development of preschool-age children, particularly those from low- income families, through strategies and professional development that are based on scientifically based reading research. School districts, including charter schools that are districts in their state, SEAs, or partnerships of (1) a district, SEA, or both, and (2) at least one nonprofit organization may apply. To support efforts to develop and implement performance-based teacher and principal compensation systems in high- need schools. High-need school districts, SEAs, for-profit or nonprofit organizations, IHEs, regional consortia of SEAs, or consortia of high-need districts may apply. IHEs, for-profits, and nonprofits must be in partnership with a high-need district or an SEA. To support the recruitment and retention of highly qualified mid- career professionals, including qualified paraprofessionals, and recent college graduates who have not majored in education to teach in high-need schools and districts through the development of new or enhanced alternative routes to certification. IHEs as well as consortia of these institutions and SEAs or school districts. To support professional development activities for education personnel working with English language learners. 41,800 Fiscal year 2009 appropriations (Dollars in thousands) (1) School district that (a) are eligible to receive funds under the Elementary and Secondary Education Act (ESEA), Title I, Part A, pursuant to Sec. 1113 of ESEA and (b) serve students in one or more of grades 6 through 12. Eligible districts may apply individually, with other eligible districts, or in partnership with one or more of the following entities: SEAs; intermediate service agencies; public or private IHEs; and public or private organizations with expertise in adolescent literacy, rigorous evaluation, or both. (2) SEAs on behalf of one or more districts that meet the requirements above. SEAs must apply on behalf of one or more eligible districts and also may partner with one or more of the following entities: intermediate service agencies; public or private IHEs; and public or private organizations with expertise in adolescent literacy, rigorous evaluation, or both. For any application, the fiscal agent must be an eligible district or an SEA. To raise student achievement in middle- and high-school-aged students who are reading below grade level, and serve schools by improving the literacy skills of struggling adolescent readers and to help build a strong, scientific research base around specific strategies that improve adolescent literacy skills. High-need school districts, consortia of high-need districts, or partnerships that consist of at least one high-need school district and at least one nonprofit organization (which may be a community- or faith-based organization) or institutions of higher education may apply. To support the development, enhancement, or expansion of innovative programs to recruit, train, and mentor principals (including assistant principals) for high-need districts. Current and former members of the U.S. armed forces, including members of the Armed Forces Reserves. Provides financial assistance and counseling to help military personnel obtain their teacher licenses, especially in shortage areas, such as math, science, and special education, and find employment in high-need districts and schools, as well as charter schools. 14,389 Fiscal year 2009 appropriations (Dollars in thousands) (1) IHEs, including Indian IHEs; (2) SEAs or school districts, in consortium with these institutions; (3) Indian tribes or organizations, in consortium with IHEs; and (4) the U.S. Department of the Interior’s Bureau of Indian Education-funded schools in consortium with IHEs. To prepare and train Indian individuals to serve as teachers and education professionals. Professional development grants are awarded to increase the number of qualified Indian individuals in professions that serve Indians; provide training to qualified Indians to become teachers, administrators, teacher aides, social workers, and ancillary education personnel; and improve the skills of those qualified Indians who serve currently in those capacities. For National Telecommunications Grants, nonprofit telecommunication entities or a partnership of such entities may apply. Supports two types of grants to nonprofit telecommunications entities: (1) grants to carry out a national telecommunications- based program to improve teaching in core curriculum areas and (2) digital educational programming grants that enable eligible entities to develop, produce, and distribute educational and instructional video programming. SEAs; school districts; the National Board for Professional Teaching Standards, in partnership with a high-need school district or SEA; the National Council on Teacher Quality, in partnership with a high-need SEA or district; or another recognized entity, including another recognized certification or credentialing organization, in partnership with a high-need SEA or district. Supports activities to encourage and support teachers seeking advanced certification or advanced credentialing through high-quality professional teacher enhancement programs designed to improve teaching and learning. 10,649 Fiscal year 2009 appropriations (Dollars in thousands) (1) A school district acting on behalf of a school or schools where at least 50 percent of the children are from low-income families; and (2) must work in partnership with at least one of the following: a state or local nonprofit or governmental arts organization; an institution of higher education; a SEA or regional education service agency; a public or private agency, institution, or organization including a museum, arts education association, library, theater, or community- or faith- based organization. Supports the implementation of high-quality professional development model programs in elementary and secondary education in music, dance, drama, media arts, and visual arts for arts educators and other instructional staff of K-12 students in high-poverty schools. School districts in the outlying areas (American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, the U.S. Virgin Islands) and the Republic of Palau. To support teacher training, curriculum development, instructional materials or general school improvement and reform, and direct educational services. The Pacific Regional Educational Laboratory provides technical assistance and makes recommendations for funding to the Secretary of Education, who conducts a grants competition. Only the National Writing Project is eligible. The National Writing Project is a nationwide nonprofit education organization that promotes K-16 teacher training programs in the effective teaching of writing. Partnership of institution of higher education, including a teacher preparation program and a school or department of arts and science, at least one high-need school district, and either a high-need school or a consortium of high-need schools served by the high-need school district; or as applicable, a high-need early childhood education program. Through collaborative efforts, to support the prebaccalaureate preparation of teachers or a teaching residency program, or a combination of such programs. Grants may also be used to carry out a leadership development program. 50,000Fiscal year 2009 appropriations (Dollars in thousands) Institutions of higher education, school districts, nonprofit organizations, and other organizations and/or SEAs. To improve the quality of K-12 special education teacher preparation programs to ensure that program graduates are able to meet the highly qualified teacher requirements and are well prepared to serve children with a high incidence of disabilities. SEA. Institutions of higher education. To develop and implement programs providing courses of study in science, technology, engineering, and mathematics fields or critical foreign languages that are integrated with teacher education. Graduates receive baccalaureate degrees in STEM fields or critical foreign languages, concurrent with teacher certification. Institutions of higher education. To offer a master’s degree in a STEM field or critical foreign language content areas to current teachers and to enable professionals in these fields to pursue a 1-year master’s degree that leads to teacher certification. 1,092 Fiscal year 2009 appropriations (Dollars in thousands) IHEs, museums, libraries, and other public and private agencies, organizations, and institutions (including for-profit organizations) or a consortium of such agencies, organizations, and institutions may apply. Applicants must demonstrate expertise in historical methodology or the teaching of history. Supports the establishment of Presidential Academies for Teachers of American History and Civics that offer workshops for both veteran and new teachers of American history and civics to strengthen their knowledge and preparation for teaching these subjects. The program also supports establishment of Congressional Academies for Students of American History and Civics for high school students to develop a broader and deeper understanding of these subjects. SEAs and school districts. Program provides assistance to states to award grants to consortia of school districts and postsecondary education institutions for the development and operation of programs consisting of the last 2 years of secondary education and at least 2 years of postsecondary education, designed to provide Tech Prep education to the student leading to an associate degree or a 2-year certificate. Awards are made to eligible state agencies for career and technical education, which award funds on the basis of a formula or competition to consortia. Eligible consortia must include at least one member in each of the two following categories: (1) A school district, an intermediate education agency, education service agency, or an area career and technical education school serving secondary school students, or a secondary school funded by Bureau of Indian Affairs; or (2) either (a) a nonprofit institution of higher education (IHE) that offers a 2-year associate degree, 2-year certificate, or 2-year postsecondary apprenticeship program, or (b) a proprietary institution of higher education that offers a 2-year associate degree program. To develop the academic, career, and technical skills of secondary and postsecondary students who enroll in career and technical programs. This program provides states with support for leadership activities, administration of the state plan for career and technical education, and subgrants to eligible recipients to improve career and technical education programs. State agencies for career and technical education. Program designed to address the unique education and culturally related academic needs of American Indian and Alaska Native students, including preschool children, so that these students can achieve the same challenging state performance standards expected of all students. This is Education’s principal vehicle for addressing the particular needs of Indian children. Grant funds supplement the regular school programs and support such activities as after-school programs, early childhood education, tutoring, and dropout prevention. Districts that enroll a threshold number of eligible Indian children and certain schools funded by the Bureau of Indian Affairs; Indian tribes, and under certain conditions, may also apply. Supports high-quality education programs for migratory children and helps ensure that migratory children who move among the states are not penalized by disparities among states in curriculum, graduation requirements, or state academic content and student academic achievement standards. States use program funds to identify eligible children and provide education and support services. These may include academic instruction, bilingual and multicultural instruction, career education services, advocacy services, counseling and testing services, health services, and preschool services. SEAs, which in turn make subgrants to local operating agencies that serve migrant students. Local operating agencies may be school districts, institutions of higher education, and other public and nonprofit agencies. Program offers grants to support local family literacy projects that integrate early childhood education, and adult literacy. Five percent of funds are is aside for family literacy grants for migratory worker families, the outlying areas, and Indian tribes and tribal organizations; one grant must be awarded to a women’s prison and up to 3 percent is for evaluation activities. Remaining funds are allocated to SEAs based on their Title I, Part A allocation and SEAs make competitive subgrants to partnerships of school districts and other organizations. Projects include providing staff training and support services. SEAs and subgrants to school district partnerships. Primarily to districts that (1) have a total average daily attendance of fewer than 600 students or only serve schools located in counties of fewer than 10 persons per square mile, and (2) serve schools with Education’s National Center for Education Sciences locale code of 7 or 8 or located in an area defined as rural by state. To provide financial assistance to rural districts to assist them in meeting their state’s definition of adequate yearly progress. This program provides grant funds to rural districts that serve concentrations of children from low- income families. SEAs receive grants and provide subgrants to school districts in which (1) 20 percent or more of the children age 5-17 served by the school district are from families with incomes below the poverty line, (2) all schools served by the district have a school locale code of 6,7, or 8; and are (3) not eligible to participate in the Small Rural School Achievement program. To provide special education services to children with disabilities, ages 3-5. Permitted expenditures include the salaries of special education teachers and costs associated with related services. SEAs. Assists states including the District of Columbia and Puerto Rico in meeting the costs of providing special education and related services to children with disabilities. States may use funds to provide a free appropriate public education to children with disabilities. Permitted expenditures include the salaries of special education teachers and costs associated with related services personnel, such as speech therapists and psychologists. SEAs and school districts. To improve the education of limited English proficient children and youths by helping them to learn English and meet state academic content and student academic achievement standards. SEAs and subgrants to school districts. To improve the career and technical education skills of Native Americans and Alaska Natives. Projects make improvements in career and technical education programs for Native American and Alaska Native youths. Federally recognized Indian tribes, tribal organizations, Alaska Native entities, and consortia of any of the previously mentioned entities may apply. Provides assistance to plan, conduct, and administer programs or portions of programs that provide career and technical training and related activities to Native Hawaiians. Program supports career and technical education and training projects for the benefit of Native Hawaiians. Community-based organizations primarily serving and representing Native Hawaiians. Enables grantees to increase the participation of low- income students in both pre-advanced placement and advanced placement courses and tests. Allowable activities include professional development for teachers, curriculum development, the purchase of books and supplies, and other activities directly related to expanding access to and participation in advanced placement courses and tests for low-income students. School districts, SEAs, and nonprofit organizations. Program helps school districts improve reading achievement by providing students with increased access to up-to-date school library materials; well-equipped, technologically advanced school library media centers; and professionally certified school library media specialists. School districts may use funds for a variety of activities such as providing professional development for school library media specialists and providing activities that foster increased collaboration among library specialists, teachers, and administrators. School districts in which at least 20 percent of students served are from families with incomes below the poverty line. Designed to improve the education opportunities and achievement of preschool, elementary, and secondary Indian children by developing, testing, and demonstrating effective services and programs. Funding priorities in 2008 were for (1) school readiness projects that provide age- appropriate educational programs and language skills to 3- and 4-year-old Indian students to prepare them for successful entry into school at the kindergarten level and (2) college preparatory programs for secondary school students designed to increase competency and skills in challenging subject matter, such as mathematics and science. SEAs, school districts, Indian tribes, Indian organizations, federally supported elementary and secondary schools for Indian students, and Indian institutions, including Indian institutions of higher education, or consortia of such entities. Designed to help break the cycle of poverty and improve the literacy of participating migrant families by integrating early childhood education, adult literacy or adult basic education, and parenting education into a unified family literacy program. Funds support projects such as early childhood education, adult education; Head Start programs, training for staff, and support services. Institutions of higher education, school districts, SEAs, and nonprofit and other organizations and agencies. Provides grants to initiate, expand, and improve physical education programs for K-12 students to help them make progress toward meeting state standards for physical education. Funds may be used to provide equipment and support and to enable students to participate actively in physical education activities. Funds also may support staff and teacher training and education. School districts and community-based organizations. Grants assist in the desegregation of public schools by supporting the elimination, reduction, and prevention of minority group isolation in elementary and secondary schools with substantial numbers of minority group students. Projects must support the development and implementation of magnet schools that assist in the achievement of systemic reforms and provide all students with the opportunity to meet challenging academic content and achievement standards. Projects support the development and design of innovative education methods and practices that promote diversity and increase choices in public education programs. The program supports capacity development through professional development and other activities, such as the implementation of courses of instruction in magnet schools that strengthen students’ knowledge of core academic subjects. Program supports the implementation of courses of instruction in magnet schools that strengthen students’ knowledge of core academic subjects. School districts or consortia of districts that are implementing court-ordered or federally approved voluntary desegregation plans that include magnet schools are eligible to apply. Supports the enhancement, expansion, documentation, evaluation, and dissemination of innovative, cohesive models that demonstrate effectiveness in (1) integrating into and strengthening arts in the core elementary and middle school curricula, (2) strengthening arts instruction, and (3) improving students’ academic performance, including their skills in creating, performing, and responding to the arts. Funds must be used to (1) further the development of programs designed to improve or expand the integration of arts education, (2) develop materials designed to help replicate or adapt arts programs, (3) document and assess the results and benefits of arts programs, and (4) develop products and services that can be used to replicate arts programs in other settings. School districts and nonprofit organizations. Promotes education equity for women and girls through competitive grants. Allowable activities include training for teachers and other school personnel to encourage gender equity in the classroom, evaluating exemplary model programs, school-to-work transition programs, guidance and counseling activities to increase opportunities for women in technologically demanding workplaces, and developing strategies to assist districts in evaluating, disseminating, and replicating gender-equity programs. Institutions of higher education, school districts, SEAs, nonprofit organizations, other organizations and agencies. Provides grants to support language instruction education projects for Limited English Proficient children from Native American, Alaska Native, Native Hawaiian, and Pacific Islander backgrounds to ensure that they meet the same rigorous standards for academic achievement that all children are expected to meet. Indian tribes; tribally sanctioned education authorities; Native Hawaiian or Native American Pacific Islander native language education organizations; and elementary, secondary, or postsecondary schools operated or funded by the Bureau of Indian Affairs Education, or a consortium of such schools and an institution of higher education. This program provides authority for the Secretary of Education to support nationally significant programs to improve the quality of elementary and secondary education at the state and local levels and to help all students meet challenging state academic standards. Institutions of higher education, school districts, SEAs, and nonprofit and other organizations and agencies. To carry out a coordinated program of scientifically based research, demonstration projects, innovative strategies, and similar activities designed to enhance the ability of K-12 schools to meet the education needs of gifted and talented students. Institutions of higher education, school districts, SEAs, nonprofit organizations, other organizations and agencies. Provides grants to establish, improve, or expand innovative foreign language programs for elementary and secondary school students. In awarding grants under this program, the Secretary of Education supports projects that (1) show the promise of being continued beyond their project period and (2) demonstrate approaches that can be disseminated and duplicated by other school districts. School districts. Provides grants to establish, improve, or expand innovative foreign language programs for elementary and secondary school students. In awarding grants under this program, the Secretary of Education supports projects that promote systemic approaches to improving foreign language learning in the state. SEAs. To develop innovative educational programs to assist Native Hawaiians and to supplement and expand programs and authorities in the area of education. School districts, SEAs, and IHEs with experience in developing or operating Native Hawaiian programs or programs of instruction in the Native Hawaiian language, and Native Hawaiian education organizations; public and private nonprofit organizations, agencies, and institutions; and consortia thereof. To meet the unique education needs of Alaska Natives and support supplemental programs to benefit Alaska Natives. Activities include, but are not limited to, the development of curricula and education programs that address student needs and the development and operation of student enrichment programs in science and mathematics. Eligible activities also include professional development for educators, activities carried out through Even Start and Head Start programs, family literacy services, and dropout prevention programs. An SEA or school district may apply as part of a consortium involving an Alaska Native organization. Also Alaska Native organizations, education entities with experience in developing or operating Alaska Native programs or programs of instruction conducted in Alaska Native languages, cultural and community-based organizations with experience in developing or operating programs to benefit Alaska Natives, and consortia or organizations. To (1) improve results for children with disabilities by promoting the development, demonstration, and use of technology; (2) support educational media services activities designed to be of value in the classroom setting for children with disabilities; and (3) provide support for captioning and video description that and appropriate for use in the classroom setting. Program supports technology development, demonstration, and utilization. Educational media activities, such as video descriptions and captioning of educational materials, also are supported. Institutions of higher education, school districts, SEAs, nonprofit organizations, or other organizations. To promote academic achievement and improve results for children with disabilities by providing technical assistance, model demonstration projects, dissemination of useful information, and implementation activities that are supported by scientifically based research. Institutions of higher education, school districts, SEAs, nonprofit organizations, and other organizations and/or agencies. This program promotes economic and financial literacy among all students in kindergarten through grade 12 through the award of one grant to a national nonprofit education organization that has as its primary purpose the improvement of the quality of student understanding of personal finance and economics. The National Council on Economic Education, SEAs, school districts. A program supporting innovative reform projects for improving the quality of postsecondary education and increasing student access. Institutions of higher education, and other organizations and agencies. To enable SEAs to design, develop, and implement statewide longitudinal data systems to efficiently and accurately manage, analyze, disaggregate, and use individual student data, consistent with the Elementary and Secondary Education Act of 1965, as amended (20 U.S.C. 6301 et seq.). SEAs. Improving Instruction Through Implementation of the Partnership Instructional Coaching Model The Effects of Teacher Preparation and Professional Development on Special Education Teacher Quality The Influence of Collaborative Professional Development Groups & Coaching on the Literacy Instruction of Upper Elementary Special Education Teachers Impact of Professional Development on Preschool Teachers’ Use of Embedded-Instruction Practices Integrating Science and Diversity Education: A Model of Pre-Service Elementary Teacher Preparation Using Video Clips of Classroom Instruction as Item Prompts to Measure Teacher Knowledge of Teaching Mathematics: Instrument Development and Validation Standards-Based Differentiated ELD Instruction to Improve English Language Arts Achievement for English Language Learners Enhancing Knowledge Related to Research-Based Early Literacy Instruction Among Pre-Service Teachers The Pathway Project: A Cognitive Strategies Approach to Reading and Writing Instruction for Teachers of Secondary English Language Learners Content-Focused Coaching for High Quality Reading Instruction Do Lower Barriers to Entry Affect Achievement and Teacher Retention: The Case of New York City Math Immersion Early Childhood Hands-On Science Curriculum Development and Demonstration Project National Center for Research on Early Childhood Education (NCRECE): Preschool Teacher Professional Development Study National Center for Performance Incentives Center for the Analysis of Longitudinal Data in Education Research (CALDER) Replication and Outcomes of the Teaching SMART Program in Elementary Science Classrooms Identifying the Conditions Under Which Large Scale Professional Development Policy Initiatives are Related to Teacher Knowledge Instructional Practices, and Student Reading Outcomes Embedded Classroom Multimedia: Improving Implementation Quality and Student Achievement in a Cooperative Writing Program Enhancing the Quality of Expository Text Instruction Through Content and Case-Situated Professional Development Teaching Teachers to Teach Critical Reading Strategies (CREST) Through an Intensive Professional Development Model Examining the Efficacy of Two Models of Preschool Professional Development in Language and Literacy A Randomized Controlled Study of the Efficacy of Reading Apprenticeship Professional Development for High School History and Science Teaching and Learning Assessment of Pedagogical Knowledge of Teachers of Reading Connecting Primary Grade Teacher Knowledge to Primary Grade Student Achievement: Developing the Evidence-Based Reading/Writing Teacher Knowledge Assessment System Algebra Connections: Teacher Education in Clear Instruction and Responsive Assessment of Algebra Patterns and Problem Solving The Relationship Between Mathematics Teachers’ Content Knowledge and Students’ Mathematics Achievement: Exploring the Predictive Validity of the Praxis Series Middle School Mathematics Test Professional Development in Early Reading Improving Teacher Quality to Address the Language and Literacy Skills of Latino Children in Pre-Kindergarten Programs Can Literacy Professional Development be Improved With Web-Based Collaborative Learning Tools? A Randomized Field Trial Assessing Teacher Effectiveness: How Can We Predict Who Will Be a High Quality Teacher? Teacher Licensure Tests and Student Achievement Opening the Black Box in Choice and Regular Public Schools (a research project within the National Research & Development Center on School Choice) National Research Center on Rural Education Support (estimated amount of total award devoted to teacher quality research) Bryon Gordon (Assistant Director) and James Whitcomb (Analyst-in- Charge) managed all aspects of the assignment. Nancy Purvine, Ed Bodine, and Kristin Van Wychen made significant contributions to this report in all aspects of the work. Jean McSween, Stuart Kaufman, and Ying Long provided key technical support, and James Rebbe provided legal support. Christopher Langford assisted with quality assurance. Jessica Orr contributed to writing this report. Mimi Nguyen developed the graphics for the report. | Policymakers and researchers have focused on improving the quality of our nation's 3 million teachers to raise the achievement of students in key academic areas, such as reading and mathematics. Given the importance of teacher quality to student achievement and the key role federal and state governments play in supporting teacher quality, GAO's objectives included examining (1) the extent that the U.S. Department of Education (Education) funds and coordinates teacher quality programs, (2) studies that Education conducts on teacher quality and how it provides and coordinates research-related assistance to states and school districts, and (3) challenges to collaboration within states and how Education helps address those challenges. GAO interviewed experts and Education officials, administered surveys to officials at state educational agencies and state agencies for higher education in the fall of 2008, and conducted site visits to three states. Education allocates billions of federal dollars for teacher quality improvement efforts through many statutorily authorized programs that nine offices administer. Education officials said these offices share information with one another as needed, and from time to time Education has established and completed broader collaborative efforts. Yet, GAO found little sustained coordination and no strategy for working systematically across program lines. Education also has not described how it will coordinate crosscutting teacher quality improvement activities intended to support its goal of improving student achievement in its annual performance plan. Our previous work has identified the use of strategic and annual plans as a practice that can help enhance and sustain collaboration. Without clear strategies for sustained coordination, Education may be missing key opportunities to leverage and align its resources, activities, and processes to assist states, school districts, and institutions of higher education improve teacher quality. Education has conducted evaluations for some of its teacher quality programs and has awarded grants to researchers for a variety of research on teacher quality interventions, which are intended to inform policymakers and educators about program operations and which programs or interventions are having an impact. While evaluations have been done or are under way for about two-fifths of these programs, little is known about whether most of the programs are achieving their desired results. Education provides information from evaluations and also from research through the Internet and a system of regional and national providers. These providers also either conduct or synthesize research and provide assistance mainly to states and school districts. These providers coordinate among themselves and with one another in various ways. State agency officials reported through our surveys that limited resources and incompatible data systems were the greatest challenges to their collaborative efforts to improve teacher quality. State officials reported that data systems could be used to inform teacher quality policy efforts by linking student and teacher data, or linking data from kindergarten through 12th grade and the postsecondary education systems. To help address these challenges, Education provides some financial support and other assistance. For example, one $65 million program that helps states develop statewide data systems also received another $250 million in the American Recovery and Reinvestment Act of 2009. Also, the act requires states to report on the progress they are making toward linking statewide data systems that allow matching of individual student achievement to individual teachers. This additional funding could help states defray costs associated with these efforts. |
Public safety personnel across the nation—including first responders, law enforcement officers, and natural resource managers, among others— rely on LMR systems to gather and share information while conducting daily operations and to coordinate their emergency response efforts. These systems are intended to provide secure, reliable, mission-critical voice communications in a variety of environments, scenarios, and emergencies. We reported in 2012 that these public safety communications systems are fragmented across thousands of federal, state, and local jurisdictions and often lack “interoperability,” or the ability to communicate across agencies and jurisdictions. Figure 1 displays the typical components of an LMR system, including handheld portable radios, mobile radios typically mounted in vehicles, base stations, and repeaters, which retransmit radio signals to extend the coverage area. Handheld portable radios are typically carried by the LMR user and tend to have a limited transmission range. Mobile radios are often located in vehicles and use the vehicle’s power supply and a larger antenna, providing a greater transmission range than handheld portable radios. Base station radios are located in fixed positions, such as dispatch centers, and tend to have the most powerful transmitters. A network is required to connect base stations to the same communication system. Repeaters increase the effective communication range of handheld portable radios, mobile radios, and base station radios by retransmitting received radio signals. LMR networks connect different base stations to the same communications system and operate by transmitting voice and data through radio waves at specific frequencies and channels within the radio frequency portion of the electromagnetic spectrum. According to DHS, the shortage of available channels within a single radio band resulted in the expansion of public safety systems into multiple radio frequency bands within the radio frequency spectrum. In the United States, NTIA administers spectrum for federal government use and FCC administers spectrum for non-federal use (e.g., state and local government, and commercial use). Federal agencies generally operate on different radio frequency bands than those used by state and local agencies, as shown in figure 2. LMR systems that operate on different radio frequency bands are not always interoperable, making it potentially difficult for different jurisdictions to communicate with one another. To address this issue, NTIA has designated specific radio frequencies, known as federal interoperability channels, for use among federal agencies and between federal agencies and non-federal entities with which federal agencies require interoperability. Similarly, FCC designated national interoperability channels for use by the public safety community at the state and local levels. FCC licensees of other Public Safety and Industrial/Business Pool frequencies may also share their facilities with federal users. According to FCC, interoperability channels licensed by FCC are reserved specifically for different agencies or jurisdictions to coordinate and resolve initial interoperability issues when responding to an incident. Federal users may use the national interoperability channels only for interoperability with (and at the invitation of) a non-federal entity. Technology solutions have been developed to enhance interoperability across different radio frequency bands and equipment. According to FCC, advancements in LMR technology—including software-defined radios, multi-band radios, and interoperable gateways—have enhanced interoperability among different LMR devices. Software-defined radios use reconfigurable software that can be changed to alter the radio’s operating parameters without making any changes to the hardware components. Multi-band radios can operate on more than one radio frequency band, with the goal of allowing emergency responders to communicate with partner agencies regardless of the radio frequency band on which they operate. Interoperable gateways use “bridging” or network approaches to enhance interoperability, by using radio network bridges or “gateways” that provide a direct interface between separate radio networks. In addition to these and other technology solutions, a suite of voluntary national standards, known as Project 25 (P25) standards, is intended to facilitate interoperability among different manufacturers’ LMR communications products. The goal of P25 is to specify formal standards for interfaces among the various components of an LMR system commonly used by emergency responders. The P25 standards are intended to benefit the public safety community by promoting marketplace competition for interoperable products and enabling interoperable communications within and among public safety agencies, among other intended benefits. To further support interoperable communications and to address emergency communications breakdowns that undermined response efforts during terrorist attacks in 2001 and Hurricane Katrina in 2005, various pieces of legislation have been enacted over the past 15 years. The Homeland Security Act of 2002 created the Department of Homeland Security, and within the department, a Directorate of Emergency Preparedness and Response responsible for, among other things, “developing comprehensive programs for developing interoperative communications technology, and helping to ensure that emergency response providers acquire such technology.” The Post-Katrina Emergency Management Reform Act of 2006 was enacted to address various shortcomings identified in the preparation for and response to Hurricane Katrina and included legislative reforms related to emergency management. For example, the act required DHS, among other things, to develop the National Emergency Communications Plan and created the Office of Emergency Communications within DHS to improve first responder communications. More recently, the DHS Interoperable Communications Act was enacted in 2015 with the goal to achieve and maintain interoperable communications capabilities among DHS agencies. The Office of Emergency Communications administers the ECPC, which serves as a focal point to improve coordination and share information among 14 federal agencies in support of enhanced interoperability and the ability to provide emergency responders and officials with continued communications during disasters and incidents. According to a 2013 report prepared by the ECPC Research and Development focus group, federal agencies plan to continue to rely on existing LMR systems to support mission-critical emergency communications needs. The Office of Emergency Communications also worked with federal, state, local, and tribal jurisdictions to create its 2014 National Emergency Communications Plan, which it views as the nation’s strategic plan for emergency communications. The long-term vision of the plan—to enable the nation’s emergency response community to communicate and share information across levels of government, jurisdictions, disciplines, and organizations for all threats and hazards, as needed and when authorized—aligns with a broad goal of achieving interoperability. One of the top priorities of the 2014 plan is to identify and prioritize areas for improvement in emergency responders’ LMR systems. DHS developed the SAFECOM Interoperability Continuum in partnership with the federal, state, and local LMR users to help agencies and jurisdictions to plan and implement interoperability solutions for data and voice communications. The Interoperability Continuum can be used as a tool by LMR users to track progress in strengthening interoperable communications by addressing five interrelated elements viewed as necessary to achieve interoperability. These five elements are: Governance refers to establishing a shared vision, across jurisdictions and disciplines, and an effective organizational structure to support any project or initiative that seeks to enhance interoperability by providing guidance and support through common policies, processes, and procedures. Standard operating procedures (SOP) refer to documents containing formal written guidelines or instructions that outline the expected actions for various scenarios, including normal day-to-day operations and emergency situations. SOPs typically have both operational and technical components and enable LMR users to act in a coordinated fashion in the event of an emergency. Technology refers to the equipment/infrastructure, network, and applications that agencies use to exchange critical information when responding to incidents. Training & Exercises refers to the instructional support designed to develop knowledge, skills, and performance of public safety personnel. Usage refers to how often interoperable communications capabilities are used—for example, for daily operations, overseeing planned events, or only for emergency or unplanned events. According to DHS’s Office of Emergency Communications, LMR systems can be complex and costly to implement, requiring a lifecycle approach to manage them. For example, DHS alone has reported that it owns a collective inventory of LMR equipment valued at more than $1 billion. DHS operates and maintains six LMR national networks and almost 520 systems providing mission essential support to approximately 125,000 frontline agents and officers who help to prevent terrorism and secure our national borders, among other responsibilities. Also, according to DHS, since the useful life of an LMR system is 10–15 years, continued investment is needed to operate and maintain these systems and ensure they continue to support users’ needs. In addition to the investments made by federal departments in LMR systems, the federal government has provided billions of dollars in 2015 and 2016 in grant funding for state, local, tribal, and territorial governments to install, expand, and enhance their LMR systems, according to SAFECOM and the National Council of Statewide Interoperability Coordinators. Based on responses to our survey, federal agencies generally use LMR devices to meet their unique mission or operational requirements. For example, the equipment needed to operate underground in a mining facility is different from what is needed to fight fires (in a high-heat environment, with the user wearing gloves) or for law enforcement (which may require encryption). DHS’s National Response Framework—a guide to how the nation plans to respond to disasters and emergencies— describes 15 emergency support functions, or federal coordinating structures, that group resources and capabilities of federal departments and agencies into functional areas that are most frequently needed in a national response. Based on responses to our survey, the six most frequently cited emergency support functions relating directly to the agencies’ core missions are shown in table 1. Although there are many manufacturers of LMR systems and devices, most agencies that we surveyed reported using equipment provided by the same manufacturer. Specifically, of the 57 agencies that responded to our related survey questions, more than two-thirds reported using LMR systems (40 of 57) and LMR devices (44 of 57) manufactured by Motorola. In written responses to our survey, agencies reported that they prefer to continue to use equipment from the same manufacturers for various reasons, including ensuring compatibility of new LMR equipment with existing system requirements and reducing the need for training on new equipment and systems. For our analysis of agencies’ LMR interoperability requirements and ratings, we asked each agency participating in our survey to identify (from a list of all agencies we surveyed) all other agencies with which the respondent agency requires LMR interoperability. We also asked the respondent agency to rate the level of interoperability with each agency that they had identified, among other questions. We refer to this as “independently” identifying the need for LMR interoperability. We later compared all agency responses to determine whether pairs of agencies identified each other, meaning that both agencies in the pair reported that they require LMR interoperability with each other. We refer to this as “mutually” identifying the need for LMR interoperability. Not all federal agencies that responded to our survey reported a need for LMR interoperability with one another, but most agencies mutually and independently agreed whether or not they require it. That is, more than 80 percent of the possible pairs of agencies we surveyed mutually and independently reported that they do not generally require LMR interoperability; and another 5 percent mutually and independently reported that they do generally require it. The remaining approximately 14 percent of possible agency pairs reported a potential need for this two way communication, but this potential need was not mutually and independently reported by both agencies within the pair. For example, the Office of the Secretary of the Interior reported requiring interoperability with 22 other agencies, but only 2 agencies reported requiring interoperability with it. Alternatively, FEMA reported requiring LMR interoperability with only 8 agencies but 21 other agencies reported requiring interoperability with it. Figure 3 represents the level of mutual agreement between agencies regarding their need for LMR interoperability. That is, the dots in the figure represent the 57 agencies we surveyed plus the FBI, the gray lines connect pairs of agencies whereby only one agency within the pair identified the need to be interoperable with the other agency (i.e., lack of agreement), and the black lines connect pairs of agencies whereby both agencies within the pair mutually and independently identified the need to be interoperable with one another. Table 2 quantifies the information covered in figure 3 for the 1,653 possible agency pairs—given the group size of 57 agencies we surveyed plus FBI—including the specific number of agency pairs that mutually identified a need for LMR interoperability or not, and the number of pairs that did not mutually identify a need for LMR interoperability (i.e., within a possible agency pair, one agency identified a need for interoperability but the other agency did not). Based on our survey results, figure 4 shows agencies within federal departments with an identified need for LMR interoperability. Agencies closer to the center of the figure reported requiring interoperability with the greatest number of other agencies whereas those agencies located toward the edge of the figure require interoperability with fewer agencies. Similar to figure 3, each of the 226 gray lines connects an agency pair whereby only one agency within the pair identified the need to be interoperable with the other agency and each of the 86 black lines connects an agency pair whereby both agencies within the pair mutually and independently identified the need to be interoperable with one another. Among the pairs of agencies that agreed on their need for two-way communication, the quality of interoperability—as rated by the agencies requiring it—was generally good. To develop an understanding of the extent to which a mutually identified need for LMR interoperability is actually being achieved, we asked agencies to evaluate the general level of LMR interoperability actually achieved with each of their identified partner agencies. Based on the 86 pairs of agencies that mutually reported that LMR interoperability with each other was required, we expected 172 ratings—that is, a rating from each agency in each pair. However, because FBI did not provide us with its rating of the quality of interoperability with its partner agencies, we received 157 ratings in total. About 68 percent of the ratings from agencies that mutually agreed on the need to communicate with each other using LMR reported having good or excellent LMR interoperability. Figure 5 lists federal agencies (including FBI) that reported the need for LMR interoperability with other federal agencies for daily operations, planned events, or unplanned or emergency events within the past 5 years. The color-coded blocks correspond with each listed agencies’ assessment of the quality of its LMR interoperability with its identified partner agencies. For more detailed information about the specific agencies requiring LMR interoperability, the partner agencies they identified, and their assessment of their levels of interoperability with each identified partner agency, see an interactive graphic which can be viewed at http://www.gao.gov/products/gao-17-12. The use of standards-based and multi-band LMR equipment and training and exercises have helped to enhance interoperability, according to agencies we surveyed. With respect to standards-based equipment, almost all of the agencies that use LMR equipment to communicate with other agencies have partially or fully implemented the use of P25- compliant LMR devices, according to our survey. P25 standards are intended to facilitate interoperability among communications products of different manufacturers by supporting a variety of LMR system configurations, call types, and features (including encryption). Most agencies that we surveyed (49) reported that their agency or department requires the use of P25 standards-compliant LMR devices; however, not all agencies reported fully using P25 equipment, nor do they all view the standards as helpful. That is, of the 36 agencies that reported having fully implemented P25-compliant equipment, 32 reported that using P25- compliant equipment somewhat or greatly enhances interoperability. Six agencies reported that they do not use P25-compliant LMR devices for the following reasons: (1) it would be difficult for the agency to integrate the technology with its current LMR system, (2) no perceived need for the technology, (3) benefits of the technology are unclear, and (4) the agency requires LMR devices with proprietary or unique features that do not comply with P25 standards. Another LMR technology—the multiband radio (including dual, tri- and quad-band devices)—operates on multiple public-safety radio bands and can help to enhance interoperability across users on different parts of the radio spectrum. However, fewer than half of the agencies responding to this question in our survey—21 out of 56—reported fully implementing the use of multiband radios. More than 85 percent of agencies (18 of 21) that routinely use multiband radios reported that they somewhat or greatly helped interoperability with identified partners. Multiband radios can help enhance interoperability because they enable a single portable radio to operate on multiple radio bands, thereby enhancing LMR interoperability with partners at the state and local level, or with other agencies operating at a different radio frequency band. Regarding training and exercises, more than half of the agencies we surveyed (32 of 57) reported that they participate in training on LMR equipment used for daily operations, and almost all of the agencies participating in such training reported that it helped interoperability with partner agencies. In addition to training, exercises can help to reinforce what is learned in training. Nearly one-third of the agencies told us they fully implemented exercises to test specific technologies and procedures, and almost all of those agencies reported they found these exercises to somewhat or greatly help their agency’s interoperability with key partners. Nearly one-quarter of the agencies reported that they fully implemented joint exercises with key partners to gain familiarity with LMR equipment for daily operations, planned events, or unplanned or emergency incidents. In written responses to our survey, agencies noted additional training and exercises that could enhance interoperability, including: making LMR training available online, sharing lessons learned from incidents, and continuing to implement large-scale exercises to gain familiarity with equipment before an emergency occurs. For example, one agency reported that wide-scale wildland fire-fighting exercises involving multiple- county, state, Bureau of Land Management, and Forest Service personnel have been helpful toward achieving interoperability when needed. Several factors continue to hinder interoperability, according to agencies we surveyed. In particular, the following factors continue to limit agencies’ progress in achieving interoperability with partner agencies: (1) the use of proprietary features and encryption in devices, (2) the limited use of interoperability channels, (3) the lack of standard operating procedures, and (4) the limited investments in LMR systems and devices. Some of the agencies we surveyed reported that proprietary features used within the LMR systems and devices of their partner agencies have hindered interoperability with their partner agencies. As we reported in 2012, while the P25 standards are intended to facilitate interoperability among LMR systems and devices of different manufacturers, the standards remain voluntary. As a result, LMR systems and devices marketed as P25-compliant can also include proprietary features that render the equipment incompatible with equipment from other manufacturers. To help ensure that LMR equipment is truly compliant with the P25 standards, DHS’s Office for Interoperability and Compatibility has partnered with the Department of Commerce Public Safety Communications Research program to develop the P25 Compliance Assessment Program. This voluntary program aims to independently test LMR equipment to ensure that equipment marketed as P25-compliant actually complies with P25 standards for performance and interoperability. Proprietary Features Increase Switching Costs In GAO-12-343, we reported that the use of proprietary features makes it costly for agencies to switch their LMR devices from one manufacturer to another, since doing so would require replacing or modifying older devices to be compatible with new ones. Thus, these switching costs may compel agencies to continue to buy devices from the incumbent device manufacturer. The cost of switching is particularly high when a manufacturer has installed proprietary features that are not interoperable with competitors’ devices. Additionally, even in cases where devices from different manufacturers are supposed to be compatible—that is, interoperable and compliant with P25 standards—a fear of incompatibility may deter an agency from switching to a new manufacturer when it needs to add additional LMR devices to its existing LMR system. More than a quarter of the agencies responding to these questions in our survey use LMR systems (16 of 56) or devices (20 of 57) with proprietary features and over half (34 of 57) also reported using LMR devices with encryption features. In written responses to our survey, agencies provided reasons for using proprietary features, several of which relate to unique mission-related situations or the need to access other LMR networks, such as state and local networks. For example, agencies noted mission-related situations such as underground operations, high-density and congested environments, and “man-down” signaling to call for help when a LMR user is incapacitated as reasons for including proprietary features. With respect to encryption, one agency noted that its LMR devices use an encryption feature to maintain interoperability with state and local public safety partner agencies using the same type of encryption. DHS’s Office of Emergency Communications notes that encryption features in LMR devices can help protect critical information transmitted from one LMR device to another from being compromised or disclosed and can provide assurance that sensitive information is reasonably protected from unauthorized access. Although more than 30 percent of the agencies responding to our survey (18 of 57) reported that incompatible encryption capability with systems used by partner agencies somewhat or greatly hindered their ability to maintain interoperability, we did not observe this result in the specific examples of identified agency pairs and their assessment of their LMR interoperability. That is, agencies that require LMR interoperability rated interoperability with their identified partner agencies similarly regardless of whether or not their identified partner agency uses encryption in its LMR devices. According to DHS officials, partner agencies can enhance interoperability when they agree to share common encryption keys. According to our survey, 14 agencies have implemented SOPs for sharing of encryption keys or agreeing to an encryption standard and 13 of these 14 agencies reported that doing so was greatly or somewhat helpful toward achieving interoperability with their partner agencies. Federal and national interoperability channels provide agencies with a set of radio frequencies to use on location, to coordinate and resolve initial challenges to achieving interoperability when responding to an emergency or unplanned event. DHS encourages LMR users to maximize their flexibility and be prepared for emergency events by preprogramming as many interoperability channels into their radios as possible (as permitted by applicable regulations), including the federal and national interoperability channels. DHS’s National Interoperability Field Operations Guide—available on the ECPC library webpage within the www.max.gov website—includes rules and regulations for the use of nationwide and other interoperability channels, and other reference material. LMR users who have not pre-programmed their devices or are unfamiliar using the channels may be slow to respond or experience interoperability difficulties during an emergency event. For example, during the 2013 Boston Marathon bombings, when traditional communications systems— including radio networks and protocols, and some of the radio channels designated for the Marathon under the communications plan—were overloaded, Boston’s police, fire, and public and private emergency medical service personnel used a dedicated radio channel to communicate and quickly summon aid to the scene. By comparison, some regional specialized weapons and tactics (SWAT) teams from state and local police departments and law enforcement councils experienced difficulty communicating because their radios were not programmed to the interoperable channels. Similarly, the after-action report for the 2012 Navy Yard shooting noted that officers from federal and local law enforcement agencies were communicating on separate channels while searching for the gunman, resulting in gaps in communications and increased risk to fellow officers. Although more than two-thirds of the federal agencies responding to our survey reported that their radios are pre-programmed to the federal and national interoperability channels, 11 of the 57 agencies reported that their radios are not pre-programmed to use these NTIA-regulated federal emergency channels, and 17 of the 57 federal agencies reported that their devices are not pre-programmed to use FCC-regulated national interoperability channels. In written responses related to this survey question, some of these agencies explained that they did not see the need to do so or were unaware that the channels existed. However, as mentioned previously, DHS views these channels as providing greater flexibility to agencies in the event of an emergency. About one-fourth of the agencies responding to our survey reported that training related to accessing federal and national interoperability channels was a medium or high priority for their agency. DHS SAFECOM guidance states that interoperability requires not only the technical ability to communicate through the use of compatible LMR equipment but also formalized agreement among federal agencies, state and local entities, and other emergency service organizations to communicate and cooperatively respond to emergencies and disaster events. Agencies can establish such agreements by developing SOPs to define roles, responsibilities, and appropriate usage of dedicated interoperability resources (e.g., interoperability channels) during response operations. DHS’s SAFECOM recommends that partner agencies that need to use LMR to communicate develop SOPs and engage in training for daily operations, planned events, and unplanned or emergency events. We analyzed survey results for agencies that identified the need for LMR interoperability with other agencies, particularly regarding whether the agencies have SOPs related to interoperability. Based on survey responses, when an agency identified the need for LMR interoperability with another agency, the agency also reported having SOPs with the identified agency in about 48 percent of the cases. Furthermore, the quality of interoperability tended to be higher when SOPs were in place than when they were not. In cases where an agency reported requiring LMR interoperability with another agency and having SOPs with that agency, the quality of interoperability was rated as excellent for 40 percent of the cases; good for 45 percent of the cases; and fair, poor, or nonexistent for 15 percent of the cases. In cases where an agency reported requiring a link and not having SOPs with the other agency, interoperability was rated as excellent for 16 percent of cases; good for 51 percent of cases; and fair, poor, or nonexistent in 33 percent of these cases. In addition to having SOPs in place with partner agencies, DHS recommends that agencies engage in training and exercises to gain familiarity with the SOPs to improve response to unplanned or emergency events with partner agencies. However, two-thirds of the agencies responding to this survey question (37 of 56) have not fully implemented training on standard operating procedures, continuity processes, and related topics even though many of these agencies (20 of 37) said that doing so is a medium or high priority for their agency. To encourage agencies requiring LMR interoperability to develop SOPs, DHS has published and distributed guidance on its website and via the ECPC clearinghouse for information on www.max.gov. DHS also recognizes the importance of training to ensure that emergency responders understand SOPs and have the skills needed to carry them out, but according to DHS, it does not have the regulatory authority to require other agencies to develop SOPs or to provide relevant training to federal agencies. According to DHS, maintaining an LMR system requires a large investment, due to its high cost and relatively-short life cycle of about 10 to 15 years and deferring maintenance and upgrades to aging LMR systems and devices can limit interoperability. To help ensure effective LMR operations, SAFECOM guidance encourages emergency responders to regularly maintain communications systems and equipment, and to upgrade their systems when appropriate. For example, upgrades may include investing in standards-based equipment, adopting new technologies, and updating the hardware and software of existing LMR systems. However, in response to our survey, more than two-thirds of the agencies that responded to this question (39 of 57) reported that the limited availability of funding to replace or upgrade incompatible or aging LMR equipment greatly or somewhat hindered their ability to maintain interoperability with partner agencies. DHS has produced guidance to help agencies to establish and maintain LMR systems, including planning and budgeting for the long-term maintenance of these communication systems. Nearly half (27 of 57) of agencies we surveyed reported using contract vehicles to acquire LMR systems and devices. Contract vehicles contain groups of preapproved contracts that enable agencies to purchase LMR equipment from a list of vendors with established prices. We have previously reported that coordinating purchases of like products and services—such as by using preapproved contracts—enables agencies to leverage spending to the maximum extent possible. Agencies using preapproved contracts to purchase LMR equipment reported similar benefits, including cost savings, reduced administrative burden, enhanced interoperability, and standardized equipment. Among the 27 federal agencies that reported using preapproved contracts to procure LMR systems and devices, most reported using contracts sponsored by the DHS or the Department of the Interior, although several other contract vehicles were used by a smaller number of agencies (see fig. 6). Among the agencies that used preapproved contracts, many reported that they have used multiple contract vehicles to purchase LMR equipment in the past 5 years. For example, 13 agencies reported using two or more different vehicles, and three agencies reported using four different vehicles. We have reported that agencies’ use of potentially duplicative contracts to purchase similar goods and services can potentially reduce their benefits by imposing significant costs to the agencies. That is, agencies may miss an opportunity to leverage their buying power, if purchasing under many different agreements. Twenty-three agencies we surveyed also have used a sole source or other procurement mechanisms to acquire LMR systems and devices within the past 5 years, whereby agencies contract with one specific manufacturer, without competition, to acquire systems and devices when it is believed to be in the best interest of the agency. In written comments on the survey, some agencies reported using sole source procurements to ensure that all the LMR devices they purchased would work with their existing systems. For example, one agency reported that using a sole source procurement allows it to obtain additional equipment from the same manufacturer as its current LMR system. Another noted that a sole source procurement allows the agency to replace existing equipment with similar equipment, which reduces the cost of training for LMR users and technicians who maintain and repair the equipment. Several other agencies reported using a sole source procurement to ensure that they can obtain LMR devices with needed features to meet operational requirements. While some agencies that responded to our survey reported using contract vehicles, many reported that they do not coordinate with other agencies before purchasing new LMR equipment. According to the Office of Management and Budget (OMB), better coordination among agencies interested in commonly-purchased items—such as information technology (IT)—can help the agencies to leverage the government’s purchasing power. We have previously identified using a coordinated procurement approach as a key practice that can reduce procurement costs to agencies. According to GSA, a structured and collaborative approach to procurement can help agencies save money and improve overall performance by better leveraging their purchasing power. However, in response to our survey, nearly 40 percent of agencies (22 of 57) reported that they have not coordinated procurement activities of LMR devices and related equipment with other federal agencies within the past 5 years, such as by identifying common technical requirements before purchasing new LMR equipment. In written comments on the survey, some of these agencies provided the following reasons for not coordinating LMR procurements: Difference in mission: for example, one agency reported that its mission does not overlap with that of other federal agencies, a circumstance that made it difficult to coordinate procurements with them. Lack of common technical requirements: for example, one agency reported that its radio system needs to have maritime capabilities that most other federal agencies do not need. Low quantity of LMR devices: for example, one agency reported that it needs only about 100 LMR devices and trying to coordinate the purchase of such a small quantity would be more burdensome than helpful. Timing of procurement: for example, one agency reported that it tried to execute a contract for LMR purchases with another agency in the past, but the timing of the cycles by which the two agencies’ purchased new LMR equipment was difficult to coordinate due to their having two different contract-performance periods. According to OMB officials, agencies had noted similar reasons for not coordinating other commonly purchased goods, such as IT hardware and software. In particular, OMB officials told us that although agencies may initially struggle to identify common technical requirements, agencies can typically identify and agree to a limited number of standard technical configurations to meet the needs of about 80 percent of common IT requirements, such as those for laptops and desktops. These items make up more than half of the federal government’s overall expenditures and agencies often purchase and manage these items in a fragmented and inefficient manner, according to OMB. In response, in 2014, OMB’s Office of Federal Procurement Policy announced its category management initiative, an approach based on leading practices to manage entire categories of spending across government for commonly purchased goods and services, such as IT hardware and software. The initiative is designed to allow the federal government to buy goods and services more like a single enterprise, leveraging its purchasing power as the world’s largest consumer. OMB identified three critical steps departments and agencies could take to improve procurement practices and achieve cost savings: (1) reduce administrative costs by consolidating acquisitions through fewer high-performing contract vehicles; (2) standardize configurations for common requirements to drive savings; and (3) implement smarter business practices, such as jointly purchasing replacement IT equipment on a regular cycle, to achieve strategic and predictable budget requirements and optimize price and performance. At the time of our review, OMB had not yet considered LMR equipment within its category management initiative, in part because the initial strategic plan for IT focused on implementing OMB policy related to laptops and desktops, software, and mobile devices and services. However, OMB officials acknowledged that a category management approach to LMR procurement may save the government money while also supporting the goal of enhanced LMR interoperability among agencies, largely because it would require agencies to identify their common technical requirements and purchase equipment in larger quantities through fewer transactions. OMB officials said that LMR equipment could be a focus of future efforts once data analysis is conducted to understand how many agencies use LMR equipment, which contract vehicles are used to purchase LMR equipment, and overall LMR expenditures. In our discussion with OMB officials, they noted the widespread use of LMR equipment and the large number of contract vehicles currently being used to purchase LMR equipment as reasons for pursuing a consolidated procurement of LMR equipment through a category management approach. Including LMR equipment in OMB’s category management initiative may enable the federal government to more fully leverage its aggregate buying power to obtain the most advantageous terms and conditions for LMR procurements and realize cost savings. Although the exact amount of federal funds spent each year on LMR equipment government-wide is unknown, we estimate it is likely hundreds of millions of dollars, given the known costs to DHS, a single department. Specifically, DHS has reported that its agencies spent almost $526 million on LMR infrastructure, equipment, and personnel in fiscal year 2016, with plans to continue spending approximately $450 million for each of the next 5 years, on average. According to OMB officials, the coordination required for a category management approach includes discussions to standardize configurations for common requirements and establish a shared vision through common policies, processes, and procedures. Agencies’ subject matter experts must first identify the common technical standards and features required for a category management approach, according to OMB officials. For example, to develop such standards for the IT goods and services category management initiative, OMB convened IT and procurement professionals from the National Aeronautics and Space Administration, the General Services Administration, and the National Institutes of Health to work with industry partners and representatives from 20 federal agencies to develop a government-wide solution for purchasing IT products and services. As a result of this initiative, three existing contract vehicles were identified as high-performance, and OMB began requiring civilian agencies to use those vehicles to purchase from among six standard configurations of laptops and desktops. Our survey results suggest that such coordination, if applied to LMR procurement, could enhance interoperability among partner agencies. For example, many of the agencies that engage in coordinated procurement also reported a better general level of LMR interoperability. Based on survey responses, when an agency identified the need for LMR interoperability with another agency and coordinated with that agency on technical requirements before purchasing new equipment, the quality of interoperability was reported as: excellent in 50 percent of the cases; good in 39 percent of the cases; and worse (fair, poor, nonexistent) in 11 percent of the cases. In cases when an agency identified the need for LMR interoperability with another agency but did not coordinate on technical requirements before purchasing new equipment, a much lower quality of interoperability was reported—that is, LMR interoperability was rated excellent for 13 percent of the cases; good for 55 percent of the cases; and worse (fair, poor, nonexistent) for the remaining 32 percent of the cases. In addition, the cost-saving potential of category management could aid agencies that, as previously noted, reported funding constraints in their ability to replace or upgrade aging LMR equipment to maintain interoperability. Several federal agencies have required LMR interoperability with one another in recent years for daily operations, planned events, and during emergencies. Although these agencies spend millions of dollars each year on LMR equipment, many of them do not coordinate with one another before purchasing new equipment—for example, by agreeing to purchase through a limited number of high-performing contract vehicles. As a result, the agencies may be limited in their ability to exert buying power with manufacturers to obtain quantity discounts. This duplication of procurement efforts for similar goods and services imposes significant costs to agencies. OMB recognizes that agencies often purchase and manage items in a fragmented and inefficient manner, through tens of thousands of contracts and delivery orders. To address this issue, OMB’s Office of Federal Procurement Policy directs agencies to implement category management as a way to manage spending across government for commonly purchased goods and services. This approach enables the federal government to leverage its purchasing power and realize cost savings and may also help to enhance interoperability, particularly if taken in combination with inter-agency agreements, and training and exercises. Although OMB’s category management approach includes many IT goods and services, it does not include LMR equipment. By including LMR equipment in the category management initiative, the federal government may be able to more fully leverage its aggregate buying power to save money and obtain the most advantageous terms and conditions for LMR procurements while also helping agencies to more effectively communicate in their day-to-day operations and when responding to emergencies. To improve federal agency LMR procurement practices, the Director of OMB should direct the Office of Federal Procurement Policy to: examine the feasibility of including LMR technology in the category if warranted, include LMR technology within the appropriate spend category. We provided a draft of this report to OMB, DHS, Commerce, FCC and GSA for their review and comment. OMB, DHS, and Commerce provided technical comments, which we incorporated as appropriate. In commenting on a draft of the report, OMB generally agreed with our recommendations and noted that it is working to identify which IT strategies will produce the best return on investment and that it continues to evaluate its category-specific strategic plans. In DHS’s technical comments, officials stressed that interoperability is achieved by strong leadership and governance structures; planning and coordination; common policies and procedures that promote interoperability across agencies and jurisdictions (e.g., mutual aid agreements, joint procurement policies that ensure equipment is interoperable); regular training and exercises that allow responders to practice interoperability skills; and the purchase of standards-based equipment. We are sending copies of this report to appropriate congressional committees, the Secretary of Homeland Security, the Secretary of Commerce, the Chairman of FCC, the Administrator of GSA, and the Director of OMB. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-2834 or shear@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix II. This report focuses on the current LMR technology, procurement practices, policies, and guidance to identify ways that select agencies can further facilitate interoperability among first responders. Specifically, we reviewed (1) LMR systems and devices used by selected federal agencies and the state of LMR interoperability among these agencies; (2) factors that help and hinder interoperability among agencies that use LMR; and (3) selected agencies’ practices for procuring LMR systems. We plan to review federal agencies’ LMR interoperability with tribal, state, and local entities in future work. To obtain information for all of our objectives, we conducted a web-based survey of 74 civilian federal agencies. We were interested in agencies that have used LMR to communicate with at least one other federal agency for daily operations, planned events like presidential inaugurations or unplanned/emergency incidents within the past 5 years. The initial list of federal agencies was identified by the civilian participating members of the Emergency Communications Preparedness Center (ECPC) and confirmed by e-mail; we did not survey agencies from the Department of Defense. These agencies were sent a web-based survey that included questions related to LMR technology used, procurement practices, and technical and non-technical factors that helped or hindered agencies’ ability to achieve interoperability. The first question of the survey was a screening question to confirm that the agency used LMR to communicate with at least one other federal agency. All 74 agencies responded to the screening question. Agencies that met this criterion—58 federal LMR users in all—were further surveyed about the type of equipment they use, interoperability needs, and procurement practices, among other topics. Fifty-seven of the 58 agencies that we identified as federal LMR users responded to the full survey. The Federal Bureau of Investigation (FBI) did not respond to the full survey but provided responses to a limited set of survey questions related to our first objective, identifying agencies with which they require LMR interoperability. Specifically, the FBI provided a list of civilian federal agencies that it required LMR to communicate with within the past 5 years, which we included in the partner agency network analysis. Sixteen agencies that confirmed that they did not use LMR for communication in the first question did not continue with the survey. To ensure that our survey questions and skip pattern were clear and logical and that respondents could answer the questions without undue burden, we pre- tested our survey with five agencies: the Office of the Chief Information Officer at the Department of Interior, the Office of the Chief Information Officer at the Department of Homeland Security; the Forest Service at the Department of Agriculture; the Office of the Inspector General for Tax Administration at the Department of the Treasury; and the Bureau of Diplomatic Security at the Department of State. We administered the survey from April 2016 through June 2016; therefore, responses reflect information and views as of that time. We provide survey results based on the number of respondents to each question because not all respondents answered every question of the survey. Therefore the total number of respondents may be fewer than 57 for some results. We did not ask agencies to provide additional explanation on how they arrived at their responses. The survey and a more comprehensive tabulation of the results can be viewed at GAO-17-13SP. Table 3 provides the list of federal agencies we surveyed. To determine the LMR systems and devices used by the agencies and the state of interoperability among select federal agencies, we asked survey respondents to provide information about the characteristics of LMR systems and devices they currently use. We also asked each agency to identify—from the list of 74 agencies—those agencies with which they have required LMR interoperability within the past 5 years (i.e., “partner agencies”). We asked them to indicate whether LMR interoperability with each partner agency was needed for daily operations, planned events, or unplanned events (including emergencies), and we asked them to rate their current level of interoperability with each partner agency. To identify factors that have helped or hindered agencies’ interoperability with their identified partner agencies, we surveyed agencies’ current practices against recommended practices identified in the five elements of the SAFECOM Interoperability Continuum, which includes governance, standard operating procedures, technology, training and exercises, and usage. For example, we asked agencies to indicate whether they have standard operating procedures related to their LMR interoperability with their partner agencies. For each factor that the agencies have implemented, we asked how much the factor helped, if at all, and for factors that they have not implemented fully, we asked if the factor is a priority for the agency to implement. We also asked agencies to rate the extent to which factors have hindered their ability to maintain interoperability with partner agencies. Lastly, to understand how LMR procurement practices of select agencies affected interoperability, we surveyed agencies’ procurement practices, including whether they use common contract vehicles and their identified outcomes for each vehicles. In addition, we asked if the agencies have used sole source contracts to procure LMR equipment and an explanation for why they do so. We reviewed literature to identify category management as a potential procurement practice that can leverage the buying power of the federal government to increase cost saving and reduce redundancy. To understand the feasibility of using category management to procure LMR equipment, we asked officials from the Office of Management and Budget what factors they consider when deciding whether a particular technology makes a good candidate for its category management initiative. We also asked the officials if LMR procurement would benefit from inclusion in the category management initiative. We also reviewed relevant legislation and Department of Homeland Security (DHS) planning documents related to interoperability among federal agencies, including the National Emergency Communications Plan, the National Response Framework, and SAFECOM documentation related to five key elements of interoperability. We reviewed our prior reports and others from federal agencies for examples of how factors helped or hindered their interoperability. We interviewed officials from federal agencies with responsibilities related to emergency communications and procurement of LMR equipment, including DHS; the National Telecommunications and Information Administration and the National Institute of Standards and Technology, within the Department of Commerce; the Federal Communications Commission; the General Services Administration; the Office of Management and Budget; and administrators of the ECPC. In addition to the individual named above, Sally Moino (Assistant Director), John Healey, (Analyst in Charge), Teresa Anderson, Jenn Beddor, Melissa Bodeau, Russ Burnett, Thanh Lu, Josh Ormond, Cheryl Peterson, Ernest Powell, Elizabeth Wood, and John Yee made key contributions to this report. | Public safety personnel across the nation rely on LMR to share information and coordinate their emergency response efforts. LMR systems are intended to provide secure, reliable, mission-critical voice communications in a variety of environments, scenarios, and emergencies; however, LMR interoperability—the ability to communicate across agencies—has been a long-standing challenge at all levels of government. GAO was asked to examine federal agencies’ LMR interoperability and procurement practices. GAO examined (1) LMR equipment used by federal agencies and the state of LMR interoperability among these agencies; (2) factors that help and hinder LMR interoperability among agencies; and (3) agencies’ LMR procurement practices. GAO surveyed civilian federal agencies, identified through their membership in the Emergency Communications Preparedness Center (57 agencies fully responded to the survey and one agency provided a partial response); reviewed Department of Homeland Security planning documents related to interoperability; and interviewed federal agency officials with responsibilities related to emergency communications and procurement of LMR equipment. GAO also reviewed OMB initiatives to improve federal procurement. Federal agencies GAO surveyed generally use land mobile radio (LMR) equipment to meet their core missions, such as public safety, emergency management, or firefighting. More than two-thirds of the 57 agencies GAO surveyed reported using equipment from the same manufacturer because, for example, they believe doing so will help ensure compatibility of new LMR equipment with existing system requirements. Most agencies GAO surveyed were consistent in identifying each other as agencies with which they have or have not needed LMR interoperability over the past 5 years. Of the agencies that identified the need to communicate with each other, about two-thirds reported generally having a good or excellent level of LMR interoperability. The use of standards-based and multi-band LMR equipment has helped to enhance interoperability among agencies, but the use of proprietary features and other factors continue to hinder interoperability. Almost all of the agencies that GAO surveyed reported using LMR equipment that meets voluntary technical standards, which have improved interoperability. Further, almost half of these agencies reported using multiband radios, which operate on multiple public-safety radio bands, to enhance interoperability. However, agencies reported several factors continue to limit their progress in achieving interoperability with other federal agencies. These factors include the use of proprietary features and encryption in devices and limited investments in LMR systems and devices. For example, about half of the agencies surveyed reported that the use of proprietary features within LMR devices has hindered interoperability. Nearly half of the agencies GAO surveyed reported using pre-approved vendors with established prices to acquire LMR equipment, mainly through contracts sponsored by the Departments of Homeland Security and the Interior. While this approach can facilitate cost savings and interoperability, many of these agencies reported purchasing equipment through multiple agreements, a practice that can reduce these benefits. About 40 percent of agencies GAO surveyed reported using sole-source procurement or independent approaches. According to the Office of Management and Budget (OMB), in general, agencies often purchase and manage items in a fragmented and inefficient manner. This approach can result in duplication of effort, which imposes significant costs on federal agencies. OMB has directed agencies to implement “category management” as an improved way to manage spending across government for commonly purchased goods and services. This approach enables the government to leverage its purchasing power and realize cost savings. However, OMB’s category management initiative does not include LMR equipment even though federal agencies spend millions of dollars annually purchasing such equipment. By including LMR equipment in OMB’s category management initiative, the government could more fully leverage its aggregate buying power to obtain the most advantageous terms and conditions for LMR procurements. OMB officials agreed that a category management approach to LMR procurement might save the government money while supporting the goal of enhanced interoperability among agencies that require it, but OMB has not examined the feasibility of applying this approach to the procurement of LMR equipment. GAO recommends that OMB examine the feasibility of including LMR in its category management initiative. OMB generally agreed with GAO’s recommendations. |
GPRA is intended to shift the focus of government decisionmaking, management, and accountability from activities and processes to the results and outcomes achieved by federal programs. New and valuable information on the plans, goals, and strategies of federal agencies has been provided since federal agencies began implementing GPRA. Under GPRA, annual performance plans are to clearly inform the Congress and the public of (1) the annual performance goals for agencies’ major programs and activities, (2) the measures that will be used to gauge performance, (3) the strategies and resources required to achieve the performance goals, and (4) the procedures that will be used to verify and validate performance information. These annual plans, issued soon after transmittal of the President’s budget, provide a direct linkage between an agency’s longer-term goals and mission and day-to-day activities. Annual performance reports are to subsequently report on the degree to which performance goals were met. The issuance of the agencies’ performance reports, due this year by March 31, represents a new and potentially more substantive phase in the implementation of GPRA—the opportunity to assess federal agencies’ actual performance for the prior fiscal year and to consider what steps are needed to improve performance and reduce costs in the future. NSF’s mission is to promote the progress of science; to advance the national health, prosperity, and welfare; and to secure the national defense. NSF carries out its mission primarily by making merit-based grants and cooperative agreements to individual researchers and groups in partnership with colleges, universities, and other public and private institutions. For fiscal year 2001, NSF has a budget of $4.4 billion and a staff of about 1,200 government employees to accomplish its mission. Implementing GPRA has been a challenge for NSF, whose mission involves funding research activities, because the substance and timing of research outcomes are unpredictable and research results can be difficult to report quantitatively. With OMB’s approval, NSF uses an alternative format—a qualitative scale for the assessment of outcomes—for which it relies on independent committees of scientific experts. These committees determine the level of NSF’s success in achieving its goals. NSF uses quantitative goals for its management and investment process goals. This section discusses our analysis of NSF’s performance in achieving the selected key outcomes, as well as the strategies it has in place— particularly strategic human capital management and information technology strategies—for achieving these outcomes. In discussing these outcomes, we have also provided information drawn from our prior work on the extent to which NSF has provided assurance that the performance information it is reporting is accurate and credible. NSF, in its fiscal year 2000 performance report, states that it met its discoveries outcome and cites numerous examples of its achievements in such scientific fields as mapping the Arctic Ocean floor and extra-solar planetary discovery. NSF judged its performance as successful on the basis of assessments by independent committees of scientific experts. In compiling committee members’ scores and aggregating their comments, NSF took into account only those reports with substantive comments and ratings that were clearly justified. NSF officials told us that, for the scientific discoveries outcome goal, all of the committees judged NSF as successful in achieving it and justified their assessments. However, the performance report did not provide information on the specific numbers of reports it included and excluded in reaching its judgments for this outcome or any of the other outcomes. Furthermore, NSF discussed the independent scientific committees’ results for only one of the scientific discoveries five areas of emphasis—namely, the balance of innovative, risky, and interdisciplinary research area. Instead of providing a more complete analysis of the scientific committees’ assessments, NSF contracted with an external third party—PricewaterhouseCoopers—to make an independent assessment of the performance results. PricewaterhouseCoopers concluded that NSF’s fiscal year 2000 results were valid and verifiable. NSF’s fiscal year 2002 performance plan included a new section on the means and strategies for success related to this outcome that includes strategies that generally are clear and reasonable. To implement its outcome goal, NSF has both (1) process strategies, such as supporting the most promising ideas through merit-based grants and cooperative agreements, and (2) program strategies, such as supporting programmatic themes identified as areas of emphasis. However, NSF’s plan generally does not address key components of strategic human capital management, although its “people” and “management” outcome goals include such human capital initiatives as workforce diversity, an NSF Academy for workforce training, and a survey on the work environment. NSF is in the process of developing a 5-year strategic plan on its workforce needs that must be submitted to OMB by July 20, 2001. This strategic plan will guide NSF’s future effort in this area. NSF reported that it made substantial progress, achieving most of its performance goals related to the award and administration of research grants. While not listed as an outcome goal, the administration of grants includes many of NSF’s management and investment process goals. For example, NSF exceeded by 21 percent one of its management performance goals—to receive at least 60 percent of full grant proposal submissions electronically through a new computer system called FastLane. NSF also exceeded by 5 percent another management goal that at least 90 percent of its funds will be allocated to projects reviewed by appropriate peers external to NSF and selected through a merit-based competitive process. NSF continued to miss one of its investment process goals—to process 70 percent of proposals within 6 months of receipt—dropping from 58 percent to 54 percent in fiscal year 2000. As part of its review of NSF, PricewaterhouseCoopers concluded that NSF’s fiscal year 2000 processes were valid and verifiable and relied on sound business processes, system and application controls, and manual checks of system queries to confirm the accuracy of reported data. NSF’s fiscal year 2002 performance plan generally includes strategies for achieving NSF’s performance goals that appear to be clear and reasonable. However, in some cases, the strategies are vague, and how NSF will use them to achieve its performance goals is unclear. For example, one of NSF’s three strategies for identifying best management practices for its large infrastructure projects is to ensure input from members of the external community who build, operate, and utilize research facilities. Furthermore, while NSF has strategies for the process of funding awards, it does not generally address the oversight needs to ensure that funding recipients meet the awards’ requirements. NSF’s 5-year workforce strategic plan is addressing concerns regarding the management of a growing portfolio of program activities with relatively flat personnel levels—a key issue for developing strategic human capital management strategies. For the selected key outcomes, this section describes major improvements or remaining weaknesses in NSF’s (1) fiscal year 2000 performance report in comparison with its fiscal year 1999 report and (2) fiscal year 2002 performance plan in comparison with its fiscal year 2001 plan. It also discusses the degree to which the agency’s fiscal year 2000 report and fiscal year 2002 plan address concerns and recommendations by NSF’s Inspector General. NSF improved its fiscal year 2000 performance report, making major changes to address the weaknesses we reported in the prior year’s performance report. Our prior year’s review noted that NSF did not discuss either its reasons for falling short of a performance goal or its strategies for attaining the goal in the future. NSF’s 2000 report corrected this weakness. For example, regarding the technology-related goal to submit, review, and process proposals electronically, the report states that the reason for not achieving the goal was due to the technological, financial, and legal issues related to electronic signatures. The strategy for addressing the technological issue was to demonstrate the paperless review capability by conducting 10 pilot paperless projects in 2001 that manage the review process in an electronic environment. We also questioned the quality of the information in the 1999 performance report, noting that it provided virtually no assurance that the information was credible. As mentioned earlier, NSF contracted with PricewaterhouseCoopers to review aspects of its GPRA data collection efforts and its performance assessment results. PricewaterhouseCoopers found no basis for questioning the integrity of the results. NSF can improve its future reports in several ways. The results of the independent committees’ reviews would benefit from more detailed information, such as including all of the areas of emphasis and the results. In addition, last year, we noted that the 1999 performance report did not describe NSF’s financial role in the examples of scientific successes presented. Such information, we said, would help to judge the extent of NSF’s role in achieving these successes. NSF officials maintain that determining NSF’s financial role in these successes would be extremely difficult and would take a considerable effort. NSF officials told us that the successes they identified for this outcome were primarily due to NSF awards. That statement would have been useful in assessing the 2000 performance report. NSF made improvements to its fiscal year 2002 performance plan. For example, last year, we reported that the performance plan contained little useful information about NSF’s intended strategy to achieve its goals, including a discussion of the problems. The 2002 plan includes a new section on the means and strategies for success. For example, for its new goal of award oversight and management, NSF will ensure that the internal committee reviewing the oversight activities for large infrastructure projects has broad disciplinary expertise and experience in managing facilities. As previously mentioned, NSF is also addressing data quality concerns, providing confidence that future performance information will be credible. Furthermore, NSF revised its outcome goal such that it does not have to succeed in demonstrating significant achievement in discoveries that advance the frontiers of science, engineering, or technology. Rather, discoveries is now one of six performance indicators for which NSF will consider itself successful when a majority is achieved. Last year, we also reported that the strategies for achieving the goals were not clearly discussed. NSF includes a new section on the means and strategies for success under each goal. NSF can improve its future performance plans by addressing its resource needs. Last year, we noted that the plan did not clearly discuss the resources for achieving the goals or the specific links between the resources and the areas of emphasis. The 2002 performance plan still does not do so. As discussed earlier, NSF’s 5-year workforce strategic plan is expected to address human capital issues, providing a basis for addressing this issue in next year’s performance plan. GAO has identified two governmentwide high-risk areas: strategic human capital management and information security. Regarding strategic human capital management, we found that NSF’s performance plan generally did not have goals and measures related to strategic human capital management, and NSF’s performance report did not explain its progress in resolving strategic human capital management challenges. However, as mentioned earlier, NSF is developing a 5-year workforce strategic plan. With respect to information security, we found that NSF’s performance plan had a goal and measures related to information security. While NSF’s performance report did not explain its progress in resolving information security challenges, it did indicate that NSF has internal management controls that continually monitor data security. We provided NSF and the Office of the Inspector General with a draft of this report for their review and comment. We met with NSF officials, including the Chief Information Officer and the Inspector General. The NSF officials generally agreed with the report. However, they noted that the fiscal year 2000 performance report did not respond to some of the Inspector General’s management challenges primarily because these challenges were identified in a November 30, 2000, letter. The Inspector General agreed that some of these management challenges were new. The NSF officials recognize that certain challenges not in the current plan and report are important, and they noted that these challenges are being addressed through internal management controls and processes. They added that NSF will continue to consider these challenges for incorporation in future performance plans. The NSF officials also provided technical clarifications, which we incorporated as appropriate. Our evaluation was generally based on the requirements of GPRA, the Reports Consolidation Act of 2000, guidance to agencies from OMB for developing performance plans and reports (OMB Circular A-11, Part 2), previous reports and evaluations by us and others, our knowledge of NSF’s operations and programs, GAO’s identification of best practices concerning performance planning and reporting, and our observations on NSF’s other GPRA-related efforts. We also discussed our review with NSF officials in the Office of Information and Resource Management; the Office of Budget, Finance, and Award Management; the Office of Integrative Activities; and the Office of Inspector General. The agency outcomes that were used as the basis for our review were identified by the Ranking Minority Member of the Senate Committee on Governmental Affairs as important mission areas for NSF and do not reflect the outcomes for all of NSF’s programs or activities. The major management challenges confronting NSF, including the governmentwide high-risk areas of strategic human capital management and information security, were identified by (1) our January 2001 high-risk update and (2) NSF’s Office of Inspector General in November 2000. We did not independently verify the information contained in the performance report and plan, although we did draw from other GAO work in assessing the validity, reliability, and timeliness of NSF’s performance data. We conducted our review from April through June 2001 in accordance with generally accepted government auditing standards. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to appropriate congressional committees; the Director, NSF; and the Director of OMB. Copies will also be made available to others on request. If you or your staff have any questions, please call me at (202) 512-3841. Key contributors to this report were Richard Cheston, Alan Stapleton, Elizabeth Johnston, and Sandy Joseph. The following table discusses the major management challenges confronting the National Science Foundation (NSF), including the governmentwide high-risk areas of strategic human capital management and information security, identified by our January 2001 high-risk update and NSF’s Office of Inspector General (IG) in November 2000. The first column of the table lists the management challenges identified by our office and NSF’s IG. The second column discusses NSF’s progress, as discussed in its fiscal year 2000 performance report, in resolving these challenges. The third column discusses the extent to which NSF’s fiscal year 2002 performance plan includes performance goals and measures to address each of these challenges. We found that while the fiscal year 2000 performance report discussed NSF’s progress in resolving most of its major challenges, it did not discuss NSF’s progress in resolving the following challenges: (1) addressing strategic human capital management issues regarding strategic human capital planning and organizational alignment, leadership continuity and succession planning, and creating results-oriented organizational cultures; (2) developing appropriate data security controls to reduce the ever increasing risk of unauthorized access; (3) developing a more coherent award administration program that ensures that grantees comply with NSF’s award requirements; (4) ensuring that NSF grantees meet their cost-sharing obligations; and (5) providing the science, operations, and logistics support needed to manage the U.S. Antarctic Program. Of NSF’s 10 major management challenges, its fiscal year 2002 performance plan (1) had goals and measures that were directly related to 5 of the challenges; (2) had goals and measures that were indirectly applicable to 1 challenge; (3) had no goals and measures related to 1 challenge but discussed strategies to address it; and (4) did not have goals, measures, or strategies to address 3 challenges. | This report reviews the National Science Foundation's (NSF) fiscal year 2000 performance report and fiscal year 2002 performance report plan required by the Government Performance and Results Act. Specifically, GAO discusses NSF's progress in addressing several key outcomes that are important to NSF's mission. NSF reported that it made substantial progress in achieving its key outcomes. Although the planned strategies for achieving these key outcomes generally are clear and reasonable, some are vague and do not identify the specific steps for achieving the goals. NSF's fiscal year 2000 performance report and fiscal year 2002 performance plan reflect continued improvement compared with the prior year's report and plan. Although the 2002 performance plan does not substantially address NSF's human capital management, NSF is developing a five-year workforce strategic plan to address strategic human capital management issues that must be submitted to the Office of Management and Budget by July 20, 2001. NSF's performance report did not explain its progress in resolving information security challenges, but NSF indicated that it has internal management controls that continually monitor data security. |
Charter schools are public schools that operate under charters (or contracts) specifying the terms by which they may operate. In general, they are established under state law, do not charge tuition, and are nonsectarian. State charter school laws and policies vary widely regarding the degree of autonomy provided to the schools, the number of charter schools that may be established, the qualifications of charter school applicants and teachers, and the accountability criteria that charter schools must meet. As of September 1997, 29 states and the District of Columbia had enacted laws authorizing charter schools, according to the Center for Education Reform. In school year 1996-97, over 100,000 students were enrolled in nearly 500 charter schools in 16 states and the District of Columbia. (App. II shows the states with charter school laws as of September 1997 and the number of charter schools operating during the school year by state.) To explore the effects of various education reform efforts, in January 1997, the Congress began holding hearings in Washington, D.C., and around the country. Among other reform efforts, the Congress has focused on the development of charter schools. Charter school operators and others at the hearings raised concerns about charter schools’ receiving the share of federal title I and IDEA grant funds they are eligible to receive. These concerns were raised in part because of differences in the way charter schools receive funds. Some charter schools receive funds directly from their states, while other charter schools depend on their local school districts for title I and IDEA program benefits. In addition to learning more about this issue, the Congress has expressed interest in learning how charter schools use federal funds intended to help them get started as new schools. To improve understanding of the charter school model, the Congress authorized the Public Charter Schools Program (start-up grants) as part of its 1994 reauthorization of ESEA. Under the program, the federal government provides financial assistance for the design and initial implementation of charter schools. The Department of Education has the authority to competitively award grants to states with laws authorizing the operation of charter schools. In evaluating state grant applications, the Department must use a peer review process and judge states’ applications on the basis of several criteria, including the (1) contribution that a state’s program will make toward helping educationally disadvantaged and other students in achieving state content and student performance standards, (2) degree of flexibility that a state will offer charter schools, and (3) likelihood that a state’s program will improve students’ educational results. States that receive grants, in turn, award subgrants to charter schools. (If a state does not apply for a grant, individual or groups of charter schools may apply directly for grants to the Department.) States may use up to 5 percent of their grant award for administration and may set aside 20 percent for establishing a charter school revolving loan fund. Grants awarded to charter schools must be used for either (1) the planning and design of a charter school, which may include establishing achievement and assessment standards and providing professional development for teachers and other staff, or (2) the initial implementation of a charter school, which may include informing the community about the school, acquiring equipment and supplies, developing curricula, or initial operational costs. Although dozens of financial aid programs exist for public elementary and secondary schools, two programs, title I and IDEA, are by far the largest federal programs. Under title I and IDEA, the Department allocates funds to state educational agencies (SEA), which then allocate funds to local educational agencies (LEA) or school districts. Charter schools receive title I and IDEA funds from their SEAs therefore in states that treat charter schools as LEAs (called the independent model). LEAs allocate title I funds to schools in their districts. In addition, LEAs provide special education and related services to eligible children enrolled in their schools and use IDEA funds to help pay the costs of doing so. Charter schools in states that treat these schools as dependents of an LEA (called the dependent model) benefit from the title I and IDEA programs on the same basis as do the LEAs’ other schools. The seven states in our review used both the independent and dependent funding models. Although Massachusetts and Minnesota consider all charter schools as independent LEAs, California and Colorado consider all charter schools as dependent members of a school district. Arizona, Michigan, and Texas use both models within their states depending on the particular program involved, the chartering authority, or other circumstances. Title I is the largest federal elementary and secondary education aid program. The program provides grants to school districts or LEAs to help them educate disadvantaged children—those with low academic achievement attending schools serving high-poverty areas. To be eligible for title I funds, LEAs must meet statutory and regulatory guidelines for minimum poverty thresholds. LEAs that have more than one school—including charter schools operating under the dependent model—allocate title I funds among their schools. The federal statute and regulations lay out complex criteria and conditions that LEAs use in deciding how to allocate funds to their schools, which results in shifting title I funds received by LEAs to individual schools with relatively higher percentages of students from low-income families. An individual school that is part of an LEA in a high-poverty area therefore might have to have enrolled a higher percentage of low-income children to receive title I funds than it would have if the school were treated as an independent LEA. In this case, a charter school that would have received title I funds as an independent LEA may not receive title I funds under the dependent model because other schools in the LEA served higher percentages of low-income children. The IDEA federal grant program is designed to help states pay for the costs of providing a free appropriate public education to all eligible children with disabilities between the ages of 3 and 21 living in the state, depending on state law or practice. The act requires, among other things, that states make such education available to all eligible children with disabilities in the least restrictive environment. Under the current formula, the Department of Education annually allocates funds to SEAs on the basis of their reported numbers of eligible children receiving special education and related services for the preceding fiscal year, the national average per pupil expenditure, and the amount the Congress appropriates for the program. The most funding that a state may receive for any fiscal year is capped at 40 percent of the national average per pupil expenditure multiplied by the number of eligible children with disabilities in the state who receive special education and related services. Under the current formula, states must distribute at least 75 percent of the IDEA funds they receive from the Department to LEAs and may reserve the rest for state-level activities. In general, SEAs allocate IDEA funds to eligible LEAs on the basis of their relative share of their state’s total number of eligible children receiving special education and related services. The benefits that individual schools may receive from IDEA funds vary by state. States may allocate IDEA funds to LEAs or to other agencies included in the act’s definition of LEAs. These other agencies include, for example, regional educational service agencies authorized by state law to develop, manage, and provide services or programs to LEAs. Some states allocate IDEA funds to regional educational service agencies for providing special education and related services to children with disabilities enrolled in the schools of one or more LEAs, including charter schools. Other states allocate IDEA funds directly to school districts, which then develop, manage, and provide their own such services to children with disabilities. A majority of the charter school operators that we surveyed reported that they received fiscal year 1996 federal start-up grant funds. Operators used these funds for a variety of purposes to establish their charter schools. Although no centralized repository of data exists for determining the extent to which charter schools have received federal funds nationwide, our study suggests that charter schools in the seven states we surveyed have not been systematically denied access to title I and IDEA funds. To date, the Congress has appropriated $155 million for start-up grants under this program. In fiscal year 1996, the Department of Education awarded grants to 19 states and the District of Columbia, ranging from about $191,000 to about $1.9 million, according to Education. In turn, each state made grant funds available to charter schools in their states. The seven states in our survey all received fiscal year 1996 program funds; the amounts they received ranged from $500,000 to almost $1.9 million. (See table 1.) Of the 41 charter schools responding to our survey, slightly more than half (or 23) received fiscal year 1996 start-up grants. States awarded grants to these schools ranging from $7,000 to $84,000; the average grant amount was about $36,000 and the median was $32,500. Funds received by individual charter schools varied by state. These differences reflect states’ flexibility in administering their grant programs and in allocating funds. funding. In Texas, for example, all charter schools received an equal amount of fiscal year 1996 grant funds ($26,785), even though enrollment at these schools varied greatly—from 90 students in one school to 180 students in another. The charter schools in our survey that received start-up grants used these funds most often to help pay for school equipment and curriculum materials, technology, and facilities renovation or leasing. Several charter schools used these funds for multiple purposes. (See table 2.) Operators of charter schools we surveyed that did not receive grant funds told us that their schools were either (1) ineligible for grants under their state guidelines, (2) unsuccessful in competing for a grant, or (3) did not apply for a grant. Schools ineligible for funds included schools that were no longer considered start-up operations or had previously received funds and did not qualify under state guidelines. Some charter school operators told us that although they applied for start-up grants, their applications were scored lower than other schools’ and, as a result, did not receive awards. Finally, a few charter school operators said that they did not apply for start-up grants because they were uninterested, did not need funds, or did not know that funds were available. Education, these funds are expected to provide, on average, about $639 per student for services provided to the nearly 6 million eligible students aged 3 through 21, plus an additional $650 per student to provide services for approximately 575,800 eligible preschool children aged 3 through 5. Despite concerns about issues related to the funding of charter schools raised during the 1997 congressional hearings, most charter school operators we surveyed who had applied for title I and IDEA funds received them. Overall, about two-fifths of the charter schools we surveyed received title I funds for the 1996-97 school year. Survey results indicated that slightly more than one-third of charter schools operating under the independent model and almost one-half of the schools operating under the dependent model received title I funds. Table 3 shows the number of charter schools surveyed that received title I funds by funding model. About two-fifths of the charter schools we surveyed did not apply for title I funds. Charter school officials who did not apply cited reasons such as (1) a lack of time to do so, (2) their school was ineligible for funds and therefore they did not apply, or (3) they found that applying for these funds would cost more than the funding would provide. Of those schools that applied for title I funds, two-thirds, or 16 of 25, reported receiving funds. Title I funding for these schools ranged from $96 to $941 per poverty student; the average amount was $466 per poverty student and the median amount was $413. The difference in per student funding relates to the allocation formulas, which consider the number and proportion of low-income children in the school, district, and county. Title I funds received by these schools represented between 0.5 and 10.0 percent of their total operating budgets. For all but four of these schools, funds received represented 5 percent or less of the schools’ total operating budgets. Regarding the IDEA program, slightly more than half of our survey respondents received funds or IDEA-funded services. Of all charter schools surveyed, two-fifths operating under the independent model received funds or IDEA-funded services; three-quarters of those operating under the dependent model received funds or services. Table 4 shows the number of charter schools surveyed that received IDEA funds or IDEA-funded services by funding model. Overall, about a third of the charter schools we surveyed did not apply for IDEA funds or services. Charter school officials who did not apply cited reasons similar to those who did not apply for title I funds such as (1) a lack of time to do so, (2) they were not eligible for funds, (3) they did not know about the availability of IDEA funds, or (4) they found that applying for these funds would cost more than the funding would provide. Four-fifths of the charter school officials who told us that they applied for IDEA funds or services reported that they received funds or services for the 1996-97 school year. For schools that obtained IDEA funds, rather than services, amounts received ranged from $30 to $1,208 per eligible student; the average school value was $421 per eligible student, and the median value was $206. IDEA funds received by schools represented between 0.08 percent and 2.50 percent of their total operating budgets. believe otherwise. For charter schools under the dependent model, however, about four times as many survey respondents believe that their schools received a fair share of IDEA funds or services as believe otherwise. Even though many charter school operators we surveyed believe that they received a fair share of federal funds, they reported, as did state officials and technical assistance providers, that several barriers hindered charter schools’ access to title I and IDEA funds. These barriers included (1) difficulties in establishing program eligibility, (2) workload demands that prohibited schools from pursuing program funds or made doing so too costly, and (3) charter school operators’ and district and state administrators’ lack of program and administrative experience. One barrier reported by charter school operators was the difficulty in establishing program eligibility primarily due to a lack of a prior year’s enrollment data and problems collecting student eligibility data. For example, three charter school officials told us that because they had no prior year’s enrollment or student eligibility data, they were not eligible under state guidelines for federal funds. School officials noted that besides this being a problem for new schools, using even 1-year-old enrollment data can significantly understate the number of title I-eligible students enrolled in schools that are incrementally increasing the number of grades they serve. Other school officials reported difficulty in collecting required student eligibility data because some families are reluctant, due to privacy concerns, to return surveys sent home with students asking for the amount of household income. Competing workload demands were another barrier reported by charter school officials. In our survey, several school officials emphasized that other administrative and educational responsibilities left them little time and resources to devote to accessing title I and IDEA funds. These officials often played many roles at their schools, including principal, office manager, nurse, and janitor. In addition, even though a majority of a charter school operators who noted in our survey that the title I and IDEA application processes were only somewhat or not at all difficult, some operators told us that, nonetheless, it was not worth their while to pursue these funds. One operator, for example, said that application and program compliance costs would exceed the amount of funds his school would be eligible for, while another said that the amount of funds his school could expect to receive was simply not worth his while to apply for them. Finally, we spoke to technical assistance providers and consultants who told us that charter school operators are often dedicated educators but who lack business and administrative experience in general or experience with federal programs in particular. They told us that such inexperience may likely discourage individuals from pursuing federal funding for their schools. Some operators told us that their lack of experience with the title I and IDEA programs was a barrier to accessing these funds. In addition, charter schools represent new and additional responsibilities for districts and SEAs that administer federal programs. As a result, state and district officials told us that it has taken time to develop new policies and procedures to accommodate charter schools. Charter school operators reported that outreach and technical assistance were critical to their ability to access federal funds. Charter school officials most often cited receiving information about the availability of federal funds and the amount their schools would be eligible for as factors helping them access title I and IDEA funds. Officials cited a number of sources from which they had obtained such information, including their own states’ departments of education and local school district officials. In addition, other operators told us that state and local program officials’ flexibility facilitated their access to funds. Several states and the Department have taken steps to help charter schools access federal funds. Some states, for example, are changing allocation procedures to better accommodate charter schools and providing training and technical assistance to school operators. Among other things, some states are allowing charter schools to use comparable—and more easily obtainable—data to establish the income levels of students’ families. Such efforts will allow charter schools to demonstrate eligibility for title I funds without having historical data. In addition, some states have actively sought to inform charter school operators of available funds and provide training to school operators on applying for and administering these funds. using state administrative and excess title I funds to serve new charter schools. Under the charter school start-up grant program, the Congress provided that the Department may reserve up to 10 percent of appropriated funds to conduct national activities. Using these funds, the Department has sponsored national meetings for state officials and charter school operators. In November 1997, for example, the Department sponsored a national conference for charter schools in Washington, D.C. The Department invited state officials and charter school operators from across the country and conducted workshops on topics, including federal grant programs, new requirements under IDEA, and developing and implementing charter schools. The Department has also funded the development of an Internet web site with information on federal programs, charter school operational issues, a charter school resource directory as well as profiles of charter school states and charter schools. Charter schools have used federal start-up funds for a variety of purposes, depending on the schools’ particular needs. These needs have most often included school equipment and curriculum materials, technology, and facilities renovation or leasing. Our study suggests that charter schools in the seven states we surveyed have not been systematically denied access to title I and IDEA funds and that the barriers charter schools face in accessing these funds appear to have no relation to charter schools’ treatment as school districts or as members of school districts. Rather, other barriers, many of which have no relation to the path federal funds take, have more significantly affected charter schools’ ability to access title I and IDEA funds. These other barriers include state systems that base funding allocations on the prior year’s enrollment and student eligibility data, the costs of accessing funds compared with the amounts that schools would receive, and time constraints that prevent charter school operators from pursuing funds. Despite these barriers, most charter school operators who expressed an opinion in our survey believe that title I and IDEA funds are fairly allocated to charter schools. Although a variety of factors help charter schools access federal funds, according to our review, training and technical assistance are critical to ensuring that charter school operators have access to these funds. Several states and the Department of Education have initiatives under way to facilitate such access. This concludes my statement, Mr. Chairman. I would be happy to answer any questions you or the members of the Committee may have. Charter schools were also operating in Alaska, Delaware, the District of Columbia, Florida, Georgia, Hawaii, Illinois, Louisiana, New Mexico, and Wisconsin during the 1996-97 school year. Not applicable. Totals do not include alternative schools operating in Oregon during the 1996-97 school year. States with charter legislation but no charter schools. States included in our survey with number of schools operating in each. States and the District of Columbia having charter laws and schools but not included in our survey, with number of schools operating in each. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed charter schools' experiences in accessing selected federal funds, focusing on: (1) start-up grants under title I of the Elementary and Secondary Education Act (ESEA) and the Individuals with Disabilities Education Act (IDEA); (2) factors that help and hinder charter schools in accessing title I and IDEA funds; (3) charter school operators' opinions about whether they are receiving a fair share of these funds; and (4) state and federal efforts intended to help charter schools gain access to title I and IDEA funds. GAO noted that: (1) slightly more than half of the schools GAO surveyed received fiscal year 1996 start-up grants ranging from $7,000 to $84,000; the average grant amount was $36,000; (2) the schools used the start-up grant funds for a variety of purposes, including curriculum materials and equipment, other technology, and facilities renovation or leasing; (3) about two-fifths of the charter schools GAO surveyed received title I funds, and slightly more than half of the schools received IDEA funds or IDEA-funded special education services; (4) most charter school operators GAO surveyed who expressed an opinion told GAO they believe they received a fair share of federal title I and IDEA funds; (5) nonetheless, charter school operators also cited a variety of barriers to accessing title I and IDEA funds, including: (a) difficulties in establishing program eligibility; (b) workload demands; and (c) a lack of program and administrative experience; (6) they reported that outreach and technical assistance were critical to helping them access federal funds; (7) several states and the Department of Education have begun initiatives to help charter schools access federal funds; (8) some states, for example, are revising or developing alternative allocation policies and procedures to better accommodate charter schools' access to federal funds and providing training and technical assistance to charter school operators; and (9) the Department has recently issued guidance to states and school districts on allocating title I funds to charter schools, and, among other things, has sponsored national meetings for state officials and charter school operators. |
The electricity industry, as shown in figure 1, is composed of four distinct functions: generation, transmission, distribution, and system operations. Once electricity is generated—whether by burning fossil fuels; through nuclear fission; or by harnessing wind, solar, geothermal, or hydro energy—it is generally sent through high-voltage, high-capacity transmission lines to local electricity distributors. Once there, electricity is transformed into a lower voltage and sent through local distribution lines for consumption by industrial plants, commercial businesses, and residential consumers. Because electric energy is generated and consumed almost instantaneously, the operation of an electric power system requires that a system operator constantly balance the generation and consumption of power. Utilities own and operate electricity assets, which may include generation plants, transmission lines, distribution lines, and substations—structures often seen in residential and commercial areas that contain technical equipment such as switches and transformers to ensure smooth, safe flow of current and regulate voltage. Utilities may be owned by investors, municipalities, and individuals (as in cooperative utilities). System operators—sometimes affiliated with a particular utility or sometimes independent and responsible for multiple utility areas—manage the electricity flows. These system operators manage and control the generation, transmission, and distribution of electric power using control systems—IT- and network-based-systems that monitor and control sensitive processes and physical functions, including opening and closing circuit breakers. As we have previously reported, the effective functioning of the electricity industry is highly dependent on these control systems. See the list of related past GAO products at the end of this report. However, for many years aspects of the electricity network lacked adequate technologies—such as sensors—to allow system operators to understand key information to detect how much electricity was flowing on distribution lines, communications networks to further integrate parts of the electricity grid with control centers, and computerized control devices to automate system management and recovery. As the electricity industry has matured and technology has advanced, utilities have begun taking steps to update the electricity grid—the transmission and distribution systems—by integrating new technologies and additional IT systems and networks. Though utilities have regularly taken such steps to upgrade their electricity systems, industry and government stakeholders have begun to articulate a broader, more integrated vision for transforming today’s electricity grid into one that is more reliable and efficient, facilitates alternative forms of generation— including renewable energy, and gives consumers real-time information about fluctuating electricity costs. This vision—commonly referred to as smart grid—would increase the use of IT systems and networks and two-way communication to automate actions that system operators formerly had to make manually. These efforts are designed to, among other things, improve transmission of electricity from power plants to consumers, provide grid operators with more information about conditions on the electricity system, integrate new and improved technologies into the grid, and allow consumers to receive more information about electricity prices and availability from the electricity system. Smart grid modernization is an ongoing process and initiatives have commonly involved installing advanced metering infrastructure (smart meters) on homes and commercial buildings that enable two-way communication between the utility and the customer. For example, FERC estimated advanced metering use in the United States at 4.7 percent in 2008, compared to 0.7 percent in 2006. Initiatives have also involved adding “smart” components to provide the system operator with more detailed data on the conditions of the transmission and distribution systems and better tools to observe the overall condition of the grid (called wide-area situational awareness). These include advanced, “smart” switches on the distribution system that communicate with each other to reroute electricity around a troubled line; and high-resolution, time synchronized monitors––called phasor measurement units––on the transmission system. Figure 2 illustrates one possible smart grid configuration. Utilities making actual smart grid investments may choose alternative configurations using different technologies and communications media depending on factors such as cost, customer needs, and local conditions. Future smart grid applications may also include key roles for energy storage, in particular, storing electricity that is generated when it is inexpensive to produce. This may involve using improved battery technology, including the batteries in plug-in electric and hybrid-electric vehicles. Furthermore, smart grid systems may be used to encourage consumers to lower their demand for electricity during periods of high usage—called peaks. This could occur using home networks that automatically control appliances’ electricity consumption in response to programmed consumer preferences and information about prices and demand received from the utility. According to the National Energy Technology Laboratory, a Department of Energy (DOE) national laboratory with a key role in supporting DOE smart grid efforts, smart grid systems fall into several different categories, as outlined in table 1. The use of smart grid systems may have a number of benefits, including improved reliability from fewer and shorter outages, downward pressure on electricity rates due to the ability to shift peak demand, an improved ability to transmit power from alternative energy sources such as wind, and an improved ability to detect and respond to potential attacks on the grid. It could also help consumers make more informed choices about when to use electricity; for example, how much to use when demand and prices are high. On the other hand, upgrading the grid would require major investments whose costs would ultimately be passed to utility consumers. Some electricity stakeholders, particularly those representing consumers, question whether the benefits of smart grid investments would be fully realized and have suggested that less costly approaches could achieve similar benefits. State utility regulators are to evaluate applications for smart grid investments on a case-by-case basis. A number of these regulators have approved specific smart grid investments after determining that their benefits to consumers outweigh their costs. According to the FERC-proposed smart grid policy statement, to achieve the smart grid characteristics and functions outlined in EISA, it is essential that these systems be interoperable—able to work with each other without special effort on the part of the customer. NIST officials explained that the electricity grid has historically relied on proprietary technology which is difficult to integrate with the technology of other manufacturers. In the case of smart grid upgrades, utilities have sought devices and systems that are interoperable and easily integrated with technologies from different vendors. The smart grid vision and its increased reliance on IT systems and networks expose the electric grid to potential and known cybersecurity vulnerabilities associated with using such systems, which in turn increase the risk to the smooth and reliable operation of the electricity grid. As we and others have previously reported, these potential vulnerabilities include: increasing the use of systems and networks increases the number of entry points and paths that can be exploited by potential adversaries and other unauthorized users; increasing the use of new system and network technologies can introduce new, unknown vulnerabilities; interconnecting systems and networks can allow adversaries wider access and the ability to spread malicious activity; and increasing the amount of customer information being collected on systems (and transmitting it via networks) provides monetary incentive for adversaries to attack these systems, and could lead to the unauthorized disclosure and use of private information. In addition to these potential vulnerabilities, we and others have also reported that smart grid and related systems have known cyber vulnerabilities. For example, cybersecurity experts have demonstrated that certain smart meters can be successfully attacked, and the impact of such attacks includes the ability to disrupt the electricity grid. In addition, we reported in 2007 that certain smart systems—commonly referred to as control systems—used in industrial settings such as electric generation have cybersecurity vulnerabilities that, if exploited, could result in serious damages and disruption. Further, in 2009, the Department of Homeland Security, in cooperation with a DOE national laboratory, ran a test that demonstrated that a vulnerability, commonly referred to as “Aurora,” had the potential to allow unauthorized users to remotely control, misuse, and cause damage to a small commercial electric generator. Moreover, in 2008, the Central Intelligence Agency reported that malicious activities against IT systems and networks have caused disruption of electric power capabilities in multiple regions overseas, including a case that resulted in a multicity power outage. Both the federal government and state governments have authority for overseeing the electricity industry. With respect to the electricity prices and rates of investor-owned utilities, wholesale electricity sales and transmission of electricity in interstate commerce are regulated by the federal government, specifically FERC. This involves approving whether to allow utilities to recover the costs of investments they make to the transmission system. State public utility commissions (PUC) generally have authority to regulate local distribution and retail sales of electricity by investor-owned utilities in their state, including whether to allow these utilities to recover the costs of investments made to the distribution system. For cooperative and some municipal utilities, whose rate regulation by FERC and many state public utility commissions is limited, municipal city councils or cooperative boards of directors will generally approve cost recovery for electric investments. With respect to smart grid initiatives, individual utilities can choose to invest in smart grid devices on their own. However, as noted above, depending on the type of utility and where cost recovery is sought, either FERC, the state PUC, or another entity will have authority for deciding whether to allow that utility to recover the costs of smart grid investments from customers. State and federal authorities also play key roles with respect to reliability, which can be affected by a system’s cybersecurity. State regulators generally have authority to oversee the reliability of the local distribution system. The North American Electric Reliability Corporation (NERC) is the federally designated U.S. Electric Reliability Organization overseen by FERC. NERC has responsibility for conducting reliability assessments and enforcing mandatory standards to ensure the reliability of the bulk power system—a term that refers to facilities and control systems necessary for operating the electric transmission network and certain generation facilities needed for reliability. NERC develops reliability standards collaboratively through a deliberative process involving utilities and others in the electricity industry—which are then sent to FERC for approval. These reliability standards include critical infrastructure protection standards for protecting electric utility-critical and cyber-critical assets. In 2008, FERC approved eight critical infrastructure standards developed by NERC. These standards established requirements to help ensure the secure electronic exchange of information needed to operate and support the reliability of the bulk power system, and to help prevent unauthorized physical or electronic access to critical cyber assets. The eight standards require certain users, owners, and operators of the bulk power system to establish policies, plans, and procedures to safeguard physical and electronic access to control systems; identify and protect critical cyber assets; train personnel on security matters; report security incidents; and be prepared to recover from a cyber incident. NERC staff is engaged in the NIST-facilitated process, in particular, to address whether new or modified reliability standards will be necessary to ensure the continued reliability of the bulk power system as new smart grid technologies and systems are developed and integrated with existing systems and networks. In 2007, EISA established that it is federal policy to support the modernization of the electricity grid and required actions by a number of federal agencies, including NIST, FERC, and DOE. Specifically, the act directed NIST’s Director, who reports to the Secretary of Commerce, to coordinate development of a framework of, among other things, IT standards for achieving the interoperability of smart grid systems. To accomplish this, NIST, starting in 2009, facilitated a process with stakeholders (e.g., utilities, smart grid technology vendors, standards development organizations, and others) to identify interoperability and cybersecurity standards related to smart grid. In January 2010, NIST reported that this process resulted in the identification of 75 standards that support smart grid interoperability. Of these, 11 involved cybersecurity. In addition to the NIST efforts to develop a framework for identifying interoperability and cybersecurity standards, the agency also identified the need to institute an initiative to develop cybersecurity guidelines for organizations such as electric companies, IT system vendors, and others involved in developing and implementing smart grid systems. To carry out the above tasks (i.e., developing the standards framework and drafting the cybersecurity guidelines), NIST planned to establish two key working groups that are described in table 2. With regard to FERC, under EISA the commission is to adopt those standards (identified as part of the NIST efforts) that it deemed necessary to ensure smart grid systems operate as intended. The act calls for FERC to institute a rule-making proceeding to accomplish this. Further, with regard to DOE, EISA authorized the department to establish two initiatives to facilitate development of industry smart grid efforts––the Smart Grid Investment Grant Program and the Smart Grid Regional Demonstration Initiative. DOE made $3.5 billion and $685 million of American Recovery and Reinvestment Act (Recovery Act) funds available for these respective initiatives. In October 2009, under the Smart Grid Investment Grant Program, DOE announced awards for 100 grants to utilities in multiple states to stimulate the rapid deployment and integration of advanced digital technology needed to modernize the nation’s electric grid. In November 2009, under DOE’s Smart Grid Regional Demonstration Initiative, the department announced awards for 32 grants to fund regional demonstrations to verify technology viability, quantify costs and benefits, and validate new business models for the smart grid at a scale that can be readily adopted around the country. In addition to these recent actions, the federal government has undertaken other initiatives to facilitate the implementation of industry smart grid efforts, including funding technical research and development, data collection, and coordination activities (for more details on these efforts see appendix III). Most of these initiatives have been led by DOE. NIST developed, and issued in August 2010, a first version of its smart grid cybersecurity guidelines. To do this, NIST established in March 2009, the smart grid cyber security working group to, among other things, develop guidelines for entities (e.g., utilities, equipment manufacturers, and regulators) to secure their smart grid systems. NIST intended the guidelines to, among other things, provide a process for entities to follow for developing solutions to address the security of their smart grid systems. To develop the guidelines, NIST planned to have the working group perform an assessment of the cybersecurity risks associated with existing and planned smart grid systems and then use the risk information, and an assessment of the privacy implications of these systems, to identify security requirements (i.e., controls) essential to securing such systems. As part of this assessment, NIST planned to address other key elements of cybersecurity, including the impact of coordinated cyber-physical attacks, and identifying smart grid system vulnerabilities. The working group intended to complete these efforts and issue the guidelines in June 2010. The working group has largely completed these steps, including issuing the guidelines. Specifically, during 2009 and 2010, the working group defined and then performed a high-level risk assessment of existing and planned smart grid systems—such as for transporting and storing electricity, and for advanced metering infrastructure. The risk assessment included identifying assets, vulnerabilities, and threats as well as specifying impacts for these and other systems as a means to identify security requirements (i.e., controls)—such as access control policies and procedures, employee training programs, incident response, and risk management—for securing such systems. Using the results of the risk assessment and other efforts, the working group issued the smart grid cybersecurity guidelines in August 2010. The guidelines include important elements, such as a high-level strategy that organizations can use to develop an approach to securing their smart grid systems, including identifying appropriate security requirements. In addition, the guidelines identified potential cryptography issues that entities may encounter and solutions for resolving these issues; included a privacy impact assessment for the smart grid with a discussion of mitigating factors; identified potential smart grid vulnerabilities, as well as the possible impacts to organizations should the vulnerabilities be exploited; identified smart grid security problems, including how to ensure that access can be gained to critical devices and systems by personnel when ordinary authentication fails for any reason, and how to ensure that updates utilities send to smart meters are secure; detailed cybersecurity design issues, such as for password complexity identified smart grid cybersecurity areas requiring further research and development. NIST stated in the guidelines that this initial version was to be updated periodically to incorporate any emerging issues. While NIST largely addressed the key elements in developing its guidelines, it did not address an important element essential to securing smart grid systems and networks that NIST had planned to include. Specifically, it did not address the risk of combined cyber-physical attacks. NIST also identified other key elements that surfaced during its development of the guidelines that need to be addressed in future guideline updates. These include identifying research and development that needs to be performed, such as for synchrophasor security; cryptography issues, and solutions to resolve cryptography issues; and additional smart grid system design issues, such as managing vulnerabilities incurred in the supply chain. NIST officials said they did not address the cyber-physical and other above topics in the guidelines because, in part, they had not yet fully developed these sections by the planned June 2010 issuance date. Consequently, if NIST had taken the time to address and incorporate these topics, it would have caused the agency to have been even further behind schedule, meaning the guidelines would have been issued later than August 2010. NIST officials also said that the working group intends to update the guidelines to, among other things, address these missing elements. To do so, NIST drafted a plan and schedule for updating the cybersecurity guidelines periodically. While a positive step, the plan and schedule, as of October 2010, were still in draft form. NIST officials stated that they are in the process of rewriting the plan and schedule and intend to have them finalized by the end of the year. Having a finalized plan and schedule with specific milestones is critical for ensuring the guidelines fully address key cybersecurity elements that have not been incorporated thus far. Without it, there is increased risk that important cybersecurity elements will not be addressed by entities implementing smart grid systems, thus making these systems vulnerable to attack. In 2010, FERC began reviewing for adoption an initial set of smart grid interoperability and cybersecurity standards developed through the NIST standards process. However, FERC has not developed a coordinated approach with other regulators to monitor the extent to which industry follows these voluntary standards, because, according to officials, it has not yet determined whether or how to perform such a task. Without a documented approach to coordinate with state and other regulators on this issue, FERC will not be well positioned to promptly begin monitoring the results of any standards it adopts or quickly respond if gaps arise. In October 2010, FERC began its process of reviewing for adoption smart grid standards related to interoperability and cybersecurity, but authority to enforce these standards is divided among multiple regulators. The five standards being initially reviewed were identified by NIST as ready for regulator consideration and represent a subset of those identified through the NIST-facilitated smart grid standards process. FERC designated a docket for a proceeding to review these five standards and adopt those that it believes are necessary to ensure smart grid functionality and interoperability in interstate transmission of electric power and regional and wholesale electricity markets. FERC staff were uncertain when the initial set of standards would be adopted, but both FERC and NIST officials told us that, because smart grid standards are continually evolving, they expect multiple rounds of standards to be reviewed and adopted by FERC. FERC staff have suggested various criteria that they believe the Commissioners should use when considering whether to adopt the standards, including recommending relying on the assessment of the NIST Cyber Security Working Group and rule making comments to determine if cybersecurity has been adequately incorporated. FERC also provided guidance to help NIST prioritize interoperability standards development. In a July 2009 smart grid policy statement, FERC proposed prioritizing two crosscutting issues—system security (including cybersecurity) and intersystem communication—along with four key functionalities—wide area situational awareness, demand response, electric storage, and electric transportation. While EISA gives FERC authority to adopt smart grid standards, it does not provide FERC with specific enforcement authority. In particular, EISA gives FERC the authority to adopt standards once it finds the NIST process has led to sufficient consensus. However, according to FERC officials, the statute did not provide specific additional authority to allow FERC to require utilities or manufacturers of smart grid technologies to follow these standards. As a result, any standards identified and developed through the NIST-led process are voluntary unless regulators use other authorities to indirectly compel utilities and manufacturers to follow them. Stakeholders we spoke with—federal electricity officials, participants in the smart grid standards development process, and other electricity and cybersecurity experts—noted that, while voluntary industry-developed standards have historically been used in the electricity industry, some factors could limit the extent to which they are followed. Although some explained that economic and market pressure should encourage manufacturers and utilities to follow voluntary standards, others noted that there could still be gaps in the extent to which the standards are followed, particularly if the cost of following standards is high or if utilities have varying levels of familiarity with and interest in implementing them. According to FERC officials, FERC’s only authority to require utilities to follow standards or use standards-compliant devices would derive from its existing reliability and cost-recovery authorities under the Federal Power Act, which generally apply to transmission assets. For example, FERC could require that utilities subject to its rate regulation use standards- compliant smart grid devices as a condition of allowing them to recover the costs of smart grid investments on the transmission system. Additionally, to the extent that interoperability and cybersecurity standards are deemed necessary to ensure the reliability of the bulk power system, such standards could be considered through the NERC standards- setting process, and if approved, would be considered mandatory and enforceable by both NERC and FERC. However, FERC officials noted that NERC’s reliability standards-setting process involves extensive deliberation by industry; that it is possible that NERC could choose not to develop a mandatory reliability standard that FERC had adopted through its separate process for smart grid standards; and that FERC is prohibited from adopting reliability standards on its own outside of the NERC process. The fragmented nature of electricity industry regulation further complicates enforcement of smart grid standards and oversight of smart grid investments using FERC and other regulators’ existing authorities. Oversight responsibility is divided among various regulators at the federal, state, and local level, and FERC’s authority is limited to certain parts of the grid, generally the transmission system. As a result, state regulatory bodies and other regulators with authority over the distribution system will play a key role in overseeing the extent to which interoperability and cybersecurity standards are followed since many smart grid upgrades will be installed on the distribution system. Such regulatory fragmentation can make it difficult for individual regulators to develop an industry-wide understanding of whether utilities and manufacturers are following voluntary standards. This is due to the large number of regulators in the industry—FERC, electricity regulators in 50 states and the District of Columbia, and regulators of thousands of cooperative and municipal utilities—and their potentially limited visibility over parts of the grid outside their jurisdiction. The state public utility commissions we spoke with were at different points in developing their approach to monitoring smart grid interoperability and cybersecurity. Multiple state regulators told us that, while they have not imposed any formal requirements on utilities with respect to the interoperability and cybersecurity of smart grid technologies, their offices have ongoing conversations with regulated utilities about the issue. Others have established requirements in PUC rule makings outlining minimum functionalities that smart meters must achieve, and in the case of the Public Utility Commission of Texas, audits that smart meter manufacturers must obtain to demonstrate that smart meter data can be securely accessed by customers and others. Additionally, the California and Colorado commissions have opened proceedings to initiate discussion with the public about how to best address topics like the interoperability and cybersecurity of smart grid technologies. Finally, most PUC staff were uncertain what approach their Commissions would take to enforce any standards that FERC decides to adopt, and three said that limited resources and technical expertise made their roles in overseeing interoperability and cybersecurity, including participating in the NIST standards process, more challenging. A number of cooperatively and municipally owned utilities fall partially out of the purview of federal and state regulators, and as such, it will be up to their regulators—often utility boards of directors—to oversee the interoperability and cybersecurity of their smart grid efforts. In Nebraska, for example, the state is entirely composed of consumer owned utilities, including municipal and cooperative utilities and public power districts. This means that, in part, oversight of smart grid interoperability and cybersecurity in this state will fall to the numerous individual regulators of these utilities. In addition, there are thousands of cooperatively and municipally owned utilities located across the country. Despite the importance of ensuring manufacturers and utilities follow smart grid standards, FERC has not developed an approach coordinated with other regulators to monitor at a high level the extent to which industry will follow the voluntary smart grid standards it adopts. There have been some initial efforts by regulators to share views. For example, a collaborative dialogue between FERC and the National Association of Regulatory Utility Commissioners (NARUC) to facilitate the transition to a smart electric grid—the FERC-NARUC Collaborative on Smart Response—has discussed the standards-setting process in general terms. However, according to FERC and NARUC officials, FERC and the state PUCs have not established a joint approach for monitoring how widely voluntary smart grid standards are followed in the electricity industry or developed strategies for addressing any gaps. According to FERC officials and others representing municipal and cooperative utilities, FERC also has not coordinated in such a way with groups representing public power and cooperative utilities—utilities not routinely subject to FERC’s or the states’ jurisdiction for rate-setting purposes. Such groups include the American Public Power Association, which represents municipally owned utilities, and the National Rural Electric Cooperative Association, which represents cooperatively owned utilities. FERC has not developed such an approach, because, according to officials, it has not yet determined whether or how to conduct high-level monitoring of compliance with smart grid standards it adopts under EISA. Adherence to standards is an important step toward achieving an interoperable and secure electricity system. Unless FERC and other regulators have a good understanding of whether utilities and manufacturers are following smart grid standards, it will be difficult to know whether a voluntary approach to standards setting is effective or if changes are needed. According to federal internal control guidance, managers need to compare actual performance—in this case, the extent to which manufacturers and utilities follow voluntary standards—to planned or expected results throughout the organization and analyze significant differences. Given the fragmented nature of electricity regulation, it may not be possible for FERC to perform such a review alone, and the agency may have to collaborate with other regulators. Past GAO work highlights that when carrying out activities to enhance interagency collaboration, it is critical to involve nonfederal partners—in this case, state and other regulators with responsibility for overseeing key components of the electricity industry—in decision making. Without a documented approach established in advance to coordinate with state and other regulators on this issue, FERC will not be well positioned to promptly begin monitoring the results of any standards it adopts—including a high- level assessment of whether industry follows them—and quickly respond if gaps arise. Such a delay could result in a patchwork of approaches across the United States and lead to incompatibilities between systems, higher costs, and a less secure electricity grid. A number of activities are under way that may result in information to inform a FERC assessment of the extent to which voluntary standards are followed, but these efforts are not coordinated or complete. According to DOE officials, as a part of DOE’s broader effort to publish a smart grid system report every 2 years as required by EISA, the department expects to report some information about the progress and effectiveness of smart grid interoperability and cybersecurity standards. Additionally, NIST has efforts under way to establish a process for vendors to certify their smart grid products as complying with standards and coordinate industry development of additional standards as needed. However, it is unclear to what extent these planned activities will specifically focus on assessing industry compliance with voluntary standards across regulatory jurisdictions and options to address any gaps that exist. Moreover, unlike FERC, the state PUCs, and other electricity regulators, neither DOE nor NIST has the authority to routinely require industry to follow standards should gaps exist. Leveraging the views of experts (by means of panel discussions), we identified the following six challenges that are key to ensuring the cybersecurity of the systems and networks that support our nation’s electricity grid. Aspects of the current regulatory environment make it difficult to ensure the cybersecurity of smart grid systems. In particular, jurisdictional issues and the difficulties associated with responding to continually evolving cyber threats are a key regulatory challenge to ensuring the cybersecurity of smart grid systems as they are deployed. Regarding jurisdiction, our experts expressed concern that there was a lack of clarity about the division of responsibility between federal and state regulators, particularly regarding cybersecurity. While jurisdictional responsibility has historically been determined by whether a technology is located on the transmission or distribution system, experts raised concerns that smart grid technology may blur these lines. For example, devices such as smart meters deployed on parts of the grid traditionally subject to state jurisdiction could, in the aggregate, have an impact on those parts of the grid that federal regulators are responsible for—namely the reliability of the transmission system. There is also concern about the ability of regulatory bodies to respond to evolving cybersecurity threats. For example, one expert questioned the ability of government agencies to adapt to rapidly evolving threats, while another highlighted the need for regulations to be capable of responding to the evolving cybersecurity issues. In addition, our experts expressed concern with agencies developing regulations in the future that are overly specific in their requirements, such as those specifying the use of a particular product or technology. Consequently, unless steps are taken to mitigate these challenges, regulations may not be fully effective in protecting smart grid technology from cybersecurity threats. Consumers are not adequately informed about the benefits, costs, and risks associated with smart grid systems. Specifically, there is concern that consumers are not aware of the benefits, costs, and risks associated with smart grid systems. This lack of awareness may limit the extent to which consumers are willing to pay for secure and reliable systems, which may cause regulators to be reluctant to approve rate increases associated with cybersecurity. As a result, until consumers are more informed about the benefits, costs, and risks of smart grid systems, utilities may not invest in, or get approval for, comprehensive security for smart grid systems, which may increase the risk of attacks succeeding. Utilities are focusing on regulatory compliance instead of comprehensive security. The existing federal and state regulatory environment creates a culture within the utility industry of focusing on compliance with cybersecurity requirements, instead of a culture focused on achieving comprehensive and effective cybersecurity. Specifically, experts told us that utilities focus on achieving minimum regulatory requirements rather than designing a comprehensive approach to system security. In addition, one expert stated that security requirements are inherently incomplete, and having a culture that views the security problem as being solved once those requirements are met will leave an organization vulnerable to cyber attack. Consequently, without a comprehensive approach to security, utilities leave themselves open to unnecessary risk. There is a lack of security features being built into smart grid systems. Security features are not consistently built into smart grid devices. For example, our experts told us that certain currently available smart meters have not been designed with a strong security architecture and lack important security features, including event logging and forensics capabilities which are needed to detect and analyze attacks. In addition, our experts stated that smart grid home area networks—used for managing the electricity usage of appliances and other devices in the home—do not have adequate security built in, thus increasing their vulnerability to attack. Without securely designed smart grid systems, utilities will be at risk of not having the capacity to detect and analyze attacks, which increases the risk that attacks will succeed and utilities will be unable to prevent them from recurring. The electricity industry does not have an effective mechanism for sharing information on cybersecurity and other issues. The electricity industry lacks an effective mechanism to disclose information about smart grid cybersecurity vulnerabilities, incidents, threats, lessons learned, and best practices in the industry. For example, our experts stated that while the electricity industry has an information sharing center, it does not fully address these information needs. In addition, President Obama’s cyberspace policy review, released in May 2009, also identified challenges related to cybersecurity information sharing within the electric and other critical infrastructure sectors and issued recommendations to address the areas. According to our experts, information regarding incidents such as both unsuccessful and successful attacks must be able to be shared in a safe and secure way to avoid publicly revealing the reported organization and penalizing entities actively engaged in corrective action. Such information sharing across the industry could provide important information regarding the level of attempted cyber attacks and their methods, which could help grid operators better defend against them. If the industry pursued this end, it could draw upon the practices and approaches of other industries when designing an industry-led approach to cybersecurity information sharing. Without quality processes for information sharing, utilities will not have the information needed to adequately protect their assets against attackers. The electricity industry does not have metrics for evaluating cybersecurity. The electricity industry is also challenged by a lack of cybersecurity metrics, making it difficult to measure the extent to which investments in cybersecurity improve the security of smart grid systems. Experts noted that while such metrics are difficult to develop, they could help compare the effectiveness of competing solutions and determine what mix of solutions combine to make the most secure system. Furthermore, our experts said that having metrics would help utilities develop a business case for cybersecurity by helping to show the return on a particular investment. Until such metrics are developed, there is increased risk that utilities will not invest in security in a cost-effective manner, or have the information needed to make informed decisions on their cybersecurity investments. The electricity industry is in the midst of a major transformation as a result of smart grid initiatives, and this transformation has led to significant financial investment by many entities, including utilities, private companies, and the federal government. For their part, NIST and FERC have efforts planned and under way to carry out their smart grid roles and responsibilities, although limitations exist in the planning and coordination efforts of these two key agencies. Specifically, NIST does not have a definitive plan and schedule, including specific milestones, for updating and maintaining its cybersecurity guidelines to address key missing elements. Furthermore, FERC has not established an approach coordinated with other regulators to monitor the extent to which industry is following the smart grid standards it adopts. The voluntary standards and guidelines developed through the NIST and FERC processes offer promise. However, a voluntary approach poses some risks when applied to smart grid investments, particularly given the fragmented nature of regulatory authority over the electricity industry. Currently, NIST and FERC’s efforts are hindered by their lack of an approach to (1) updating voluntary cybersecurity guidelines and (2) monitoring whether voluntary standards are being followed by manufacturers and utilities and periodically reporting to Congress on whether additional authorities are needed. Not having such an approach could result in gaps being recognized too late to avoid incompatibilities between systems, costly equipment replacements, or unnecessarily long periods of vulnerability to cyber attack. The lack of an approach to monitoring compliance with standards also limits the information available to Congress on how widely the smart grid standards are being followed and whether additional regulatory authorities are needed to address any gaps. In addition to the challenges being faced by NIST and FERC, the electricity industry faces its own set of challenges that are critical to ensuring smart grid systems and networks are implemented securely. Addressing these challenges will involve participation by private sector organizations and government agencies, including NIST and FERC. Because these two agencies are key to addressing the challenges, it is especially important that NIST and FERC when addressing their planning and coordination limitations also consider whether the challenges should be addressed in their current and planned cybersecurity efforts. To reduce the risk that NIST’s smart grid cybersecurity guidelines will not be as effective as intended, we recommend that the Secretary of Commerce direct the Director of NIST to finalize the agency’s plan for updating and maintaining the cybersecurity guidelines, including ensuring it incorporates (1) missing key elements identified in this report, and (2) specific milestones for when efforts are to be completed. We also recommend that NIST, as a part of finalizing the plan, assess whether any cybersecurity challenges identified in this report should be addressed in the guidelines. To improve coordination among regulators and help Congress better assess the effectiveness of the voluntary smart grid standards process, we recommend that the Chairman of FERC, making use of existing smart grid information, develop an approach to coordinate with state regulators to (1) periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cybersecurity standards and (2) develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation. To the extent that FERC determines it lacks authority to address any gaps in compliance that cannot be addressed through this coordinated approach with other regulators, the Chairman should report this information to Congress. coordinate with groups that represent utilities subject to less FERC and state regulation (such as municipal and cooperative utilities) to (1) periodically evaluate the extent to which utilities and manufacturers are following voluntary interoperability and cybersecurity standards and (2) develop strategies for addressing any gaps in compliance with standards that are identified as a result of this evaluation. To the extent that FERC determines it lacks authority to address any gaps in compliance that cannot be addressed through this coordinated approach, the Chairman should report this information to Congress. We also recommend that the Chairman of FERC, working with NERC as appropriate, assess whether any cybersecurity challenges identified in this report should be addressed in commission cybersecurity efforts. In written comments—signed by the Secretary of Commerce and the Chairman of FERC (see appendixes IV and V, respectively)—on a draft of this report, both agencies stated that they agreed with our recommendations. Although Commerce agreed with the recommendations, the department (1) offered three related comments on a finding in the report, and (2) suggested rewording part of our recommendations based on those comments. Specifically, in the first two comments, the department wanted to replace wording we used in the report (i.e., replacing “missing key elements” with “NIST’s follow-on cyber-physical activity”) and delete two report sentences which, in its view, incorrectly implied that NIST planned to complete its cyber-physical activity and report its work results in the issuance of the August 2010 guidelines. In its third comment, Commerce agreed that the risk of combined cyber-physical attacks needs to be addressed in the guidelines, but reiterated its disagreement with our report statement that NIST was planning to cover this in the August 2010 guidelines. Based on these comments, the department suggested wording changes to part of our recommendations to reflect its view. However, our review of drafts of the guidelines, including one issued by NIST to the public in February 2010, coupled with discussions with NIST officials responsible for developing the guidelines, show that that the agency had planned to address this topic in the August 2010 version of the guidelines. Based on this evidence, we did not make any changes to our report. In addition to agreeing to our recommendations, FERC also (1) commended the draft report’s discussion of cybersecurity for the electric industry, (2) said it appreciated the report’s conclusions, and (3) described steps it intended to take to implement the recommendations. Specifically, with regard to our recommendation to improve coordination among regulators, FERC stated that it intends to direct commission staff to evaluate possible approaches to improving coordination among regulators. In addition, FERC stated that if the commission finds that it lacks authority to address gaps in electric industry compliance with voluntary interoperability and cybersecurity standards, it intends to report this information to Congress as our report recommends. Further, in response to our recommendation to assess whether any of the challenges identified in our report should be addressed in commission cybersecurity efforts, FERC said it had directed commission staff to develop procedures to perform such an assessment. In addition to the above comments, FERC also presented two general issues with the report. The first is that while FERC agreed with the challenge associated with the lack of cybersecurity metrics, identified in the draft, it commented that developing valid metrics also presents a separate challenge of its own. We agree with this view and believe it is consistent with our report findings. The second issue is that according to FERC, our report appeared to assume that all relevant manufacturers and utilities are to comply with the voluntary standards being developed through the process specified in EISA. To clarify, we neither stated this assumption in our report nor was it our intent to imply such an assumption. Nonetheless, it is important to note that the findings described in our report show it is critical for FERC to determine the extent to which these standards are being followed, and that is why we included a recommendation for the agency to coordinate with state regulators and others to achieve this goal. We also provided a copy of the draft report for review and comment to DOE. In an e-mail from the Team Lead for Strategic Planning and Daily Operations within DOE’s Office of Electricity Delivery and Energy Reliability, the department provided technical comments on the report, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, Secretary of Commerce, Director of NIST, Chairman of FERC, and other interested parties. The report is also available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have questions about matters discussed in this report, please contact David Powner at (202) 512-9286 or David Trimble at (202) 512-3841, or by e-mail at pownerd@gao.gov or trimbled@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix VI. Our objectives were to (1) assess the extent to which the National Institute of Standards and Technology (NIST) has developed smart grid cybersecurity guidelines, (2) evaluate the Federal Energy Regulatory Commission’s (FERC) efforts to adopt smart grid cybersecurity and other standards and monitor their use by industry, and (3) identify challenges associated with ensuring the cybersecurity of the smart grid. For our first objective, we analyzed applicable laws to determine NIST’s responsibilities with respect to the smart grid. Then we analyzed agency plans and related documentation and interviewed responsible officials to determine the steps NIST was planning to take or had taken to meet those responsibilities. Specifically, we analyzed NIST’s plans for developing smart grid cybersecurity guidelines, and compared them with the issued guidelines to identify any differences. Where there was a difference between NIST’s plans and what had been completed, we analyzed the impact of the difference and its cause. For the second objective, we analyzed FERC documentation, including their interim and final Smart Grid Policy Statement, and reviewed relevant laws and regulations. We interviewed FERC staff to better understand their authority with respect to smart grid standards, expected approach to standards adoption, and the extent of coordination with other regulators. We also interviewed state electricity regulators to understand their regulatory approach and perspectives on smart grid standards being identified and developed through the NIST process. The state regulators we sought the views of included the Alabama Public Service Commission, California Public Utilities Commission, Colorado Public Utilities Commission, Nebraska Power Review Board, Public Utilities Commission of Ohio, Pennsylvania Public Utility Commission, and the Public Utility Commission of Texas. These states were selected because they had smart grid activities of interest and were generally varied in terms of location, size, and regulatory structure. As part of this work, we identified the steps taken by these states to oversee interoperability and cybersecurity of smart grid investments, although we did not evaluate their adequacy. In Nebraska, because all utilities are consumer-owned, state electricity regulators do not have authority to oversee whether smart grid investments are interoperable or cyber secure. As a result, we excluded Nebraska from any summaries of state responses presented in the body of this report. We also met with staff from two groups representing public and cooperatively owned utilities: the American Public Power Association and the National Rural Electric Cooperative Association. Additionally, we reached out to various electricity experts, including representatives of standards development organizations, participants in the NIST standards development process, and others, to gather their opinions on the strengths and limitations of the NIST approach and standards setting. For our third objective, we convened a panel of experts in coordination with the National Academy of Sciences. Specifically, we worked iteratively with the National Academy of Sciences’ Computer Science and Telecommunication Board to choose a group of panel members with expertise in subjects most applicable to our objective. The selected experts included representatives from electric utilities responsible for implementing and securing smart grid systems, public utility commissions, trade associations, smart grid technology vendors, and cybersecurity experts. A full list of the expert panelists can be found in appendix III. A key topic discussed by the panel was the major cybersecurity challenges facing the grid, and related issues, such as the potential consequences of security failures, adequacy of current cybersecurity technology, effectiveness of regulatory frameworks and enforcement mechanisms, potential benefits for key stakeholder groups, and additional steps regulators could take to ensure that smart grid investments are secure. We then analyzed the results of the panel, and from that analysis developed a list of the major challenges and a summary of each. We then had the panelists review the list and our accompanying summary to make sure we accurately captured their views. We conducted this performance audit from November 2009 to January 2011, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to efforts discussed in this report, the federal government has undertaken other efforts to facilitate smart grid implementation, including conducting and funding technical research and development, data collection, and coordination activities. Most of these initiatives have been led by the Department of Energy (DOE). Table 3 describes 10 of these other key efforts, including the federal agency involved and the purpose of the effort. The names and affiliation of the experts who participated in the panel discussion held June 2-3, 2010, in Washington, D.C., are: Sharla Artz, Director of Government Affairs, Schweitzer Engineering Laboratories, Inc. David Baker, Director of Services, IOActive, Inc. David Batz, Manager, Cyber & Infrastructure Security, Edison Electric W. Earl Boebert, Sandia National Laboratories (retired) Michael Butler, Senior Analyst, National Institute of Standards and Matthew Carpenter, Senior Security Analyst, InGuardians Jeffrey E. Dagle, Chief Electrical Engineer, Energy Technology Development, Pacific Northwest National Laboratory David Dunn, Manager, Organizational Governance Support, Independent Robert Former, Principal Security Engineer, Itron, Inc. In addition to the individuals named above, key contributions were made to this report by Gary N. Mountjoy, Assistant Director, IT; Jon R. Ludwigson, Assistant Director, NRE; Nabajyoti Barkakati; Scott F. Borre; Camille M. Chaires; Neil J. Doherty; Rebecca E. Eyler; Paige M. Gilbreath; Lee A. McCracken; Thomas E. Murphy; Andrew S. Stavisky; Walter K. Vance; and Maria P. Vargas. Critical Infrastructure Protection: Update to National Infrastructure Protection Plan Includes Increased Emphasis on Risk Management and Resilience. GAO-10-296. Washington, D.C.: March 5, 2010. Defense Critical Infrastructure: Actions Needed to Improve the Identification and Management of Electrical Power Risks and Vulnerabilities to DOD Critical Assets. GAO-10-147. Washington, D.C.: October 23, 2009. Critical Infrastructure Protection: OMB Leadership Needed to Strengthen Agency Planning Efforts to Protect Federal Cyber Assets. GAO-10-148. Washington, D.C.: October 15, 2009. Critical Infrastructure Protection: Current Cyber Sector-Specific Planning Approach Needs Reassessment. GAO-09-969. Washington, D.C.: September 24, 2009. Critical Infrastructure Protection: Sector-Specific Plans’ Coverage of Key Cyber Security Elements Varies. GAO-08-64T. Washington, D.C.: October 31, 2007. Critical Infrastructure Protection: Multiple Efforts to Secure Control Systems Are Under Way, but Challenges Remain. GAO-07-1036. Washington, D.C.: September 10, 2007. Critical Infrastructure Protection: Sector Plans and Sector Councils Continue to Evolve. GAO-07-706R. Washington, D.C.: July 10, 2007. Critical Infrastructure: Challenges Remain in Protecting Key Sectors. GAO-07-626T. Washington, D.C.: March 20, 2007. Critical Infrastructure Protection: Challenges in Addressing Cybersecurity. GAO-05-827T. Washington, D.C.: July 19, 2005. Cybersecurity: Continued Efforts Are Needed to Protect Information Systems from Evolving Threats. GAO-10-230T. Washington, D.C.: November 17, 2009. Cybersecurity: Continued Federal Efforts Are Needed to Protect Critical Systems and Information. GAO-09-835T. Washington, D.C.: June 25, 2009. Transmission Lines: Issues Associated with High-Voltage Direct- Current Transmission Lines along Transportation Rights of Way. GAO-08-347R. Washington, D.C.: February 1, 2008. Meeting Energy Demand in the 21st Century: Many Challenges and Key Questions. GAO-05-414T. Washington, D.C.: March 16, 2005. Electricity Markets: Consumers Could Benefit from Demand Programs, but Challenges Remain. GAO-04-844. Washington, D.C.: August 13, 2004. Energy Markets: Additional Actions Would Help Ensure That FERC’s Oversight and Enforcement Capability Is Comprehensive and Systematic. GAO-03-845. Washington, D.C.: August 15, 2003. Electricity Markets: FERC’s Role in Protecting Consumers. GAO-03-726R. Washington, D.C.: June 6, 2003. Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations’ Benefits and Performance. GAO-08-987. Washington, D.C.: September 22, 2008. Electricity Restructuring: Key Challenges Remain. GAO-06-237. Washington, D.C.: November 15, 2005. Electricity Restructuring: 2003 Blackout Identifies Crisis and Opportunity for the Electricity Sector. GAO-04-204. Washington, D.C.: November 18, 2003. Electricity Restructuring: Action Needed to Address Emerging Gaps in Federal Information Collection. GAO-03-586. Washington, D.C.: June 30, 2003. Lessons Learned from Electricity Restructuring: Transition to Competitive Markets Under Way, but Full Benefits Will Take Time and Effort to Achieve. GAO-03-271. Washington, D.C.: December 17, 2002. Restructured Electricity Markets: California Market Design Enabled Exercise of Market Power. GAO-02-828. Washington, D.C.: June 21, 2002. Restructured Electricity Markets: Three States’ Experiences in Adding Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. | The electric industry is increasingly incorporating information technology (IT) systems into its operations as part of nationwide efforts--commonly referred to as smart grid--to improve reliability and efficiency. There is concern that if these efforts are not implemented securely, the electric grid could become more vulnerable to attacks and loss of services. To address this concern, the Energy Independence and Security Act of 2007 (EISA) provided the National Institute of Standards and Technology (NIST) and Federal Energy Regulatory Commission (FERC) with responsibilities related to coordinating the development and adoption of smart grid guidelines and standards. GAO was asked to (1) assess the extent to which NIST has developed smart grid cybersecurity guidelines; (2) evaluate FERC's approach for adopting and monitoring smart grid cybersecurity and other standards; and (3) identify challenges associated with smart grid cybersecurity. To do so, GAO analyzed agency documentation, interviewed responsible officials, and hosted an expert panel. NIST has developed, and issued in August 2010, a first version of its smart grid cybersecurity guidelines. The agency developed the guidelines--for entities such as electric companies involved in implementing smart grid systems--to provide guidance on how to securely implement such systems. In doing this, NIST largely addressed key cybersecurity elements that it had planned to include in the guidelines, such as an assessment of the cybersecurity risks associated with smart grid systems and the identification of security requirements (i.e., controls) essential to securing such systems. This notwithstanding, NIST did not address an important element essential to securing smart grid systems that it had planned to include--addressing the risk of attacks that use both cyber and physical means. NIST also identified other key elements that surfaced during its development of the guidelines that need to be addressed in future guideline updates. NIST officials said that they intend to update the guidelines to address the missing elements, and have drafted a plan to do so. While a positive step, the plan and schedule are still in draft form. Until the missing elements are addressed, there is an increased risk that smart grid implementations will not be secure as otherwise possible. In 2010, FERC began a process to consider an initial set of smart grid interoperability and cybersecurity standards for adoption, but has not developed a coordinated approach to monitor the extent to which industry is following these standards. While EISA gives FERC authority to adopt smart grid standards, it does not provide FERC with specific enforcement authority. This means that standards will remain voluntary unless regulators are able to use other authorities--such as the ability to oversee the rates electricity providers charge customers--to enforce them. Additionally, although regulatory fragmentation--the divided regulation over aspects of the industry between federal, state, and local entities--complicates oversight of smart grid interoperability and cybersecurity, FERC has not developed an approach coordinated with other regulators to monitor whether industry is following the voluntary smart grid standards it adopts. FERC officials said they have not yet determined whether or how to do so. Nonetheless, adherence to standards is an important step toward achieving an interoperable and secure electricity system and establishing an approach for coordinating on standards adoption could help address gaps, if they arise. With respect to challenges to securing smart grid systems, GAO identified the following six key challenges: (1) Aspects of the regulatory environment may make it difficult to ensure smart grid systems' cybersecurity. (2) Utilities are focusing on regulatory compliance instead of comprehensive security. (3) The electric industry does not have an effective mechanism for sharing information on cybersecurity. (4) Consumers are not adequately informed about the benefits, costs, and risks associated with smart grid systems. (5) There is a lack of security features being built into certain smart grid systems. (6) The electricity industry does not have metrics for evaluating cybersecurity. GAO recommends that NIST finalize its plan and schedule for updating its cybersecurity guidelines to incorporate missing elements, and that FERC develop a coordinated approach to monitor voluntary standards and address any gaps in compliance. Both agencies agreed with these recommendations. |
According to the Department of Homeland Security (DHS), the number of UAC from any country apprehended at the U.S. border climbed from nearly 28,000 in fiscal year 2012 to more than 42,000 in fiscal year 2013, and to more than 73,000 in fiscal year 2014. Prior to fiscal year 2012, most UAC apprehended at the border were Mexican nationals. However, as figure 1 shows, starting in fiscal year 2013, the total number of UAC from El Salvador, Guatemala, and Honduras surpassed the number of UAC from Mexico and, in fiscal year 2014, far surpassed the number of UAC from Mexico. Recent data and research indicate that, while fewer UAC are being apprehended in the United States in 2015, the pace of migration from Central America remains high. According to DHS, as of August 2015, apprehensions at the southwest border are down 46 percent compared with last year—with more than 35,000 UAC apprehended in fiscal year 2015 compared with about 66,000 through the same time period in fiscal year 2014. However, analyses of DHS data indicate that apprehensions in the month of August 2015 increased compared to previous months this year and exceeded by nearly 50 percent August 2014 apprehensions. Moreover, research by two nongovernmental organizations indicates that a greater number of Central Americans this year are being apprehended in Mexico. According to the Migration Policy Institute, Mexico has increased its enforcement capacity and is apprehending a greater number of Central American migrants, including children. Specifically, in its study published in September 2015, the institute projected that Mexico’s apprehensions of children from El Salvador, Guatemala, and Honduras will increase this year by 9,000. In addition, according to research conducted by the Washington Office on Latin America, Mexico has greatly increased its rate of apprehension of Central American migrants. These studies indicate that many Central American children who in the past may have made it to the U.S. border and been counted in U.S. apprehension statistics, have this year been apprehended in Mexico. Children from El Salvador, Guatemala, and Honduras face a host of perils both within their countries and along the migration route to the United States. These countries have among the world’s highest murder rates, according to the United Nations Office on Drugs and Crime, along with a widespread presence of gangs, high poverty rates, and a number of other persistent problems. Children who migrate can encounter further risks along the journey, including robbery, extortion, abandonment, rape, or murder. A number of U.S. agencies provide assistance to the three countries. The U.S. Agency for International Development (USAID), the Department of State (State), DHS, the Millennium Challenge Corporation (MCC), and the Inter-American Foundation (IAF) have programs providing assistance in areas such as economic development, rule of law, citizen security, law enforcement, education, community development, and others. In fiscal year 2014, USAID, State, DHS, and IAF allocated a combined $44.5 million for El Salvador, $88.1 million for Guatemala, and $78 million for Honduras. In addition, MCC signed a threshold program agreement with Honduras in fiscal year 2013 totaling $15.6 million, a compact agreement with El Salvador in fiscal year 2014 totaling $277 million, and a threshold program agreement with Guatemala in fiscal year 2015 totaling $28 million. Additional information on agency- and program-specific funding is included in our July 2015 report. In September 2014, the governments of El Salvador, Guatemala, and Honduras issued a regional plan in response to the recent migration increase. The plan, referred to as the Plan of the Alliance for Prosperity in the Northern Triangle: A Road Map, outlines four strategic actions that seek to stimulate the productive sector to create economic opportunities, develop opportunities for people, improve public safety and enhance access to the legal system, and strengthen institutions to increase people’s trust in the state. In addition, in March 2015, the administration issued the U.S. Strategy for Engagement in Central America, with the primary objectives of prosperity, governance, and security, and the goals of an economically integrated Central America that is fully democratic; provides economic opportunities for its people; has more accountable, transparent, and effective public institutions; and is a safe environment for its citizens. As we reported in July 2015, according to agency officials a variety of factors likely caused the rapid increase in UAC migration of recent years, including the increased presence of coyotes, perceptions concerning U.S. immigration law, recent improvements in the U.S. economy, the increased use of social media, and the worsening of pervasive problems. Increased presence of smugglers (or coyotes). Agency officials from all three countries that we spoke to said that smugglers, also known as coyotes, had proliferated and grown more influential and sophisticated in recent years. Officials from USAID and State in all three countries noted that coyotes were often well known and trusted in communities. In addition, agency officials we spoke to in all three countries noted that coyotes had instituted new marketing and messaging tactics, such as offering three attempts to migrate to the United States for one fee— known as a “three-for-one” deal. Coyotes had also intentionally spread rumors and misinformation about U.S. immigration policy. For example, agency officials told us that, in some cases, in an effort to drive smuggling business, coyotes led many people to believe children could migrate to the United States and receive permission to stay indefinitely if they arrived by a certain date. Perceptions of U.S. immigration policy. According to agency officials, general perceptions concerning U.S. immigration policy had played a growing role in UAC migration. According to State officials in El Salvador and Guatemala, local media outlets had optimistically discussed comprehensive immigration reform efforts in the United States and sometimes failed to discuss the complexity of immigration reform. In addition, according to USAID officials, Honduran youth and coordinators of community centers who were interviewed as part of a USAID focus group indicated they believed the United States would allow migrant minors, mothers traveling with minors, and pregnant women to stay for a period of time upon arrival in the United States. Improvements in U.S. economy and family reunification. Agency officials also noted that recent improvements in the U.S. economy had fueled increased UAC migration, enabling family reunification in the United States. For example, State and USAID officials in Honduras noted that the improving economy had enabled parents who immigrated to the United States to send money back to their home country to pay coyotes so their children could migrate and reunify the family in the United States. According to officials in El Salvador, as the economy improved there, more Salvadorans have attempted to migrate to the United States to reunify with family. Increased use of social media. The use of social media can encourage migration, according to some agency officials. For example, officials in Guatemala noted that social media outlets enable migrants who arrive in the United States to share messages and pictures with families in their home countries, an act that can serve as a powerful and influential endorsement of the decision to migrate. Additionally, according to a study performed by State contractors in El Salvador, many people advertise immigration services through social media and offer travel services to ensure safe arrival in the United States. Worsening of longstanding pervasive challenges. Violence, poverty, and poor access to education and other services have been pervasive development challenges in all three countries, predating the UAC migration increase. However, according to agency officials we spoke to in all three countries, some of these problems had grown worse in recent years and could have contributed to the rise of UAC migration. For example, in Honduras, agency officials noted that levels and perceptions of violence had grown worse, in part because of the rise in extortions. Worsening security concerns also negatively affect access to education. For example, agency officials in El Salvador noted that many children will not attend school after the seventh grade because traveling to some schools requires crossing gang borders, and that girls in particular face the risk of being attacked or raped en route. In Guatemala, agency officials stated that poor economic and social conditions in the Western Highlands—a remote, mountainous area in the western part of Guatemala, inhabited by over 20 different indigenous groups—had declined even further in recent years. In addition, agency officials noted that deteriorating climate conditions, including several consecutive years of drought and a coffee rust blight that has hurt coffee production and cost jobs in Honduras and Guatemala, exacerbated long-standing economic concerns in many communities. For our July 2015 report, we met with children from all three countries who offered similar insights concerning the causes of migration. For example, children at a USAID outreach center in San Pedro Sula, Honduras, noted the lack of educational and job opportunities in their communities as a reason for migrating. Children from a particularly violent neighborhood told us it was even more difficult for them to obtain a job because potential employers would sometimes choose not to hire them because of where they live. Children at an outreach center in El Salvador also noted that sometimes, even with an education, one cannot find work in El Salvador and that there are more opportunities and chances to succeed in the United States. Children at this same center indicated that the desire to migrate is even stronger for children with parents in the United States. Prior to this hearing, we asked agency officials for their observations on what factors may have led to the overall decline in UAC apprehensions in fiscal year 2015 as well as the increase in UAC apprehensions in August 2015. Several DHS offices offered various perspectives for these changes in UAC apprehension numbers. Officials from U.S. Customs and Border Protection’s (CBP) U.S. Border Patrol and from U.S. Immigration and Customs Enforcement’s (ICE) Enforcement and Removal Operations stated that most of the decrease in the number of UAC apprehensions in fiscal year 2015 could be attributed to Mexico’s increased enforcement of its own southern border. Concerning the uptick in apprehensions in August 2015, officials from CBP’s U.S. Border Patrol and DHS’s Office of Intelligence and Analysis stated that the increase could be attributed to the recent U.S. policy change ending the detention of migrant families. According to these officials, the policy change may have created the impression that the United States is allowing family units into the country and then releasing them, which could serve as a motivating factor for migration. Similarly, officials from ICE’s Homeland Security Investigations stated that interviews with migrants have indicated that migrants believe that if they arrive in the United States with children, they will not be detained for a long time and will be allowed to stay in the United States. Officials from ICE’s Enforcement and Removal Operations stated that there is no definitive answer for what may have caused the increase in apprehensions in August 2015, but that some of the same factors that caused the UAC migration increase in 2014, such as pursuit of economic opportunities, desire for family reunification, and violence, could be considered. In our July 2015 report, we found that among the various agency actions taken in response to UAC migration, several sought to directly combat coyotes, which agency officials identified as a key emergent factor causing migration. Agencies also had established efforts to increase legal migration and improve migrant return centers, and had identified other longstanding efforts as seeking to address underlying causes of migration. Antismuggling efforts. In response to the increase in UAC migration, we found that DHS and State had supported several law enforcement and legislative outreach efforts with an increased focus on investigating and dismantling smuggling operations in all three countries. For example, according to DHS officials, in response to the rapid increase in UAC migration in 2014, DHS shifted the investigative priorities of its Transnational Criminal Investigative Units (TCIU)—which include host government police, customs officers, and prosecutors, among others—to target child-smuggling operations in all three countries. A DHS official in Guatemala told us the unit there was able to dismantle two of the seven criminal organizations it was investigating that were actively smuggling children. In addition, State in Honduras is working with a Department of Justice resident legal advisor to assist the Honduran attorney general’s office in prosecuting trafficking and alien-smuggling cases, while State support in Guatemala included assistance to reform police training, with a new emphasis on UAC-related issues in the community policing techniques, criminal investigations, and human rights curricula. State also participated in legislative and political outreach efforts to combat smuggling. For example, in Guatemala, State has advocated modifying certain laws that would better enable Guatemalan law enforcement to investigate and prosecute these cases. Public information campaigns to deter migration. We also found that DHS and State had carried out several public information campaigns between 2013 and 2015 intended to dissuade citizens of El Salvador, Guatemala, and Honduras from migrating to the United States. DHS’s campaigns in 2013 and 2014 focused on warning potential migrants of the dangers of the journey. DHS had launched two campaigns in 2015, including one to increase awareness of requirements under the executive action on immigration, which was launched in January 2015 but was stopped February 16, 2015, because of a federal court ruling that granted a preliminary injunction to prevent expansion of Deferred Action for Childhood Arrivals, among other things. DHS also has an ongoing campaign, “Know the Facts,” which was launched in Mexico, El Salvador, Guatemala, and Honduras in late July. According to DHS, the campaign, which was developed with the Department of State and was approved by the White House, is intended to deter individuals from Mexico, El Salvador, Guatemala, and Honduras from entering the United States illegally by increasing awareness of U.S. immigration policies and enhanced border security efforts, as well as the dangers posed by smugglers. The campaign was extended to run through the end of November due to the increase in the number of UACs arriving to the United States, according to DHS. State public affairs officials we spoke to at the U.S embassies in all three countries told us they used the DHS campaign materials and developed their own materials to launch related public information campaigns in-country while also supporting similar host government campaigns. In-country refugee parole program. In an effort to increase legal migration and reduce the number of children attempting to migrate to the United States, we found that State and DHS had collaborated to implement a new in-country refugee/parole processing program. The program was announced in November 2014 and began accepting applications the following month. Efforts to strengthen migrant return and repatriation centers. USAID and State also have an interagency agreement to provide assistance to strengthen migrant reception and repatriation efforts in all three countries. Efforts under this program have included providing immediate, basic assistance to returnees; undertaking construction efforts to improve existing facilities; and working with host governments to systemize data gathered from the returned migrants. Longstanding efforts seeking to address underlying causes of migration. We also reported that USAID, State, IAF, and MCC programs have long sought to address what officials have identified as underlying causes of migration, including persistent development challenges such as violence, poverty, and lack of educational opportunities. For example, USAID supports programs in each country seeking to reduce violence, improve economic opportunities through improved agricultural practices and other efforts, and increase access to education and health services, among others. State supports programs in each of the three countries seeking to reduce violence and improve citizen security by offering training and technical support to prosecutors, the police, and border patrol units, among others. IAF officials said that IAF supports local initiatives in more than 880 communities in El Salvador, Guatemala, and Honduras, with nearly half of its investment in the three countries intended to directly benefit youth through job creation and other community-based activities. MCC’s compact in El Salvador and threshold program in Guatemala— each in development prior to the recent migration increase—include programs to improve the quality of secondary education to assist youth in finding employment. USAID, State, and IAF outlined plans to modify some of these longstanding efforts in response to the rise in UAC migration. For example, in Guatemala, USAID outlined plans to increasingly target youth at risk of migration through various programs and to introduce agricultural programming, including coffee rust-resistant seedlings, and to provide nonagricultural economic opportunities for youth. State and DHS have outlined plans to strengthen border security efforts through their vetted units to stem migration, and to increase the size of antigang units in an effort to reduce violence. Our July 2015 report found that agencies had generally located programs in alignment with long-term objectives for El Salvador, Guatemala, and Honduras, such as addressing areas of high poverty and violence. These objectives are outlined in various strategy and planning documents. In some cases, the development objectives outline priority geographic locations for programs that agencies have identified as addressing underlying causes of UAC migration, such as crime and poverty. USAID’s Country Development Cooperation Strategy documents, for example, outline development objectives for each country that focus on specific locations. State country planning documents similarly highlight strategic priorities for the three countries, and in some cases outline priority geographic locations. Agency officials told us they drew on various sources of information to understand which areas in El Salvador, Guatemala, and Honduras had high levels of UAC migration, including information produced by DHS, USAID, and entities such as the International Organization for Migration, host government agencies, and other local organizations. In particular, they told us a key point of reference was a DHS-produced map that showed the number of UAC by location of origin based upon DHS apprehension data from January 1 to May 15, 2014. DHS officials identified various challenges to obtaining UAC location information, including the inability of children to accurately relay information on their origins, lack of documentation, and inability of border agents interacting with children to collect or record their information accurately. Nonetheless, USAID and State officials in the three countries told us that the top UAC locations of origin identified in the map were generally consistent, with a few exceptions, with their understanding of the top UAC locations of origin. Further, agency officials stated that their established programs were already located in these areas. In Honduras, where over half of the DHS- identified top 20 municipalities in terms of UAC locations of origin are situated, agency officials told us the DHS map confirmed for them that programs already existed in those locations. In Guatemala, USAID and State officials said that they consulted the DHS map and other available information about UAC origin locations and determined that there was a general overlap between those locations and agency programs. USAID officials in Guatemala noted that about 60 percent of the agency’s resources in Guatemala are used for activities in the Western Highlands, which these officials said they have identified as the primary area of UAC migration in that country. In El Salvador, USAID officials stated that, according to their review of the DHS map, their programs were already located in areas of high UAC migration. Finally, according to IAF, the DHS map illustrated a general overlap between the location of its grantees and locations with high levels of UAC migration. We obtained information on the location of USAID and State/INL-funded programs in El Salvador, Guatemala, and Honduras; the location of IAF grantees in these countries; and the top UAC locations of origin in each country, as identified by DHS. Our July 2015 report includes a series of figures that present this information. In our July 2015 report, we found agencies had outlined plans and taken some steps in the three countries since the recent rise in UAC migration by adding or expanding activities in locations identified as having high levels of UAC migration. For example, according to State’s current country plan for Honduras, State plans to expand violence prevention programs, such as the Gang Resistance Education and Training Program, to reach three new police metropolitan areas in Tegucigalpa and six police metropolitan areas in San Pedro Sula, two areas in the country agencies identified as having among the highest levels of UAC migration. In El Salvador, USAID outlined plans to expand educational opportunities to youth in additional municipalities with high levels of migration. As of June 2015, IAF officials indicated IAF had identified at least 19 new programs in El Salvador, Guatemala, and Honduras that will seek to address underlying causes of migration in areas with high levels of UAC migration. As we reported in July 2015, most agencies we reviewed had established processes to measure and evaluate programs agencies identified as addressing underlying causes of migration. For example, USAID had conducted several recent evaluations of its programs developed before the rapid increase in UAC migration but identified as addressing the causes of migration, including programs addressing crime and violence prevention and workforce development. USAID officials and documents indicated that USAID also planned to measure the impact on migration of some future programs, such as whether a program affected a person’s decision to migrate. State awarded a contract, which began in September 2014, to evaluate all countries under the CARSI program, including projects that are designed to address causes of UAC migration in El Salvador, Guatemala, and Honduras. IAF also conducts two types of project evaluations, including an end-of-project assessment for all projects, and evaluations of a subset of projects that ended 5 years earlier. According to IAF officials, in 2015, IAF planned to evaluate projects with a focus on youth engagement, including two projects in El Salvador and one in Guatemala. IAF expected these evaluations to be available in 2016. However, we found that several DHS and State programs intended to reduce migration and counter smugglers had weaknesses in performance measurement. First, DHS had established performance indicators for its TCIUs, but had not established performance targets, making it difficult to track progress of these units’ efforts to combat UAC smuggling and other priorities. DHS’s Transnational Criminal Investigative Unit Executive Report provides overviews of TCIU efforts by country, including basic performance indicators used to track TCIU success. These measures are divided into three performance categories—enforcement, capacity building, and intelligence—with various types of outputs by category. However, DHS had not set targets for these performance measures. We concluded in our July 2015 report that establishing such targets would enable DHS to compare outputs—such as arrests made—against the pre-established targets, and to better assess TCIU progress. In our July 2015 report, we recommended that DHS establish annual performance targets associated with the performance measures it has established for these units. DHS concurred with our recommendation, and noted that it would work with host nation partners to establish goals to measure TCIU investigative activities and capacity development. Last month, DHS reported to us that it also planned to create additional annual TCIU performance measures in areas such as capacity building, international cooperation, and collaboration. DHS noted it would use these measures, alongside an analysis of host country conditions that can affect TCIU efforts, to determine TCIU successes and inform efforts moving forward. Second, we found that DHS and State had not consistently evaluated their information campaigns intended to combat the misinformation promoted by smuggling organizations and reduce migration, making it difficult to know the effectiveness of these efforts. DHS evaluated its 2013 campaign but did not evaluate its 2014 campaign. An official from DHS’s office of public affairs told us that DHS did not evaluate its 2014 campaign because of funding constraints. Moreover, DHS launched this campaign at the end of June 2014, by which point migration levels had already peaked, reaching record levels, as shown in figure 3. Similarly, we found that while State had collected some information on its public outreach efforts, it had not evaluated the effectiveness of its information campaigns, according to public affairs officers we spoke to in all three Central American countries. These public affairs officers told us they did not know what the impact of the campaigns was and believed it would be difficult to measure their impact. All three of these officers expressed either uncertainty or doubt concerning the effectiveness of past campaigns centered on the dangers of migration, indicating that it is uncertain whether such campaigns resonated with citizens of the three countries since the dangers were already well known or would not dictate a person’s decision to migrate. In our July 2015 report, we concluded that evaluations are an important investment toward ensuring a campaign’s success, and that timely feedback is critical as campaigns intended to deter cyclical migration are time-sensitive. Moreover, given the increased presence of children in recent migration cycles, these campaigns need to be timed right and deliver appropriate messages. In our July 2015 report, we recommended that State and DHS integrate evaluation into their planning for, and implementation of, future public information campaigns intended to dissuade migration. DHS and State concurred with our recommendation and indicated they would take steps to strengthen campaign evaluation efforts. DHS has since noted that it will use performance metrics for its ongoing “Know the Facts” campaign in an effort to measure audience recall awareness of the campaign and its impact. DHS noted in particular that its post-campaign research will include face-to-face interviews in the capital cities and some secondary markets in El Salvador, Guatemala, Honduras, and Mexico—totaling about 1,400 interviews in each country— with interviews anticipated to begin at the end of October and a final report published by the end of November or early December. Aside from challenges in performance measurement, USAID, State, and IAF project documents outline various factors that can hamper the long- term sustainability of projects, such as lack of accountability within government institutions, lack of political will, low tax collection, poor market conditions, and limited private sector engagement. In our July 2015 review, we observed examples of how some of these factors have the potential to hamper assistance programs. For example, an interagency agreement between the departments of State and Justice outlining efforts to train Honduran prosecutors includes an assumption that the government of Honduras would commit to having a certain number of prosecutors available for at least 18 months to participate in the program. However, at the time of our visit to the country, there were no active prosecutors participating in Tegucigalpa. In El Salvador, where we visited a vocational school that, according to USAID officials, had been established in a joint partnership between USAID and a Salvadoran private company, we observed a computer lab filled with computers recently provided by USAID but with no teacher present. According to USAID officials in El Salvador, the school had asked the Salvadoran Ministry of Education to provide a salary for the teacher, but the ministry had not yet done so at the time of our visit. Agencies have outlined approaches for seeking to ensure program sustainability despite the challenges described above, such as by prioritizing improvements to government institutions; identifying sustainable funding sources, such as the private sector; and advocating for legislative and policy reforms that support program objectives. In addition, agency officials have noted the importance of involving communities, the private sector, and the police in program design to ensure they are invested in and supportive of programs’ objectives. Chairman Johnson, Ranking Member Carper, and Members of the Committee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff has any questions about this testimony, please contact me at GianopoulosK@gao.gov or 202-512-8612. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. GAO staff who made key contributions to this testimony are Judith Williams, Assistant Director; Joe Carney; Rachel Girshick; Claudia Rodriguez; Dina Shorafa; Ashley Alley; Martin De Alteriis; Seyda Wentworth; John Mingus; Oziel Trevino; and Lynn Cothern. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Since 2012 there has been a rapid increase in the number of apprehensions at the U.S.-Mexican border of UAC from El Salvador, Guatemala, and Honduras. Current data indicate the rate of UAC migration from Central America in 2015 is lower than the record levels of 2014, though apprehensions increased in August 2015. Children from these three countries face a host of challenges, such as extreme violence and persistent poverty. This testimony summarizes the findings from GAO's July 2015 report, which reviewed (1) U.S. assistance in El Salvador, Guatemala, and Honduras addressing agency-identified causes of UAC migration; (2) how agencies have determined where to locate these assistance efforts; and (3) the extent to which agencies have developed processes to assess the effectiveness of programs seeking to address UAC migration. This testimony also provides updated information on several topics covered in the report. GAO reviewed agency documents and interviewed officials in Washington, D.C., and in Central America for the report. GAO reported in July 2015 that U.S. agencies had sought to address causes of unaccompanied alien child (UAC) migration through recent programs, such as information campaigns to deter migration, developed in response to the migration increase and other long-standing efforts. The increase in migration since 2012 was likely triggered, according to U.S. officials, by several factors such as the increased presence and sophistication of child smugglers (known as coyotes) and confusion over U.S. immigration policy. Officials also noted that certain persistent conditions such as violence and poverty have worsened in certain countries. In addition to long-standing efforts, such as U.S. Agency for International Development (USAID) antipoverty programs, agencies had taken new actions. For example, Department of Homeland Security (DHS)-led investigative units had increasingly sought to disrupt human smuggling operations. GAO found that U.S. agencies located programs based on various factors, including long-term priorities such as targeting high-poverty and -crime areas, but adjusted to locate more programs in high-migration communities. For example, Department of State (State) officials in Guatemala said they moved programs enhancing police anticrime capabilities into such communities, and USAID officials in El Salvador said they expanded to UAC migration-affected locations. GAO found that most agencies had developed processes to assess the effectiveness of programs seeking to address UAC migration, but weaknesses existed in these processes for some antismuggling programs. For example, DHS had established performance measures, such as arrests, for units combating UAC smuggling, but had not established numeric or other types of targets for these measures, which would enable DHS to measure the units' progress. In addition, DHS and State had not always evaluated information campaigns intended to combat coyote misinformation. DHS launched its 2013 campaign in April, but launched its 2014 campaign in late June after migration levels peaked. Neither agency evaluated its 2014 campaign. DHS has reported that it plans to evaluate its ongoing campaign before the end of this year. GAO's July 2015 report included recommendations that DHS and State integrate evaluations into their information campaigns intended to deter migration, and that DHS establish performance targets for its investigative units. DHS concurred with both recommendations, and said that it plans to evaluate its most recent campaign. State also concurred with the recommendation directed to it. |
With more than 100,000 commercial vessels navigating U.S. waters and 12.2 million barrels of oil being imported into the United States each day, some oil spills in domestic waters are inevitable. Fortunately, however, spills are relatively infrequent and are decreasing. While oil transport and maritime traffic have continued to increase, the total number of reported spills has generally declined each year since 1990. OPA places the primary burden of liability and the costs of oil spills on the vessel owner and operator who were responsible for the spill. This “polluter pays” system provides a deterrent for vessel owners and operators who spill oil by requiring that they assume the burden of spill response, natural resource restoration, and compensation to those damaged by the spill, up to a specified limit of liability—which is the amount above which responsible parties are no longer financially liable under certain conditions. (See fig. 1 for the limits of liability by vessel type.) For example, if a vessel’s limit of liability is $10 million and a spill resulted in $12 million in costs, the responsible party only has to pay up to $10 million—the Fund will pay for the remaining $2 million. The Coast Guard is responsible for adjusting limits for significant increases in inflation and for making recommendations to Congress on whether other adjustments are necessary to help protect the Fund. OPA also requires that vessel owners and operators must demonstrate their ability to pay for oil spill response up to their limit of liability. Specifically, by regulation, with few exceptions, owners and operators of vessels over 300 gross tons and any vessels that transship or transfer oil in the Exclusive Economic Zone are required to have a certificate of financial responsibility that demonstrates their ability to pay for oil spill response up to their limit of liability. OPA consolidated the liability and compensation provisions of four prior federal oil pollution initiatives and their respective trust funds into the Oil Spill Liability Trust Fund and authorized the collection of revenue and the use of the money, with certain limitations, with regard to expenditures. The Fund’s balance has generally declined from 1995 through 2006, and since fiscal year 2003, its balance has been less than the authorized limit on federal expenditures for the response to a single spill, which is currently set at $1 billion (see fig. 2). The balance has declined, in part, because the Fund’s main source of revenue—a $0.05 per barrel tax on U.S. produced and imported oil—was not collected for most of the time between 1993 and 2006. As a result, the Fund balance was $604.4 million at the end of fiscal year 2006. The Energy Policy Act of 2005 reinstated the barrel tax beginning in April 2006. With the barrel tax once again in place, NPFC anticipates that the Fund will be able to cover potential noncatastrophic liabilities. OPA also defines the costs for which responsible parties are liable and for which the Fund is made available for compensation in the event that the responsible party does not pay or is not identified. These costs, or “OPA compensable” costs, are of two main types: Removal costs: Removal costs are incurred by the federal government or any other entity taking approved action to respond to, contain, and clean up the spill. For example, removal costs include the equipment used in the response—skimmers to pull oil from the water, booms to contain the oil, planes for aerial observation—as well as salaries and travel and lodging costs for responders. Damages caused by the oil spill: OPA-compensable damages cover a wide range of both actual and potential adverse impacts from an oil spill, for which a claim may be made to either the responsible party or the Fund. Claims include natural resource damage claims filed by trustees, claims for uncompensated removal costs and third-party damage claims for lost or damaged property and lost profits, among other things. The Fund also covers costs when responsible parties cannot be located or do not pay their liabilities. NPFC encounters cases where the source of the spill, and therefore the responsible party is unknown, or where the responsible party does not have the ability to pay. In other cases, since the cost recovery can take a period of years, the responsible party may become bankrupt or dissolved. Based on our analysis of NPFC records, responsible parties have reimbursed the majority—about 65 percent—of the Fund’s costs for the 51 spills. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. Appendix I contains additional information on the parties involved in spill response. On the basis of information we were able to assemble about responsible parties’ expenditures and payments from the Fund, we estimate that 51 oil spills involving removal costs and damage claims totaling at least $1 million have occurred from 1990 to 2006. During this period, 3,389 oil spills occurred in which one or more parties sought reimbursement from the Fund. The 51 major spills represent less than 2 percent of this total. As figure 3 shows, there are no discernable trends in the number of major oil spills that occur each year. The highest number of spills was seven in 1996; the lowest number was zero in 2006. These 51 spills occurred in a variety of locations and involved a range of vessel types. The spills occurred on the Atlantic, Gulf, and Pacific coasts and include spills both in open coastal waters and inland waterways. In addition, as figure 4 shows, 30 of the 51 spills involved cargo/freight vessels and tank barges, 12 involved fishing and other types of vessels, and 9 involved tanker vessels. The total cost of the 51 spills cannot be precisely determined because private-sector expenditures are not tracked, the various parties involved in covering these costs do not categorize them uniformly, and spills costs are somewhat fluid and accrue over time. Because spill cost data are somewhat imprecise and the data we collected vary somewhat by source, the results described below will be reported in ranges, in which various data sources are combined together. The lower and higher bounds of the range represent the low and high end of cost information we obtained. Our analysis of these 51 spills shows their total cost was approximately $1 billion—ranging from $860 million to $1.1 billion. This amount breaks down by source as follows: Amount paid out of the Trust Fund: Because the NPFC tracks and reports all Fund expenditures, the amount paid from the Fund can be reported as an actual amount, not an estimate. For these 51 spills, the Fund paid a total of $239.5 million. Amount paid by responsible parties: Because of the lack of precise information about amounts paid by responsible parties and the differences in how they categorize their costs, this portion of the expenditures must be presented as an estimate. Based on the data we were able to obtain and analyze, responsible parties spent between $620 million and $840 million. Even at the low end of the range, this amount is nearly triple the expenditure from the Fund. Costs of these 51 spills varied widely by spill, and therefore, by year (see fig. 5). For example, 1994 and 2004 both had four spills during the year, but the average cost per spill in 1994 was about $30 million, while the average cost per spill in 2004 was between $71 million and $96 million. Just as there was no discernible trend in the frequency of these major spills, there is no discernible trend in their cost. Although the substantial increase in 2004 may look like an upward trend, 2004 may be an anomaly that reflects the unique character of two of the four spills that occurred that year. These two spills accounted for 98 percent of the year’s costs. Location, time of year, and type of oil are key factors affecting oil spill costs, according to industry experts, agency officials, and our analysis of spills. Officials also identified two other factors that may influence oil spill costs to a lesser extent—the effectiveness of the spill response and the level of public interest in a spill. In ways that are unique to each spill, these factors can affect the breadth and difficulty of the response effort or the extent of damage that requires mitigation. The location of a spill can have a large bearing on spill costs because it will determine the extent of response needed, as well as the degree of damage to the environment and local economies. According to state officials with whom we spoke and industry experts, there are three primary characteristics of location that affect costs: Remoteness: For spills that occur in remote areas, spill response can be particularly difficult in terms of mobilizing responders and equipment, and they can complicate the logistics of removing oil from the water—all of which can increase the costs of a spill. Proximity to shore: There are also significant costs associated with spills that occur close to shore. Contamination of shoreline areas has a considerable bearing on the costs of spills as such spills can require manual labor to remove oil from the shoreline and sensitive habitats. The extent of damage is also affected by the specific shoreline location. Proximity to economic centers: Spills that occur in the proximity of economic centers can also result in increased costs when local services are disrupted. A spill near a port can interrupt the flow of goods, necessitating an expeditious response in order to resume business activities, which could increase removal costs. Additionally, spills that disrupt economic activities can result in expensive third-party damage claims. The time of year in which a spill occurs can also affect spill costs—in particular, impacting local economies and response efforts. According to several state and private-sector officials with whom we spoke, spills that disrupt seasonal events that are critical for local economies can result in considerable expenses. For example, spills in the spring months in areas of the country that rely on revenue from tourism may incur additional removal costs in order to expedite spill clean-up, or because there are stricter standards for clean up, which increase the costs. The time of year in which a spill occurs also affects response efforts because of possible inclement weather conditions. For example, spills that occur during the winter months in areas of the country that experience harsh winter conditions can result in higher removal costs because of the increased difficulty in mobilizing equipment and personnel to respond to a spill in inclement weather. According to a state official knowledgeable about a January 1996 spill along the coast of Rhode Island, extremely cold and stormy weather made response efforts very difficult. The type of oil spilled affects the degree to which oil can be cleaned up and removed, as well as the nature of the natural resource damage caused by the spill. The different types of oil can be grouped into four categories, each with its own set of impacts on spill response and the environment (see table 1). Lighter oils such as jet fuels, gasoline, and diesel fuel dissipate and evaporate quickly, and as such, often require minimal cleanup. However, these oils are highly toxic and can severely affect the environment if conditions for evaporation are unfavorable. For instance, in 1996, a tank barge that was carrying home-heating oil grounded in the middle of a storm near Point Judith, Rhode Island, spilling approximately 828,000 gallons of heating oil (light oil). Although this oil might dissipate quickly under normal circumstances, heavy wave conditions caused an estimated 80 percent of the release to mix with water. Natural resource damages alone were estimated at $18 million, due to the death of approximately 9 million lobsters, 27 million clams and crabs, and over 4 million fish. Heavier oils, such as crude oils and other heavy petroleum products are less toxic than lighter oils but can also have severe environmental impacts. Medium and heavy oils do not evaporate much, even during favorable weather conditions, and can blanket structures they come in contact with—boats and fishing gear, for example—as well as the shoreline, creating severe environmental impacts to these areas, and harming waterfowl and fur-bearing mammals through coating and ingestion. Additionally, heavy oils can sink, creating prolonged contamination of the sea bed and tar balls that sink to the ocean floor and scatter along beaches. These spills can require intensive shoreline and structural clean up, which is time-consuming and expensive. For example, in 1995, a tanker spilled approximately 38,000 gallons of heavy fuel oil into the Gulf of Mexico when it collided with another tanker as it prepared to lighter its oil to another ship. Less than 1 percent (210 gallons) of the oil was recovered from the sea, and as a result, recovery efforts on the beaches of Matagorda and South Padre Islands were labor intensive, as hundreds of workers had to manually pick up tar balls with shovels. The total removal costs for the spill were estimated at $7 million. Some industry experts cited two other factors as also affecting costs incurred during a spill. Effectiveness of Spill Response: Some private-sector officials stated that the effectiveness of spill response can impact the cost of cleanup. The longer it takes to assemble and conduct the spill response, the more likely it is that the oil will move with changing tides and currents and affect a greater area, which can increase costs. Some officials said the level of experience of those involved in the incident command is critical to the effectiveness of spill response. For example, they said poor decision making during a spill response could lead to the deployment of unnecessary response equipment, or worse, not enough equipment to respond to a spill. Several officials expressed concern that Coast Guard officials are increasingly inexperienced in handling spill response, in part because the Coast Guard’s mission has been increased to include homeland security initiatives. Public interest: Several officials with whom we spoke stated that the level of public attention placed on a spill creates pressure on parties to take action and can increase costs. They also noted that the level of public interest can increase the standards of cleanliness expected, which may increase removal costs. The total costs of the San Francisco spill are currently unknown. According to NPFC officials, as of December 4, 2007, the Unified Command estimated that $48 million had been spent on the response, which includes approximately $2.2 million from the Fund. The total costs will not likely be known for a while, as it can take many months or years to determine the full effect of a spill on natural resources and to determine the costs and extent of the natural resource damage. Our work for this testimony did not include a thorough evaluation of the factors affecting the spill. However, some of the same key factors that have influenced the cost of 51 major oil spills will likely have an effect on the costs in the San Francisco spill. For example, the spill occurred in an area close to shore, which caused the closing of as many as 22 beaches, according to Coast Guard officials. A weather-related factor was that the spill occurred during dense fog, which complicated efforts to determine how much of an area the spill covered. Moreover, the cargo ship spilled a heavy oil—specifically intermediate fuel oil—that requires particularly intensive shoreline and structural clean-up, and harmed scores of birds and marine mammals through coating and ingestion. Concerns have also been raised about the effectiveness of the spill response and incident command, another of the factors cited as contributing to increased costs. The National Transportation Safety Board, the Coast Guard, as well as other government agencies, are currently investigating the details of the accident and the subsequent response. The Fund has been able to cover costs from major spills that responsible parties have not paid, but risks remain. Specifically, the current liability limits for certain vessel types, notably tank barges, may be disproportionately low relative to costs associated with such spills. There is also no assurance that vessel owners and operators are able to financially cover these new limits, because the Coast Guard has not yet issued regulations for satisfying financial responsibility requirements. In addition, although OPA calls for periodic increases in liability limits to account for significant increases in inflation, such increases have never been made. Aside from issues related to limits of liability, the Fund faces other potential drains on its resources, including ongoing claims from existing spills. The Fund has been able to cover costs from major spills that responsible parties have not paid, but additional focus on limits of liability is warranted. Limits of liability are the amount, under certain circumstances, above which responsible parties are no longer financially liable for spill removal costs and damage claims. If the responsible party’s costs exceed the limit of liability, they can make a claim against the Fund for the amount above the limit. Major oil spills that exceed a vessel’s limit of liability are infrequent, but their impact on the Fund can be significant. Ten of the 51 major oil spills that occurred since 1990 resulted in limit-of- liability claims on the Fund. These limit-of-liability claims totaled more than $252 million and ranged from less than $1 million to more than $100 million. Limit-of-liability claims will continue to have a pronounced effect on the Fund. NPFC estimates that 74 percent of claims under adjudication that were outstanding as of January 2007 were for spills in which the limit of liability had been exceeded. The amount of these claims under adjudication was $217 million. We identified three areas in which further attention to these liability limits appears warranted: the appropriateness of some current liability limits, the need to adjust limits periodically in the future to account for significant increases in inflation, and the need for updated regulations for ensuring vessel owners and operators are able to financially cover their new limits. The Coast Guard and Maritime Transportation Act of 2006 significantly increased the limits of liability from the limits set by OPA in 1990. Both laws base the liability on a specified amount per gross ton of vessel volume, with different amounts for vessels that transport oil commodities (tankers and tank barges) than for vessels that carry oil as a fuel (such as cargo vessels, fishing vessels, and passenger ships). The 2006 act raised both the per-ton and the required minimum amounts, differentiating between vessels with a double hull, which helps prevent oil spills resulting from collision or grounding, and vessels without a double hull (see table 2 for a comparison of amounts by vessel category). For example, the liability limit for single-hull vessels larger than 3,000 gross tons was increased from the greater of $1,200 per gross ton or $10 million to the greater of $3,000 per gross ton or $22 million. Our analysis of the 51 spills showed that the average spill cost for some types of vessels, particularly tank barges, was higher than the limit of liability, including the new limits established in 2006. As figure 6 shows, the 15 tank barge spills and the 12 fishing/other vessel spills had average costs greater than both the 1990 and 2006 limits of liability. For example, for tank barges, the average cost of $23 million was higher than the average limit of liability of $4.1 million under the 1990 limits and $10.3 million under the new 2006 limits. The nine spills involving tankers, by comparison, had average spill costs of $34 million, which was considerably lower than the average limit of liability of $77 million under the 1990 limits and $187 million under the new 2006 limits. Similarly, the 15 major spills involving cargo/freight vessels had an average spill cost of $67 million, which was lower than both the 1990 and 2006 limits of liability. In a January 2007 report examining spills in which the limits of liability had been exceeded, the Coast Guard had similar findings on the adequacy of some of the new limits. Based on an analysis of 40 spills in which costs had exceeded the responsible party’s liability limit since 1991, the Coast Guard found that the Fund’s responsibility would be greatest for spills involving tank barges, where the Fund would be responsible for paying 69 percent of costs. The Coast Guard concluded that increasing liability limits for tank barges and non tank vessels—cargo, freight, and fishing vessels— over 300 gross tons would positively impact the Fund balance. With regard to making specific adjustments, the Coast Guard said dividing costs equally between the responsible parties and the Fund was a reasonable standard to apply in determining the adequacy of liability limits. However, the Coast Guard did not recommend explicit changes to achieve either that 50/50 standard or some other division of responsibility. Although OPA requires adjusting liability limits to account for significant increases in inflation, no adjustments to the limits were made between 1990 and 2006, when the Congress raised the limits in the Coast Guard and Maritime Transportation Act. During those years, the Consumer Price Index rose approximately 54 percent. OPA requires the President, who has delegated responsibility to the Coast Guard, through the Secretary of Homeland Security, to issue regulations not less often than every 3 years to adjust the limits of liability to reflect significant increases in the Consumer Price Index. We asked Coast Guard officials why no adjustments were made between 1990 and 2006. Coast Guard officials stated that they could not speculate on behalf of other agencies as to why no adjustments had been made prior to 2005 when the delegation to the Coast Guard was made. The decision to leave limits unchanged had financial implications for the Fund. Raising the liability limits to account for inflation would have the effect of reducing payments from the Fund, because responsible parties would be responsible for paying costs up to the higher liability limit. Not making adjustments during this 16-year period thus had the effect of increasing the Fund’s financial liability. Our analysis showed that if the 1990 liability limits had been adjusted for inflation during the 16-year period, claims against the Fund for the 51 major oil spills would have been reduced 16 percent, from $252 million to $213 million. This would have meant a savings of $39 million for the Fund. Certificates of Financial Responsibility have not been adjusted to reflect the new liability limits. The Coast Guard requires Certificates of Financial Responsibility, with few exceptions, for vessels over 300 gross tons or any vessels that are lightering or transshipping oil in the Exclusive Economic Zone as a legal certification that vessel owners and operators have the financial resources to fund spill response up to the vessel’s limit of liability. Currently, Certificate of Financial Responsibility requirements are consistent with the 1990 limits of liability and, therefore, there is no assurance that responsible parties have the financial resources to cover their increased liability. The Coast Guard plans to initiate a rule making to issue new Certificate of Financial Responsibility requirements. Coast Guard officials indicated their goal is to publish a Notice of Proposed Rulemaking by the end of 2007, but they said they could not be certain they would meet this goal. The Fund also faces several other potential challenges that could affect its financial condition: Additional claims could be made on spills that have already been cleaned up: Natural resource damage claims can be made on the Fund for years after a spill has been cleaned up. The official natural resource damage assessment conducted by trustees can take years to complete, and once it is completed, claims can be submitted to the NPFC for up to 3 years thereafter. For example, NPFC recently received and paid a natural resource damage claim for a spill in U.S. waters in the Caribbean that occurred in 1991. Costs and claims may occur on spills from previously sunken vessels that discharge oil in the future: Previously sunken vessels that are submerged and in threat of discharging oil represent an ongoing liability to the Fund. There are over 1000 sunken vessels that pose a threat of oil discharge. These potential spills are particularly problematic because in many cases there is no viable responsible party that would be liable for removal costs. Therefore, the full cost burden of oil spilled from these vessels would likely be paid by the Fund. Spills may occur without an identifiable source and therefore, no responsible party: Mystery spills also have a sustained impact on the Fund, because costs for spills without an identifiable source—and therefore no responsible party—may be paid out of the Fund. Although mystery spills are a concern, the total cost to the Fund from mystery spills was lower than the costs of known vessel spills in 2001 through 2004. Additionally, none of the 51 major oil spills was the result of discharge from an unknown source. A catastrophic spill could strain the Fund’s resources: Since the 1989 Exxon Valdez spill, which was the impetus for authorizing the Fund’s usage, no oil spill has come close to matching its costs. Cleanup costs for the Exxon Valdez alone totaled about $2.2 billion, according to the vessel’s owner. By comparison, the 51 major oil spills since 1990 cost, in total, between $860 million and $1.1 billion. The Fund is currently authorized to pay out a maximum of $1 billion on a single spill. Although the Fund has been successful thus far in covering costs that responsible parties did not pay, it may not be sufficient to pay such costs for a spill that has catastrophic consequences. In conclusion, the “polluter pays” system established under OPA has been generally effective in ensuring that responsible parties pay the costs of responding to spills and compensating those affected. However, increases in some liability limits appear warranted to help ensure that the “polluter pays” principle is carried out in practice. For certain vessel types, such as tank barges, current liability limits appear disproportionately low relative to their historic spill costs. The Coast Guard has reached a similar conclusion but so far has stopped short of making explicit recommendations to the Congress about what the limits should be. Absent such recommendations, the Fund may continue to pay tens of millions for spills that exceed the responsible parties’ limits of liability. Further, to date, liability limits have not been regularly adjusted for significant changes in inflation. Consequently, the Fund was exposed to about $39 million in liability claims for the 51 major spills between 1990 and 2006 that could have been saved if the limits had been adjusted for inflation. Without such actions, oil spills with costs exceeding the responsible parties’ limits of liability will continue to place the Fund at risk. Given these concerns, in our September 2007 report, we recommended that the Commandant of the Coast Guard (1) determine whether and how liability limits should be changed, by vessel type, and make recommendations about these changes to the Congress and (2) adjust the limits of liability for vessels every 3 years to reflect significant changes in inflation, as appropriate. DHS, including the Coast Guard, generally agreed with the report’s contents and agreed with the recommendations. To date, the Commandant of the Coast Guard has not implemented these recommendations. Madame Chair this concludes my statement. I would be pleased to answer any questions that you or other Members of the Subcommittee may have at this time. For further information on this testimony, please contact Susan Fleming at (202) 512-2834 or Flemings@gao.gov. Individuals making contributions to this testimony include Nikki Clowers, Assistant Director; Simon Galed; Stan Stenersen; and Susan Zimmerman. Response to large oil spills is typically a cooperative effort between the public and private sector, and there are numerous players who participate in responding to and paying for oil spills. To manage the response effort, the responsible party, the Coast Guard, EPA, and the pertinent state and local agencies form the unified command, which implements and manages the spill response. Beyond the response operations, there are other stakeholders, such as accountants who are involved in documenting and accounting for costs, and receiving and processing claims. In addition, insurers and underwriters provide financial backing to the responsible party. The players involved in responding to and/or paying for major spill response are as follows: Government agencies: The lead federal authority, or Federal On-Scene Coordinator, in conducting a spill response is usually the nearest Coast Guard Sector and is headed by the Coast Guard Captain of the Port. The Federal On-Scene Coordinator directs response efforts and coordinates all other efforts at the scene of an oil spill. Additionally, the on-scene coordinator issues pollution removal funding authorizations—guarantees that the agency will receive reimbursement for performing response activities—to obtain services and assistance from other government agencies. Other federal agencies may also be involved. NOAA provides scientific support, monitoring and predicting the movement of oil, and conducting environmental assessments of the impacted area. The federal, state, and tribal trustees join together to perform a natural resource damage assessment, if necessary. Within the Coast Guard, the NPFC is responsible for disbursing funds to the federal on-scene coordinator for oil spill removal activities and seeking reimbursement from responsible parties for federal costs. Additionally, regional governmental entities that are affected by the spill—both state and local—as well as tribal government officials or representatives may participate in the unified command and contribute to the response effort, which is paid for by the responsible party or are reimbursed by the responsible party or the Fund. Responsible parties: OPA stipulates that both the vessel owner and operator are ultimately liable for the costs of the spill and the cleanup effort. The Coast Guard has final determination on what actions must be taken in a spill response, and the responsible party may form part of the unified command—along with the federal on-scene coordinator and pertinent state and local agencies—to manage the spill response. The responsible parties rely on other entities to evaluate the spill effects and the resulting compensation. Responsible parties hire environmental and scientific support staff, specialized claims adjustors to adjudicate third- party claims, public relations firms, and legal representation to file and defend limit of liability claims on the Fund, as well as serve as counsel throughout the spill response. Qualified individuals: Federal regulations require that vessels carrying oil as cargo have an incident response plan and, as part of the plan, they appoint a qualified individual who acts with full authority to obligate funds required to carry out response activities. The qualified individual acts as a liaison with the Federal On-Scene Coordinator and is responsible for activating the incident response plan. Oil spill response organizations: These organizations are private companies that perform oil spill cleanup, such as skimming and disposal of oil. Many of the companies have contractual agreements with responsible parties and the Coast Guard. The agreements, called basic ordering agreements, provide for prearranged pricing, response personnel, and equipment in the event of an oil spill. Insurers: Responsible parties often have multiple layers of primary and excess insurance coverage, which pays oil spill costs and claims. Pollution liability coverage for large vessels is often underwritten by not-for-profit mutual insurance organizations. The organizations act as a collective of ship owners, who insure themselves, at-cost. The primary insurers of commercial vessels in U.S. waters are the Water Quality Insurance Syndicate, an organization providing pollution liability insurance to over 40,000 vessels, and the International Group of P & I Clubs, 13 protection and indemnity organizations that provide insurance primarily to foreign- flagged large vessels. At the federal level, the National Oil and Hazardous Substances Pollution Contingency Plan provides the framework for responding to oil spills. At the port level, each port has an Area Contingency Plan, developed by a committee of local stakeholders, that calls for a response that is coordinated with both higher-level federal plans and lower-level facility and vessel plans. The federal plans designate the Coast Guard as the primary agency to respond to oil spills on water. The Coast Guard has a National Strike Force to provide assistance to efforts by the local Coast Guard and other agencies. The Coast Guard also has an exercise program—known as the Spills of National Significance exercise program—to test national level response capabilities. This program is focused on exercising the entire response system as the local, regional and national level using large-scale, high probability oil and hazardous material incidents that result from unintentional causes such as maritime accidents or natural disasters. The most recent program exercise, in June 2007, tested the response and recovery to an oil and hazardous materials release in the wake of a large scale earthquake in the Mississippi and Ohio river valleys. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | When oil spills occur in U.S. waters, federal law places primary liability on the vessel owner or operator--that is, the responsible party--up to a statutory limit. As a supplement to this "polluter pays" approach, a federal Oil Spill Liability Trust Fund administered by the Coast Guard pays for costs when a responsible party does not or cannot pay. This testimony is based on GAO's September 2007 report on oil spill costs and select program updates on the recent San Francisco spill. Specifically, it answers three questions: (1) How many major spills (i.e., at least $1 million) have occurred since 1990, and what is their total cost? (2) What factors affect the cost of spills? and (3) What are the implications of major oil spills for the Oil Spill Liability Trust Fund? On the basis of cost information collected from a variety of sources, GAO estimates that 51 spills with costs of at least $1 million have occurred from 1990 to 2006 and that responsible parties and the federal Oil Spill Liability Trust Fund (Fund) have spent between $860 million and $1.1 billion for oil spill removal costs and compensation for damages (e.g., lost profits and natural resource damages). Since removal costs and damage claims may stretch out over many years, the costs of the spills could rise. The 51 spills varied greatly from year to year in number and cost. All vessel types were involved with the 51 major spills GAO identified, with cargo/freight vessels and tank barges involved with 30 of the 51 spills. According to industry and agency officials, three main factors affect the cost of spills: a spill's location, the time of year, and the type of oil spilled. Spills that occur in remote areas, for example, can increase costs involved in mobilizing responders and equipment. Similarly, a spill occurring during tourist or fishing season might produce substantial compensation claims, while a spill occurring during another time of year may not be as costly. The type of oil affects costs in various ways: fuels like gasoline or diesel fuel may dissipate quickly but are extremely toxic to fish and plants, while crude oil is less toxic but harder to clean up. The total costs of the recent San Francisco oil spill are unknown, but these identified factors are likely to influence the costs. To date, the Fund has been able to cover costs from major spills that responsible parties have not paid, but risks remain. Specifically, GAO's analysis shows that the new 2006 limits of liability for tank barges remain low relative to the average cost of such spills. Since 1990, the Oil Pollution Act (OPA) required that liability limits be adjusted above the limits set forth in statute for significant increases in inflation, but such changes have never been made. Not making such adjustments between 1990 and 2006 potentially shifted an estimated $39 million in costs from responsible parties to the Fund. |
Floods continue to be the most destructive natural hazard in terms of damage and economic loss to the nation. Property damage from flooding now totals over $1 billion each year in the United States and floods occur within all 50 states. Nearly 9 of every 10 presidential disaster declarations result from natural phenomena in which flooding was a major component. Most communities in the United States can experience some kind of flooding after spring rains, heavy thunderstorms, or winter snow thaws. Not only do floods cause damage and loss, they can be deadly—flooding caused the deaths of about 900 people from fiscal year 1992 through fiscal year 2001. Tropical Storm Allison, which struck the Gulf Coast in June 2001, demonstrated the economic and social impact flooding can have, causing billions of dollars in damages and 41 deaths. As a result of the storm, FEMA paid out over $1 billion in insurance claims, the largest amount paid for a single event since 1978 when FEMA began to collect summary statistics on flood claims. More recently, Hurricane Isabel ravaged the Mid-Atlantic states in September 2003. Through November 30, 2003, FEMA had paid over $160 million in flood insurance claims and estimates that ultimately, flood insurance claim payments resulting from Isabel will be about $450 million. At least 40 deaths have been attributed to the storm. Floods can be slow or fast rising but generally develop over a period of days. Flash flood waters move at very fast speeds and can roll boulders, tear out trees, destroy buildings, and obliterate bridges. Walls of water can reach heights of 10 to 20 feet and generally are accompanied by a deadly cargo of debris. Flood damage causes both direct and indirect costs. Direct costs reflect immediate losses and repair costs as well as short-term costs such as flood fighting, temporary housing, and administrative assistance. By contrast, indirect costs are incurred in an extended time period following a flood and include loss of business and personal income (including permanent loss of employment), reduction in property values, increased insurance costs, loss of tax revenue, psychological trauma, and disturbance to ecosystems. In 1968, in recognition of the increasing amount of flood damage, the lack of readily available insurance for property owners, and the cost to the taxpayer for flood-related disaster relief, the Congress passed the National Flood Insurance Act (Pub. L. No. 90-448) that created the National Flood Insurance Program. Through the National Flood Insurance Program, FEMA has sought to minimize flood-related property losses by making flood insurance available on reasonable terms and encouraging its purchase by people who need flood insurance protection—particularly those living in flood prone areas. The program identifies flood prone areas in the country, makes flood insurance available to property owners in communities that participate in the program, and requires floodplain building standards to mitigate flood hazards. FEMA also seeks to mitigate flood hazards through a variety of mitigation grant programs. Under the flood insurance program, FEMA prepares flood insurance rate maps to delineate flood prone areas including special flood hazard areas— also known as 100-year floodplains—where enhanced building standards and insurance requirements apply. Currently, FEMA is in the initial stages of a billion dollar effort to update the nation’s flood maps. The Map Modernization program is intended to improve the accuracy of flood maps, put the maps in digital format to improve their accessibility, and provide the basis for assessing the impact of other hazards in support of DHS’s efforts to protect the nation from both man-made and natural disasters. For example, the maps could be used to assess the impact of toxic chemical spills on local waterways. At the request of the Chairman of the House Financial Services Subcommittee on Housing and Community Opportunity, we have been reviewing the Map Modernization program and plan to report on FEMA’s program strategy and the status of the program later this spring. Flood maps provide the basis for establishing floodplain building standards that participating communities must adopt and enforce as part of the program. For a community to participate in the program, any structures built within a special flood hazard area after the flood map was completed must be built according to the program’s building standards that are aimed at minimizing flood losses. A key component of the program’s building standards that must be followed by participating communities is a requirement that the lowest floor of the structure be elevated to or above the base flood level—the highest elevation at which there is a 1-percent chance of flooding in a given year. The administration has estimated that the program’s standards for new construction save about $1 billion annually in flood damage avoided. According to FEMA, buildings constructed in compliance with these standards suffer approximately 80 percent less damage annually than those not built according to these standards. Flood maps also provide the basis for setting insurance rates and identifying properties whose owners are required to purchase flood insurance. When the program was created, the purchase of flood insurance was voluntary. To increase the impact of the program, the Congress amended the original law in 1973 to require the purchase of flood insurance in certain circumstances. Flood insurance is required for structures in special flood hazard areas of communities participating in the program if (1) any federal loans or grants were used to acquire or build the structures or (2) the structures are secured by mortgage loans made by lending institutions that are regulated by the federal government. The National Flood Insurance Reform Act of 1994 that further amended the program also reinforced the objective of using insurance as the preferred mechanism for disaster assistance. The act expanded the role of federal agency lenders and regulators in enforcing the mandatory flood insurance purchase requirements. It also prohibited further flood disaster assistance for any property where flood insurance was not maintained even though it was mandated as a condition for receiving prior disaster assistance. Currently, the program provides insurance for approximately 4.4 million policyholders in the nearly 20,000 communities that participate in the program. The program has paid about $12 billion in insurance claims, primarily from policyholder premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves. FEMA also has a variety of grant programs designed to mitigate the effects of natural hazards, including flooding, on people and property. From October 1989 through July 2003, FEMA funded approximately 3,900 flood mitigation projects worth about $2 billion through the flood insurance program and a variety of other grant programs. Through these projects, FEMA mitigated over 29,000 properties. FEMA’s Flood Mitigation Assistance Program is funded through the flood insurance program and is designed to reduce claims under the program. Grants provided to states and communities are to be used for flood related mitigation activities such as elevation, acquisition, and relocation of buildings insured by the flood insurance program. In implementing this program, FEMA has encouraged states to prioritize project grant applications that include repetitive loss properties. In addition, FEMA provides funding for mitigation planning activities and projects before and after floods occur, respectively through the Pre-Disaster Mitigation Program and the Hazard Mitigation Grant Program. In implementing the Pre-Disaster Mitigation Program for 2003, FEMA specifically targeted projects designed to mitigate repetitive loss properties. Through the Hazard Mitigation Grant Program, FEMA estimates that it has mitigated over 2,500 repetitive loss properties through acquisitions, elevations, and other flood protection measures. The flood insurance program has raised financial concerns because, over the years, it has lost money and at times has had to borrow funds from the U.S. Treasury. One of the primary reasons—payments for repetitive loss properties—has been consistently identified in our past work and by FEMA. About 49,000—approximately 1 percent of the 4.4 million buildings currently insured under the program—have been flooded on more than one occasion during a 10-year period and have received flood insurance payments of $1,000 or more for each claim. These repetitive loss properties are problematic not only because of their vulnerability to flooding but also because of the costs of repeatedly repairing flood damages. For example, a 1998 study by the National Wildlife Federation noted that nearly 1 out of every 10 repetitive loss homes has had cumulative flood loss claims that exceeded the value of the house. According to FEMA, repetitive loss properties have accounted for about 38 percent of all program claim costs historically and are projected by FEMA to cost about $200 million annually. Since 1978, the total cost of these repetitive loss properties to the program has been about $4.6 billion. Nearly half of all nationwide repetitive loss property insurance payments had been made in Louisiana, Florida and Texas. For example, in Texas, since 1978 there have been approximately 45,000 flood claims totaling over $1 billion for repetitive damage. These 3 states, plus 12 others, have accounted for nearly 90 percent of the total payments made for repetitive loss properties. FEMA has developed a strategy to reduce the number of properties repeatedly flooded that, like congressional proposals, seeks to target repetitive loss properties with the greatest losses. FEMA’s strategy identifies the highest priority properties, for example those with four or more losses, that would benefit from mitigation activities designed to remove them altogether from the floodplains, elevate them above the reach of floodwaters, or apply other measures that would significantly reduce their exposure to flood risk. According to FEMA, it has paid out close to $1 billion dollars in flood insurance claims over the last 21 years for these properties. As of November 30, 2003 FEMA had identified approximately 11,000 currently insured repetitive loss properties in this target group. FEMA has set up a special direct facility for servicing these properties and provides information about these property to state and local floodplain management officials. States or communities may sponsor projects to mitigate flood losses to these properties or may be able to provide property owners technical assistance on mitigation options. To facilitate grant-funded mitigation activities for this target group, FEMA also initiated a pilot program to allow states and communities (where these properties are located) to use simplified methodology and software to establish the cost-effectiveness of proposed projects when applying for grants to mitigate these repetitive loss properties. Members of Congress have also recognized the financial burden repetitive loss properties place on the program and have proposed changing premium rates for properties with the greatest losses. Two bills introduced in 2003—H.R. 253 and H.R. 670—proposed amending the National Flood Insurance Act of 1968, to, among other things, change the premiums for repetitive loss properties. Under the proposed bills, premiums charged for such properties would reflect actuarially based rates if the property owner has refused a buyout, elevation, or other flood mitigation measure from the flood insurance program or FEMA. H.R. 253, as passed by the House, included a pilot program to allow FEMA to use flood insurance program funds to target “severe” repetitive loss properties for mitigation. Specifically, FEMA could use up to $40 million each year for the next 5 years for mitigation directed at these properties. For property owners who refuse FEMA’s mitigation offers, their premium rates would be increased by 50 percent if they subsequently made a claim to the program exceeding $1,500. In the past, we have noted that increasing policyholder premiums could cause some of the policyholders to cancel their flood insurance. H.R. 253 includes a provision that provides FEMA the flexibility of increasing the deductible, which would result in a lower premium rate, for policies where property owners refuse mitigation offers and make subsequent claims exceeding $1,500. This may provide property owners who refuse mitigation offers a means for maintaining their flood insurance without a significant increase in their premium rate. While we have not fully analyzed the potential results of FEMA’s repetitive loss strategy and mitigation actions proposed by H.R. 253, based on a preliminary assessment, they appear to have the potential to reduce the number and/or vulnerability of repetitive loss properties and, thereby, the potential to help improve the program’s financial condition. By making near term investments targeted to the most costly properties to insure, FEMA should be able to reduce annual expenditures for these properties in the long term by reducing the national inventory of repetitive loss properties. According to FEMA, there are a total of about 100,000 repetitive loss properties accounting for $4.6 billion in losses since 1978. Of these properties, FEMA reports that there are about 49,000 properties that are currently insured that have accounted for about $2.6 billion in losses since 1978. Of these currently insured properties, about 6,000 repetitive loss properties that have accounted for about $792 million in losses since 1978 could be considered for mitigation efforts funded through the pilot program proposed by H.R. 253. In accordance with the bill’s proposed criteria, each of these properties either had 4 or more separate claims each exceeding $5,000 with cumulative claims exceeding $20,000 or had at least 2 separate claims with cumulative losses exceeding the value of the property. The remaining 43,000 currently insured repetitive loss properties, accounting for $1.8 billion in losses since 1978, do not meet the criteria for the proposed pilot program. Of these properties that would not be eligible for the pilot program, about 26,000 properties, accounting for about $1.6 billion in losses since 1978, had cumulative losses greater than $20,000, but either (1) less than 4 claims had been filed or (2) each claim did not meet the $5,000 threshold. (For state by state details on the total number of repetitive loss properties, the number of currently insured repetitive loss properties, the number of currently insured repetitive loss properties that meet the criteria proposed in the H.R. 253 pilot program, and the number of currently insured repetitive loss properties that do not meet the criteria, see appendix 1, tables 1, 2, 3, and 4, respectively.) As with all federal initiatives, the success of FEMA ‘s efforts in implementing a repetitive loss strategy and any future legislated program directives will be most effectively determined by using outcome-based, rather than output-based performance measures. Such outcome-based measures could allow FEMA to assess the impact of savings to the National Flood Insurance Program resulting from its mitigation of repetitive loss properties. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Subcommittee may have. For further information on this testimony, please contact William O. Jenkins at (202) 512-8777. Individuals making key contributions to this testimony include Chris Keisling, Kirk Kiester, and Meg Ullengren. This appendix contains data we obtained from FEMA’s National Flood Insurance Program Bureau & Statistical Agent on repetitive loss properties and the flood insurance losses associated with those properties. To assess the reliability of this data, we interviewed agency officials knowledgeable about the data and the system development manager responsible for maintaining the data and the systems. We determined that the data were sufficiently reliable for identifying repetitive loss properties and illustrating the potential impact of the pilot program proposed by H.R. 253 on these properties. Flood Insurance: Challenges Facing the National Flood Insurance Program. GAO-03-606T. Washington, D.C.: April 1, 2003. Major Management Challenges and Program Risks: Federal Emergency Management Agency. GAO-03-113. Washington, D.C.: January 2003. Flood Insurance: Extent of Noncompliance with Purchase Requirements Is Unknown. GAO-02-396. Washington, D.C.: June 21, 2002. Flood Insurance: Information on the Financial Condition of the National Flood Insurance Program. GAO-01-992T. Washington, D.C.: July 19, 2001. Flood Insurance: Emerging Opportunity to Better Measure Certain Results of the National Flood Insurance Program. GAO-01-736T. Washington, D.C.: May 16, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Floods have been, and continue to be, the most destructive natural hazard in terms of damage and economic loss to the nation. From fiscal year 1992 through fiscal year 2002, about 900 lives were lost due to flooding and flood damages totaled about $55 billion. Some properties have been repeatedly flooded and the subject of federal flood insurance claims. The Federal Emergency Management Agency (FEMA) within the Department of Homeland Security is responsible for assisting state and local governments, private entities, and individuals to prepare for, mitigate, respond to, and recover from natural disasters, including floods. The National Flood Insurance Program (NFIP) is the primary vehicle for FEMA's efforts to mitigate the impact of floods. The Senate Subcommittee on Economic Policy, Committee on Banking, Housing, and Urban Affairs, asked GAO to discuss (1) FEMA's approach to flood mitigation, (2) the effect of repetitive loss properties on the NFIP, and (3) recent actions taken or proposed to address the impact of repetitive loss properties on the NFIP. FEMA has taken a multifaceted approach to mitigating, or minimizing the life and property losses and disaster assistance costs that result from flooding. Through the National Flood Insurance Program, FEMA develops and updates flood maps that identify flood prone areas and makes insurance available for communities that agree to adopt and enforce building standards based upon these maps. Since its inception in 1968, the National Flood Insurance Program has paid $12 billion in insurance claims to owners of flood-damage properties that have been funded primarily by policyholders' premiums that otherwise would have been paid through taxpayer-funded disaster relief or borne by home and business owners themselves. Through a variety of grant programs, FEMA also provides funding for mitigation planning activities and projects before and after floods occur. Repetitive loss properties represent a significant portion of annual flood insurance program claims. About 1 percent of the 4.4 million properties currently insured by the program are considered to be repetitive loss properties--properties for which policyholders have made two or more $1,000 flood claims. However, about 38 percent of all program claim costs have been the result of repetitive loss properties, at a cost of about $4.6 billion since 1978. Recent federal actions to reduce program losses related to repetitive loss properties include FEMA's strategy to target severe repetitive loss properties for mitigation and congressional proposals to phase out coverage or begin charging full and actuarially based rates for repetitive loss property owners who refuse to accept FEMA's offer to purchase or mitigate the effect of floods on these buildings. FEMA's strategy and the congressional proposals appear to have the potential to reduce the number and vulnerability of repetitive loss properties and, thereby, the potential to help reduce the number of flood insurance claims. |
Chemical facilities manufacture a host of products—including basic organic chemicals, plastic materials and resins, petrochemicals, and industrial gases, to name a few. Other facilities, such as fertilizer and pesticide facilities, pulp and paper manufacturers, water facilities, and refineries, also house large quantities of chemicals. EPA has a role in preventing and mitigating accidental releases at chemical facilities through, among other things, the RMP provisions of the Clear Air Act. Under these provisions, EPA identified 140 toxic and flammable chemicals that, when present above certain threshold amounts, would pose the greatest risk to human health and the environment if released. According to EPA, approximately 15,000 facilities in a variety of industries produce, use, or store one or more of these chemicals beyond threshold amounts. The 2003 President’s National Strategy for the Physical Protection of Critical Infrastructures and Key Assets sets forth actions that EPA and DHS will take to secure the chemical infrastructure. The strategy directs EPA and DHS to promote enhanced site security at chemical facilities and review current practices and statutory requirements on the distribution and sale of certain pesticides and industrial chemicals to help identify whether additional measures are necessary. DHS is also charged with continuing to develop the Chemical Sector Information Sharing and Analysis Center, a partnership with industry to facilitate the collection and sharing of threat information, by promoting the Center and recruiting chemical industry constituents to participate. A presidential directive issued in December 2003 designates DHS as the lead federal agency for chemical security, a change from national strategies issued in July 2002 and February 2003, which named EPA as the lead. A number of other critical infrastructures have federal security requirements. All commercial nuclear power facilities licensed by the Nuclear Regulatory Commission are subject to a number of security requirements. The Aviation and Transportation Security Act of 2001 directed the Transportation Security Administration to take over responsibility for airport screening. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 requires community water systems serving more than 3,300 people to conduct a vulnerability assessment, prepare an emergency response plan, certify to EPA that the vulnerability assessment and emergency response plan have been completed, and provide a copy of the assessment to EPA. To improve security in our nation’s ports, the regulations implementing the Maritime Transportation Security Act of 2002 direct vessels and facilities—some of which are chemical facilities—to develop security plans. Congress is considering several legislative proposals that would grant DHS, or DHS and EPA, the authority to require chemical facilities to take security steps. S. 994 requires the Secretary of Homeland Security to promulgate regulations specifying which facilities should be required to conduct vulnerability assessments and to prepare and implement site security plans, a timetable for completing the vulnerability assessments and security plans, the contents of plans, and limits on the disclosure of sensitive information. S. 157 would direct EPA to designate high-priority chemical facilities based on the threat posed by an unauthorized release and require these facilities to conduct vulnerability assessments, identify hazards that would result from a release, and prepare a prevention, preparedness, and response plan. S. 157 would also require facilities to send these assessments and plans to EPA. EPA and DHS would jointly review the assessments and plans to determine compliance. S. 157 would also require that facilities consider inherently safer practices (referred to as inherently safer technologies), such as substituting less toxic chemicals. Experts agree that chemical facilities present an attractive target for terrorists intent on causing massive damage because many facilities house toxic chemicals that could become airborne and drift to surrounding areas if released. Chemical facilities could also be attractive targets for the theft of chemicals that could be used to create a weapon capable of causing harm. Justice has concluded that the risk of an attempt in the foreseeable future to cause an industrial chemical release is both real and credible. In fact, according to Justice, domestic terrorists plotted to use a destructive device against a U.S. facility that housed millions of gallons of propane in the late 1990s. In testimony on February 6, 2002, the Director of the Central Intelligence Agency warned of the potential for an attack by al Qaeda on chemical facilities. Some chemical facilities may be at higher risk of a terrorist attack than others because they contain large amounts of toxic chemicals and are located near population centers. Attacks on such facilities could harm a large number of people, with health effects ranging from mild irritation to death, cause large-scale evacuations, and disrupt the local or regional economy. No specific data are available on what the actual effects of successful terrorist attacks on chemical facilities would be. However, RMP facilities must submit to EPA estimates, including the residential population located within the range of a toxic gas cloud produced by a “worst-case” chemical release, called the “vulnerable zone.” According to EPA, 123 chemical facilities located throughout the nation have toxic “worst-case” scenarios where more than one million people could be at risk of exposure to a cloud of toxic gas. About 600 facilities could each potentially threaten between 100,000 and a million people, and about 2,300 facilities could each potentially threaten between 10,000 and 100,000 people within these facilities’ “vulnerable zones.” According to EPA, “worst-case” scenarios do not consider the potential causes of a release or how different causes or other circumstances, such as safety features, could lessen the consequences of a release. Hence, the “worst-case” scenario calculations would likely be overstating the potential consequences. However, under the Clean Air Act, RMP facilities must estimate the effects of a toxic chemical release involving the greatest amount of the toxic chemical held in a single vessel or pipe—not the entire quantity on site. Therefore, for some facilities it is conceivable that an attack where multiple chemical vessels were breached simultaneously could result in an even larger release, potentially affecting a larger population than estimated in the RMP “worst-case” scenarios. Other factors besides location and the quantity of chemicals onsite could also make a facility a more attractive target. For example, a facility that is widely recognizable, located near a historic or iconic symbol, or critical to supporting other infrastructures could be at higher risk. A 2002 Brookings Institution report ranks an attack on toxic chemical facilities behind only biological and atomic attacks in terms of possible fatalities. Currently, no one has comprehensively assessed security across the nation at facilities that house chemicals. According to a 1999 study by the Department of Health and Human Services’ Agency for Toxic Substances and Disease Registry (ATSDR), security at chemical facilities in two communities was fair to very poor. ATSDR observed security vulnerabilities such as freely accessible chemical barge terminals and chemical rail cars parked near residential areas in communities where facilities are located. Following visits to 11 chemical facilities, Justice concluded that some facilities may need to implement more effective security systems and develop alternative means to reduce the potential consequences of a successful attack. The ease with which reporters and environmental activists gained access to chemical tanks and computer centers that control manufacturing processes at chemical facilities in recent years also raises doubts about security effectiveness at some facilities. No federal laws explicitly require all chemical facilities to take security actions to safeguard their facilities against a terrorist attack. Although the federal government requires certain chemical facilities to take security precautions directed to prevent trespassing or theft, these requirements do not cover a wide range of chemical facilities and may do little to actually prevent a terrorist attack. For example, under EPA’s regulations implementing the Resource Conservation and Recovery Act of 1976, facilities that house hazardous waste generally must take certain security actions, such as posting warning signs and using a 24-hour surveillance system or surrounding the active portion of the facility with a barrier and controlled entry gates. However, according to EPA, these requirements would be applicable to only approximately 21 percent of the 15,000 RMP facilities. Regulations implementing the Maritime Transportation Security Act of 2002 also require vessels and port facilities—some of which are chemical facilities—to develop security plans. A number of federal laws also impose safety requirements on chemical facilities, but these requirements do not specifically and directly address security preparedness against terrorism. Several statutes, including the Occupational Safety and Health Act, the Clean Air Act, and the Emergency Planning and Community Right-to-Know Act, impose safety and emergency response requirements on chemical facilities that may incidentally reduce the likelihood and mitigate the consequences of terrorist attacks. All of these requirements could potentially mitigate a terrorist attack in a number of ways. First, because some of these requirements only apply to facilities with more than threshold quantities of certain chemicals, facility owners have an incentive to reduce or eliminate these chemicals, which may make the facility a less attractive target or minimize the impact of an attack. Second, both the Clean Air Act risk management plan provisions and the hazard analyses under the Occupational Safety and Health Act require facility operators to identify the areas of their facilities that are vulnerable to a chemical release. When facilities implement measures to improve the safety of these areas, such as installing sensors and sprinklers, the impact of a terrorist-caused release may be lessened. Third, the emergency response plans increase preparedness for a chemical release—whether intentional or unintentional. While these safety requirements could mitigate the effects of a terrorist attack, they do not impose any security requirements, such as conducting vulnerability assessments and addressing identified problems. While no law explicitly requires facilities to address the threat of terrorism, EPA believes that the Clean Air Act could be interpreted to provide it with authority to address site security from terrorist attacks at chemical facilities. Section 112(r) of the Clean Air Act—added by the Clean Air Act Amendments of 1990—imposes certain requirements on chemical facilities with regard to “accidental releases.” The act defines an accidental release as an unanticipated emission of a regulated substance or other extremely hazardous substance into the air. Arguably, any chemical release caused by a terrorist attack would be unanticipated and thus could be covered under the Clean Air Act. An interpretation of an unanticipated emission as including an emission due to a terrorist attack would provide EPA with authority to require security measures or vulnerability assessments with regard to terrorism. However, EPA has not attempted to use these Clean Air Act provisions. EPA is concerned that such an interpretation would pose significant litigation risk. As we reported in March 2003, there are a number of practical and legal arguments against this interpretation. We find that EPA could reasonably interpret its Clean Air Act authority to cover chemical security, but also agree with the agency that this interpretation could be open to challenges. At the time of our 2003 review, EPA supported passage of legislation to specifically address chemical security. Despite a congressional mandate to do so, the federal government has not conducted the assessments necessary to develop comprehensive information on the chemical industry’s vulnerabilities to terrorist attacks. The Chemical Safety Information, Site Security and Fuels Regulatory Relief Act of 1999 required Justice to review and report on the vulnerability of chemical facilities to terrorist or criminal attack. In May 2002, nearly 2 years after it was due, Justice prepared and submitted an interim report to Congress that described observations on security at 11 chemical manufacturing facilities Justice visited to develop a methodology for assessing vulnerability, but its observations cannot be generalized to the industry as a whole. In its fiscal year 2003 budget, Justice asked for $3 million to conduct chemical plant vulnerability assessments. In the February 2003 conference report on Justice’s appropriation act for fiscal year 2003, Congress directed that $3 million of the funding being transferred to DHS to be used for the chemical plant vulnerability assessments. Justice believes that chemical plant vulnerability assessments are now part of DHS’ mission. Federal agencies have taken preliminary steps to assist the industry in its preparedness efforts. While Justice has not assessed the vulnerability of the chemical industry, it has provided the industry with a tool for individual facilities to use in assessing their vulnerabilities. Justice, together with the Department of Energy’s Sandia National Laboratories, developed a vulnerability assessment methodology for evaluating the vulnerability to terrorist attack of facilities handling chemicals. The methodology helps facilities identify and assess threats, risks, and vulnerabilities and develop recommendations to reduce risk, where appropriate. As the lead federal agency for the operational response to terrorism, Justice’s FBI is responsible for weapons of mass destruction threat assessment and communicating warnings. Finally, agents in the FBI’s local field offices provide information and technical assistance to state and local jurisdictions and to some chemical facilities to bolster their preparedness to respond to terrorist incidents. EPA has also taken some actions. Officials have analyzed the agency’s database of RMP facilities to identify high-risk sites for DHS and Justice’s Federal Bureau of Investigation (FBI). But these facilities are only a portion of the universe of all industrial facilities that house toxic or hazardous chemicals. At the time of our review, EPA had not analyzed non-RMP facilities to determine whether any of those facilities should be considered at high risk for a terrorist attack. EPA has also issued warning alerts to the industry, hosted training classes on vulnerability assessment methodologies, and informally visited about 30 high-risk facilities to learn about and encourage security efforts. Finally, DHS’ Information Analysis and Infrastructure Protection directorate collects information from the U.S. intelligence community, other federal agencies, and the private sector. Working with ACC, an industry association representing chemical manufacturers, DHS also supports the Chemical Sector Information Sharing and Analysis Center to collect and share threat information for the chemical industry. In addition, according to EPA officials, DHS has begun identifying high-risk facilities and conducting site visits at facilities. However, neither EPA nor DHS is currently monitoring the extent to which the industry has implemented security measures. The chemical manufacturing industry has undertaken a number of voluntary initiatives to address security concerns at chemical facilities, including developing security guidelines and tools to assess vulnerabilities, but major challenges remain. All of the industry groups with whom we met have taken actions such as forming security task forces, holding meetings and conferences to share security information with members, and participating in security briefings with federal agencies. In response to the terrorist attacks on September 11, 2001, ACC—whose members own or operate approximately 1,000 RMP facilities —-now requires its members, as a condition of membership, to rank facilities using a screening tool to evaluate its facilities’ risk level. It also requires facilities to identify, assess, and address vulnerabilities at facilities using one of several available vulnerability assessment methodologies. In doing so, ACC member facilities generally follow a multistep process that includes evaluating on-site chemical hazards, existing safety and security features, and the attractiveness of the facility as a terrorist target; using hypothetical threat scenarios to identify how a facility is vulnerable to attack; and identifying security measures that create layers of protection around a facility’s most vulnerable areas to detect, delay, or mitigate the consequences of an attack. ACC established time frames for completing the vulnerability assessment and implementing security measures, based on the facility’s risk ranking. ACC reports that the 120 facilities ranked as the highest risk and 372 facilities ranked as the next highest have completed vulnerability assessments. Most of ACC’s lower-risk facilities are progressing on schedule. ACC generally requires third-party verification that the facility has made the improvements identified in its vulnerability assessment. While these are commendable actions, they do not provide a high level of assurance that chemical facilities have better protected their facilities from terrorist attack. First, ACC does not require third parties to verify that the facility has conducted the vulnerability assessment appropriately or that its actions adequately address security risks. Even though compliance with ACC’s safety and security requirements is a condition of membership, we do not believe that its requirements for facilities to periodically report on compliance with these requirements is an effective enforcement measurement because ACC does not verify implementation or evaluate the adequacy of facility measures. Second, its member facilities comprise only 7 percent of the facilities required to submit risk management plans to EPA, leaving about 14,000 other RMP facilities that may not participate in voluntary security efforts. These facilities include agricultural suppliers, such as fertilizer facilities; petroleum and natural gas facilities; food storage facilities; water treatment facilities; and wastewater treatment facilities, among others. Third, other facilities house chemicals that EPA has identified as hazardous, but in quantities that are below the threshold level required to be categorized as RMP facilities. Other industry groups are also developing security initiatives, but the extent of these efforts varies from issuing security guidance to requiring vulnerability assessments. For example, the American Petroleum Institute, which represents petroleum and natural gas facilities, published security guidelines developed in collaboration with the Department of Energy that are tailored to the differing security needs of industry sectors. Despite industry associations’ efforts to encourage security actions at facilities, the extent of participation in voluntary initiatives is unclear. EPA officials estimate that voluntary initiatives led by industry associations only reach a portion of the 15,000 RMP facilities. Furthermore, EPA officials stated that these voluntary initiatives raise an issue of accountability, since the extent to which industry group members are implementing voluntary initiatives is unknown. The chemical industry faces a number of challenges in preparing facilities against terrorist attacks, including ensuring that facilities obtain adequate information on threats and determining the appropriate security measures given the level of risk. Trade association and industry officials identified a number of concerns about preparing against terrorist attacks. First, industry officials noted that they need better threat information from law enforcement agencies, as well as better coordination among agencies providing threat information. Second, industry officials report that chemical companies face a challenge in achieving cost-effective security solutions, noting that companies must weigh the cost of implementing countermeasures against the perceived reduction in risk. Industry groups with whom we spoke indicated that their member companies face the challenge of effectively allocating limited security resources. Third, facilities face pressure from public interest groups to implement inherently safer practices (referred to in the industry as inherently safer technologies), such as lowering toxic chemical inventories and redesigning sites to reduce risks. Justice has also recognized that reducing the quantity of hazardous material may make facilities less attractive to terrorist attack and reduce the severity of an attack. While industry recognizes the contribution that inherently safer technologies can make to reducing the risk of a terrorist attack, industry officials noted that decisions about inherently safer technologies require thorough analysis and may shift, rather than reduce, risks. Finally, industry officials stated that the industry faces a challenge in engaging all chemical facilities in voluntary security efforts. ACC has made efforts to enlist facilities beyond its membership in voluntary security initiatives. The Synthetic Organic Chemical Manufacturers’ Association (SOCMA) adopted ACC’s security code for its member facilities as a condition of membership. However, the extent to which all partnering companies and associations implement the requirements is unclear. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-3841. Joanna Owusu, Vince Price, Carol Herrnstadt Shulman, and Amy Webbink made key contributions to this statement. This appendix presents information on the processes covered under the Clean Air Act’s requirements for risk management plan (RMP) facilities by industry sector and the residential population surrounding RMP facilities that could be threatened by a “worst-case” accidental chemical release. | The events of September 11, 2001, triggered a national re-examination of the security of thousands of industrial facilities that use or store hazardous chemicals in quantities that could potentially put large numbers of Americans at risk of serious injury or death in the event of a terrorist-caused chemical release. GAO was asked to examine (1) available information on the threats and risks from terrorism faced by U.S. chemical facilities; (2) federal requirements for security preparedness and safety at facilities; (3) actions taken by federal agencies to assess the vulnerability of the industry; and (4) voluntary actions the chemical industry has taken to address security preparedness, and the challenges it faces in protecting its assets and operations. GAO issued a report on this work in March 2003 (GAO-03-439). Chemical facilities may be attractive targets for terrorists intent on causing economic harm and loss of life. Many facilities exist in populated areas where a chemical release could threaten thousands. The Environmental Protection Agency (EPA) reports that 123 chemical plants located throughout the nation could each potentially expose more than a million people if a chemical release occurred. To date, no one has comprehensively assessed the security of chemical facilities. No federal laws explicitly require that chemical facilities assess vulnerabilities or take security actions to safeguard their facilities from attack. However, a number of federal laws impose safety requirements on facilities that may help mitigate the effects of a terrorist-caused chemical release. Although EPA believes that the Clean Air Act could be interpreted to require security at certain chemical facilities, the agency has decided not to attempt to require these actions in light of the litigation risk and importance of an effective response to chemical security. Ultimately, no federal oversight or third-party verification ensures that voluntary industry assessments of vulnerability are adequate and that security vulnerabilities are addressed. Currently, the federal government has not comprehensively assessed the chemical industry's vulnerabilities to terrorist attacks. EPA, the Department of Homeland Security (DHS), and the Department of Justice have taken preliminary steps to assist the industry in its preparedness efforts, but no agency monitors or documents the extent to which chemical facilities have implemented security measures. Consequently, federal, state, and local entities lack comprehensive information on the vulnerabilities facing the industry. To its credit, the chemical manufacturing industry, led by its industry associations, has undertaken a number of voluntary initiatives to address security at facilities. For example, the American Chemistry Council, whose members own or operate approximately 1,000, or 7 percent, of the facilities subject to Clean Air Act risk management plan provisions, requires its members to conduct vulnerability assessments and implement security improvements. The industry faces a number of challenges in preparing facilities against attacks, including ensuring that all chemical facilities address security concerns. Despite the industry's voluntary efforts, the extent of security preparedness at U.S. chemical facilities is unknown. In October 2002 both the Secretary of Homeland Security and the Administrator of EPA stated that voluntary efforts alone are not sufficient to assure the public of the industry's preparedness. Legislation is now pending that would mandate chemical facilities to take security steps to protect against the risk of a terrorist attack. |
The United Nations comprises six core bodies: the General Assembly, the U.N. Secretariat, the Security Council, the Economic and Social Council, the Trusteeship Council, and the International Court of Justice. In addition, the U.N. system has 12 funds and programs and 14 specialized agencies. Article 101 of the U.N. Charter calls for staff to be recruited on the basis of “the highest standards of efficiency, competence, and integrity” as well as from “as wide a geographical basis as possible.” Thus, to employ the nationals of U.N. members in an equitable manner, the Secretariat and several associated U.N. organizations have quantitative formulas that establish targets for equitable geographical representation. Geographic representation targets do not apply to all staff positions in the organizations that have established them. These organizations set aside a certain number of positions that are subject to geographic representation from among the professional and high-level positions. There also are some professional positions that are typically exempt from being counted geographically, including linguist and peacekeeper positions and positions of 1 year or less in duration. For example, in 2000, the U.N. Secretariat had a total of 14,312 staff—5,854 of whom were in professional positions. Of those professional positions, 2,389 were subject to geographic representation. Table 1 provides information for 2000 on the total number of staff in the U.N. system compared with the total number of American staff. U.N. organizations use a standard pay scale known as the U.N. Common System base salary scale to compensate their staff. (See app. VII for the salary scales for U.N. staff in professional, senior-level, and policymaking positions.) However, each U.N. organization has its own personnel policies, procedures, and staff rules. Table 2 shows the U.N. grade scale and the approximate U.S. government equivalent as determined by the International Civil Service Commission. The State Department is the U.S. agency primarily responsible for leading U.S. efforts toward achieving equitable U.S. representation in employment in U.N. organizations. In doing so, State works in cooperation with at least 17 federal agencies that have interests in specific U.N. organizations. A 1970 executive order assigns the U.S. Secretary of State responsibility for leading and coordinating the federal government’s efforts to increase and improve U.S. participation in international organizations through transfers and details of federal employees. The order further calls for each agency in the executive branch to cooperate “to the maximum extent feasible” to promote details and transfers through measures such as (1) notifying well- qualified agency employees of vacancies in international organizations and (2) providing international organizations with detailed assessments of the qualifications of employees being considered for specific positions. In addition, under the 1991 U.S. law, the Secretary of State is required to report to the Congress on whether each international organization with a geographic distribution formula is making “good faith efforts” to increase U.S. staff as well as meeting its own geographic targets. State’s Bureau of International Organization Affairs is responsible for implementing these requirements. While State is responsible for promoting and seeking to increase U.S. representation in the U.N. organizations, the U.N. entities themselves are ultimately responsible for achieving equitable representation. Since 1992, some of the U.N. organizations in our study have made gains in employing Americans, but most of the organizations we reviewed continue to fall short of their own targets for employing U.S. citizens. Moreover, compared with relative financial contributions, American representation in senior-level and policymaking positions is below several major contributors in a number of U.N. organizations. Of the six U.N. organizations in our study with geographic employment targets, only the U.N. Secretariat employed Americans in sufficient numbers to consistently satisfy its goal of equitable representation of Americans from the period of 1992 to 2000. These targets and the methodology for calculating them are different for each U.N. organization and are based on factors such as the level of the country’s U.N. contribution and population. UNDP does not have geographical representation targets for member states; however, representation of Americans at UNDP is close to the percentage of U.S. contributions, and thus it appears that the United States is equitably represented at UNDP. Although several U.N. organizations have established overall geographical representation targets, none of the U.N. organizations has developed numerical targets for senior-level and policymaking positions among the nationals of its member states. Furthermore, of the four organizations in our analysis with formal targets for overall geographic representation, only the Secretariat employed Americans in senior-level and policymaking positions at levels commensurate with those of selected major contributors relative to their contribution level. The charters and governing documents of most organizations in the U.N. system articulate the principle of equity, which requires that due regard be given to the importance of employing staff members from as wide a geographical basis as possible, and many U.N. organizations have developed formal or informal targets to achieve this objective. In the Secretariat, FAO, ILO, and WHO, where members pay regular assessments and may make additional voluntary contributions, a formal target or range is established to calculate geographic targets for employing the nationals of each member state. These targets are expressed in terms of a range of positions to provide organizations with some flexibility in meeting these targets, but the midpoint of the range is generally viewed as the ideal level of representation. A member country is regarded as “underrepresented” when it falls below the minimum range and “overrepresented” when it exceeds the maximum range. The remaining three organizations in our study—UNDP, UNHCR, and WFP—generally follow the principle of equitable geographic representation but have not adopted formal targets that are based on nationality because their funding comes from voluntary contributions rather than annual assessments. However, UNHCR and WFP have established informal targets for representation of Americans since the United States is the largest contributor to both organizations. UNDP officials, on the other hand, said that while the program does not have targets for individual countries, it seeks to achieve a “reasonable geographic balance” of international staff between donors and program countries as well as “equity within contribution levels.” The organizations in our analysis with formal geographic targets for individual countries have similar approaches to determining which positions are subject to these targets. For example, these organizations exclude general service positions (e.g., clerical positions), appointments of less than a year, and language-related positions (such as translators and interpreters). In addition, all organizations except WHO disregard positions that are financed from voluntary contributions in the formula for calculating equitable geographic distribution targets. Unlike the Secretariat and the specialized agencies, UNHCR and WFP do not set aside positions subject to geographic distribution and apply their informal targets to all professional positions. Figure 1 provides a summary of the targets for equitable U.S. representation established by the U.N. organizations that we covered in our study, expressed both in numerical and in percentage terms. The figure also lists the factors used by these organizations to determine their geographical representation targets. Member contributions, population size, and membership status are three factors that are used to determine equitable representation targets for U.N. organizations’ member states. However, not all of these factors are used by each of the organizations in our analysis. For example, ILO uses the contribution and membership factors to calculate its geographic targets, while FAO uses only the contribution factor. FAO also differs from the other organizations in that the level of position that a country’s citizens hold, in addition to the number of positions, is considered in determining that country’s representation status. FAO operates on the principle that a position low on the hierarchical scale ought not to count as much as one at the top of the scale. Thus, FAO uses a position-weighting system in which points are attributed to a position’s grade level, with a country’s quota expressed as a number of points, not positions. Appendix I provides more detailed information on the different methods used by the Secretariat and the three specialized agencies to calculate their formal targets for the equitable representation of member countries. Although some of the U.N. organizations have made gains toward employing Americans, most of the U.N. organizations in our study continue to fall short of their own targets for employing Americans. Almost a decade after the Congress first required the State Department to report on American representation in the U.N. system, the United States was equitably represented in only one of the six U.N. organizations in our study with either formal or informal targets—the U.N. Secretariat. Americans were underrepresented in the three specialized agencies—FAO, ILO, and WHO—and in two of the U.N. funds and programs—UNHCR and WFP. While UNDP does not have a target for U.S. representation, the level of Americans in UNDP is close to the percentage level of U.S. contributions. The summary in table 3 provides the overall representation status of Americans in the U.N. organizations in our study for 2000. Appendix II provides more detailed information on the trends in U.S. representation for each of the organizations in our study since 1992. We compared the relative financial contributions of the United States and the representation levels of Americans in senior and policymaking positions with those of four major contributors in the four U.N. organizations with geographic targets. We found that only the U.N. Secretariat employed Americans in senior-level and policymaking positions at levels commensurate with the average of selected major contributors relative to their contribution level. (See table 4.) While some U.N. organizations have created overall targets for equitable representation of member countries, they do not set quantitative targets for distributing positions by grade level—including senior-level and policymaking positions—among member states. Both U.S. and U.N. officials indicated that determining equitable distribution among member states for these high-level positions can be very subjective. There are no standard recruitment procedures for these positions nor is there a formal policy for rotating policymaking positions among member states. Traditionally, these policymaking appointments are made by the Secretary-General or the respective U.N. agency heads. The U.N. General Assembly in several resolutions has emphasized that “no post shall be considered the exclusive preserve of any member state or group of states.” The summary in table 4 shows the 3-year average (1998-2000) for the U.S. assessment to the four U.N. organizations and the representation of Americans in senior-level and policymaking positions, and a calculated comparative representation level if U.S. representation in senior-level and policymaking positions were proportionate to the average for major contributors given their level of contributions. In table 4, we multiplied the four-country average representation by the U.S. assessment to derive a hypothetical comparative representation level, under the assumption that U.S. representation in senior-level and policymaking positions was proportionate to the average of these four major contributors. (This analysis is not meant to suggest criteria or a methodology for determining equitable representation in these positions. It is for comparison purposes only, to show U.S. representation in senior and policymaking positions relative to the average of four major contributors.) For example, if the United States, given its 25-percent assessment at FAO, were to have representation proportionate to the 0.76 average ratio for the four selected countries, then its representation would be 19.1 percent. For details on the average ratio of the four contributors for each U.N. organization, refer to appendix II. As shown in table 4, only the U.N. Secretariat employs Americans in senior-level and policymaking positions commensurate to the average representation levels for the four major U.N. contributors we included in this study. While acknowledging that U.S. representation may appear to be less than ideal, several U.S. officials told us that U.S. influence in certain organizations is not lacking given its voice and leadership in the governing bodies and the size of U.S. contributions. Nonetheless, these officials recognize the importance of placing highly qualified Americans in high- level positions, particularly in areas considered critical to U.S. interests. While several U.N. organizations in our study are undertaking various human resource management initiatives, none of them has a long-range workforce planning strategy nor a formal recruiting and hiring action plan for achieving equitable representation within a specified time frame. However, several U.N. organizations did tailor some approaches to address underrepresentation of member countries, such as targeting entry-level programs to nationals from underrepresented countries. U.N. officials and documents emphasized that the most important criterion for appointing staff is merit in order to ensure the highest standards of efficiency and competence—with due consideration to recruiting staff from as wide a geographical basis as possible. But in selecting staff, nationality is weighed against other competing factors because U.N. officials are also asked to give priority consideration to gender. Although some organizations have specific guidelines that provide a preference for hiring qualified nationals from unrepresented and underrepresented countries, our analysis of actual hiring statistics shows that several U.N. agencies hired more nationals from equitably represented and overrepresented countries than those from unrepresented and underrepresented countries. As part of U.N.-wide reform, several U.N. organizations have a number of human resource management initiatives under way—including measures that begin to address some workforce planning issues, hold managers accountable for staff selection decisions, and provide placement and promotion opportunities for staff that are merit-based—and give due regard to geographical representation and gender balance considerations. For example, in 1997, the U.N. Secretary-General proposed a reform program that included, as one of its core elements, developing a performance-based human capital system. In May 2000, we testified that the United Nations had made some progress in such areas as implementing a merit-based appraisal system, although overall reform objectives had not yet been achieved. According to human resources directors with whom we met, addressing these broad human capital issues—including competitive compensation packages, aging of the workforce, spousal employment, and work-life balance—could in the long run help to attract and retain Americans for U.N. employment in greater numbers. (For a discussion of some of these human capital issues and related factors that may affect recruiting Americans for U.N. organizations, see app. VI.) Although some human resource management initiatives are under way, U.N. organizations have not yet developed long-range workforce planning strategies to guide recruitment and hiring efforts, nor have U.N. organizations formulated specific action plans and time frames for achieving equitable representation for underrepresented countries, including in some cases the United States. A hallmark of high-performing organizations is that human resource policies, procedures, and programs should be directly linked to achieving organizational objectives. Specifically, it is important that such organizations have a formal recruiting and hiring action plan targeted to fill short- and long-term human capital needs identified through workforce planning efforts. The U.N. organizations we examined had not systematically collected essential human capital data that could help identify factors contributing to difficulties in achieving equitable representation. For example, we asked U.N. officials about exit interviews of and feedback from American staff leaving the U.N. system as well as reasons why Americans had declined offers of U.N. employment. However, we were told that these organizations do not collect such information, which could help tailor appropriate strategies for recruiting and retaining Americans. The Secretariat and WFP recently have begun collecting this information but have not yet reported their findings. Each U.N. organization has its own processes and procedures for recruiting, assessing, and selecting candidates for employment, and many of their efforts focus on entry-level recruitment. In addition, these entry- level recruiting programs—including the U.N. Secretariat’s national competitive recruitment examinations and the other U.N. entities’ young professional programs—specifically target underrepresented member countries. Another program for junior professional officers is funded by donor countries and used as a recruitment strategy, but this program does not focus specifically on nationals from underrepresented member states. To address concerns that the United States was nearing underrepresentation in the Secretariat due to anticipated retirements, the national competitive recruitment exam, which is a prerequisite for P1 and P2 positions, was held in New York in February 2001. However, the State Department and the U.S. mission to the United Nations in New York did not widely publicize this examination. Only 40 American applicants took the examination—according to U.N. officials, this turnout was disappointingly low compared with the last examination in 1992 when 333 American applicants took the test in 3 major U.S. cities. Twenty-one of these applicants from the 1992 examination were eventually employed. A U.N. official told us that the U.N. Secretariat relies on the member states to publicize the exam, which, with the exception of the February exam, is usually conducted in capital cities. According to the U.N. official, it was not feasible to conduct the most recent exam at more U.S. sites because of resource constraints. Notice of the 2001 examination was posted on the U.N. Web site and advertised in an August 2000 issue of The Economist and in two September 2000 issues of the International Career Employment Weekly, which is a publication offering free advertising that was used by the State Department. According to a U.S. mission officer in New York, another examination will be scheduled for the United States in early 2002. Over the past few years, several U.N. organizations have developed entry- level programs and have used these programs to hire citizens from underrepresented countries. In 2000, WFP initiated a New Graduates Program to give young graduates an opportunity to join the U.N. system. Exclusively targeted at underrepresented countries, 3 of the 10 graduates selected in 2000 were from the United States. Similarly, ILO launched a Young Professionals Career Entrance Program in January 2001 to identify and hire young, highly qualified persons with the potential to become future managers within the organization. Although these positions are open to nationals of all member states, the program offers a vehicle for hiring citizens from underrepresented countries, who we were told were given preference. Three of the 10 positions filled earlier this year went to Americans. In addition, in March 2001, the first 20 recruits started training under UNDP’s Leadership Development Program, which, UNDP officials told us, takes demographic balance as well as technical competence into account in screening applicants. With assistance from their liaison offices in Washington, D.C., these organizations have organized some recruitment missions on U.S. college and university campuses. ILO, in particular, made a concerted effort to recruit new graduates, conducting five recruiting missions during the past year to visit several American colleges and universities, including Harvard, Massachusetts Institute of Technology, Cornell, Tufts, Columbia, and Stanford, among others. For many years, U.N. organizations have operated junior professional officers programs that were funded by donor countries for training young professionals who serve, usually for 2 or 3 years, in various areas. Countries that sponsor these junior professional officers pay their full costs, which range from $70,000 to $150,000 per year depending on an officer’s grade level, duty station, and marital status. At the end of their terms, these officers are often recruited as regular international staff, and donor countries have used the program as a way to promote their nationals for entry-level positions, although officers who complete the program are not guaranteed U.N. employment. As shown in table 5, the U.S. government sponsors a small number of junior professional officers. Since 1984, State’s Bureau of Population, Refugees, and Migration has sponsored 49 junior officers at UNHCR at an average cost of $110,000 per officer annually. In supporting the junior professional officers program at UNHCR, State seeks to assist U.N. organizations in implementing programs of priority interest to the United States while increasing the pool of American candidates for recruitment in U.N. organizations. According to State officials, about half of the junior officers that State has sponsored have been hired by UNHCR. Of the current American employees at UNHCR, 17 are former U.S. junior professional officers. Over the years, the U.S. Department of Agriculture has also supported a limited number of junior professional officers in the Rome-based international food and agricultural agencies at an average cost of $90,000 to $100,000 per year. While U.N. officials and documents emphasize that the most important criterion for filling positions is merit, U.N. organizations’ policies generally call for giving additional consideration to hiring qualified nationals from unrepresented or underrepresented member states. A resolution on human resources management adopted by the General Assembly in 1999 requests the Secretary-General to ensure that “among equally qualified candidates, preference is given to candidates from underrepresented member states.” Nevertheless, U.N. organizations generally weigh nationality against other competing factors in appointing staff in accordance with policies that aim to achieve gender balance and to recruit from qualified staff already within the U.N. system. Following the 1995 Fourth World Conference on Women, the U.N. General Assembly requested a 50/50 gender balance by the year 2000, a target date the United Nations now says will not be met until 2012. (Specific gender balance goals adopted by various U.N. entities are discussed in app. VI.) Although the principle of merit as the overriding criterion is clearly established, the priority placed on secondary factors, such as nationality and gender, is not as clear. For instance, while the Secretariat’s hierarchy places nationality second and gender third, ILO gives nationality and gender equal consideration, while FAO has no established hierarchy after merit. A 1998 report of the International Civil Service Commission acknowledged that, in some cases, U.N. organizations have to balance the priorities of gender and geography. Table 6 shows that several U.N. agencies in our study continue to hire more nationals from equitably represented and overrepresented countries than from unrepresented and underrepresented countries. Although U.N. organizations “encourage” hiring managers to recruit candidates from unrepresented and underrepresented countries, they do not generally restrict eligibility of candidates on the basis of nationality. A major variation is ILO’s practice—that is, competitions are usually open only to nationals of unrepresented and underrepresented countries, which are listed in each vacancy announcement. Even so, according to an ILO official, when it is difficult to find suitable candidates from one of the unrepresented or underrepresented countries, applications from nationals of equitably represented or overrepresented countries may be considered. In the case of WHO, its executive board adopted a resolution in 1997 to maintain a recruitment target of 60 percent for nationals from unrepresented and underrepresented countries and those that are considered equitably represented but fall below the midpoint of the range while limiting recruitment from overrepresented countries to 20 percent of all new appointments. Nonetheless, WHO officials told us that the organization does not restrict eligibility of applicants on the basis of nationality. Although human resources directors indicated that they give priority consideration to hiring qualified nationals from unrepresented and underrepresented countries, our analysis of the statistics they provided showed that the number of nationals hired from overrepresented countries remains relatively high. As of 2000, FAO had 85 overrepresented countries, up from 72 in 1998; ILO had 45 overrepresented countries, down from 49 in 1998; and WHO had 22 overrepresented countries, compared with 12 in 1998. For a list of the top five countries whose nationals are most overrepresented at these U.N. entities, see appendix III. We asked human resources directors whether U.N. organizations face a shortage of qualified American applicants interested in U.N. employment. On the basis of the data they provided, in general this does not appear to be the case. For instance, at the U.N. Secretariat, nearly 30,000 applications were received for 649 positions that were announced in 2000. Of those applications, more than 2,000 were Americans—of whom 410 were listed among the best qualified candidates. Six Americans were eventually hired. FAO reported receiving 11,670 applications for 130 vacancy announcements for professional positions it issued in 2000. More than 8,000 of the applications had been evaluated as of March 2001, of which 1,279 were deemed qualified—115 of them Americans. Of these, seven Americans were hired. However, FAO officials noted, recent statistics show that while the number of applications from Americans steadily increased between 1997 and 1999, there was a significant decline in 2000. FAO has not yet conducted a study examining the reasons for this decline. The State Department has written policies stating that equitable representation of Americans employed by U.N. organizations is a “high priority” and has mechanisms in place to support American employment in these bodies. Nevertheless, State’s level of effort in achieving this objective does not reflect the stated priority. Despite only minimal progress in improving representation of Americans in the U.N. system, State has reduced resources aimed at recruitment of qualified professionals and has curtailed other related activities without assessing how these reductions will affect recruitment. State’s reduction in resources resulted in its scaling back activities to support recruitment for professional positions—the pipeline for senior-level positions. Although State’s policies seek an equitable share of high-level positions for Americans, and much of the Department’s recruitment efforts are aimed toward this goal, State has not developed guidelines that define “equitable” or a mechanism for assessing progress in this area. Moreover, State also has not developed recruiting and hiring strategies or action plans to support U.N. employment of Americans. In addition, while State and other U.S. government officials with whom we spoke view promotion of Americans for U.N. employment as a collaborative effort between the State Department and other federal agencies, there has been little interagency coordination in this area. Efforts by other U.S. government agencies—such as providing federal employees with opportunities for international assignment—are not systematically organized or coordinated with State to provide assurances that the United States employs the best strategies to place Americans in the U.N. system. In a July 1999 cable to the U.S. missions to U.N. agencies, the State Department articulated the U.S. government’s goal to achieve equitable representation of Americans in all international organizations, stating that participation of Americans on the staffs of these organizations is a “high priority.” The cable established specific guidelines for supporting individuals and promoting the hiring of American citizens for senior-level and professional positions. This issue was again addressed in the October 2000 Government Performance and Results Act performance plan for State’s Bureau of International Organization Affairs. The plan states that the Bureau will seek to increase the number/percentage of Americans employed in international organizations, especially those in which the United States is underrepresented, including FAO, ILO, UNHCR, WFP, and WHO. The State Department has a variety of mechanisms in place to carry out its objectives of recruiting Americans for positions in the U.N. system. The primary mechanism is the Bureau of International Organization Affairs’ U.N. Employment Information and Assistance Unit, which helps qualified candidates from both the private and public sectors find employment in the U.N. system. In addition, high-ranking U.S. officials (such as the Secretary of State, ambassadors, and assistant secretaries) and U.N. officials have discussed American candidates for key U.N. positions and U.S. underrepresentation. The U.N. Employment Information and Assistance Unit relies on wide-ranging as well as targeted distribution of employment information as the primary vehicle for increasing recruitment. Figure 2 lists the main activities that the unit conducts to promote Americans for positions in the U.N. system. Once a year, State’s U.N. Employment Information and Assistance Unit, in collaboration with other federal agencies and the U.S. missions, compiles lists of key senior-level and policymaking U.N. positions targeted for recruitment. However, several State and other U.S. officials whose duties include recruiting American citizens for U.N. employment told us that they were not aware that such lists existed. Initiated in 1998, the lists identify positions by three rankings: (1) top priority for recruitment because they are critical to U.S. interests, (2) important because the functions of the position could impact U.S. interests, and (3) less significant. The lists include, where applicable, the expiration date of the incumbent’s position so that U.S. agencies can be notified when positions are expected to become vacant in order to find the most qualified candidates. U.S. missions to U.N. agencies, such as those we visited in Geneva, Rome, and New York, have a designated officer as the focal point for U.N. personnel and other management issues. These mission officials are the U.S. representatives on the ground with day-to-day contact with U.N. officials. According to these designated mission officers, they spend about 10 percent of their time on U.N. employment matters, including responding to inquiries and requests for support from American citizens applying for U.N. employment. They also help identify positions that are vacant or are expected to become vacant, which could be of particular interest to the United States. Although State’s guidelines urge U.S. missions to maintain active communications with U.S. citizens employed by international organizations, American citizens at every U.N. agency we visited expressed a desire to have more interaction with State staff at the U.S. missions in New York, Geneva, and Rome. Without compromising their status as international civil servants, American employees believe that they can provide U.S. officials with information and insights on substantive policy and management issues of interest to the United States. For instance, in Geneva, American employees at ILO cited a meeting held last year with a visiting high-level official from the U.S. Department of Labor that provided a forum for exchanging views on policy matters and issues of common concern, such as U.S. government and American employees’ views on various management reforms. Many of the American employees in the U.N. agencies we visited also expressed uncertainty about the type of support they can expect from the U.S. mission. Even though Americans remain underrepresented in many U.N. organizations, State has reduced its level of effort overall to recruit Americans in the U.N. system without analyzing and assessing the potential impact these curtailed and/or reduced functions could have had on recruitment. These changes included, among other things, (1) decreasing the number of staff resources assigned to carry out recruitment efforts, which required State to focus resources to support primarily senior-level and policymaking positions rather than all positions; (2) reducing the frequency of scheduled visits with U.N. human resources directors; and (3) not updating an electronic roster from which candidates are recommended to U.N. organizations for employment. In 1992, the State Department had five professionals assigned to the U.N. Employment Information and Assistance Unit, which is the unit responsible for recruitment and monitoring of American employment in numerous international organizations. Since then, State has reduced the number of staff assigned to this unit. In 1993, staff were reduced to four professionals, and 2 years later staff were further reduced to three professionals. Since 2000, two staff have been carrying out the functions assigned to the unit. In 1995, State ended its practice of supporting Americans for U.N. employment at professional levels and instead focused on senior-level and policymaking positions, which include D1 and above positions. While State’s policies call for obtaining an equitable share of high-level positions for Americans, and much of its recruitment efforts are aimed toward this goal, the Department has not developed guidelines that define “equitable” nor does it have a mechanism for assessing progress in this area. The redirection of State’s efforts to focus only on high-level positions may have the effect of reducing the pipeline of Americans in the lower ranks who could advance to high-level positions through internal promotions, which our analysis showed was the primary source for senior-level positions at U.N. organizations. For example, at WFP, out of 37 senior positions filled from 1998 to 2000, 31 (83 percent) were internal promotions, while only 6 were recruited externally. Seven of the internal promotions and two of the external hires were Americans. This demonstrates the importance of maintaining an adequate “pipeline” of qualified entry- and mid-level Americans to be considered for senior positions. Agriculture officials said that a long-term 10- to 15-year strategy aimed at entry-level recruitment to create a pool of qualified American candidates within the international organizations may be necessary in order to improve representation levels. With support from the U.S. missions, the U.N. Employment Information and Assistance Unit is State’s primary liaison with the human resources offices of the different U.N. organizations. But due to funding constraints, the director of the unit had not met with the human resources directors of U.N. organizations in the last 3 years. Human resources directors at the U.N. agencies told us that a planning session once a year with a U.S. government representative would be very useful, especially with the large number of retirements expected in the next several years. Several human resources directors told us that due to the age profiles of their staffs, they need to formulate and implement plans to address this and other workforce planning issues. For example, the U.N. Secretariat projects that up to one- fourth of the 400 staff retiring each year for the next 5 years are in positions subject to geographic distribution. Moreover, the number of Americans who left the Secretariat from 1997 to 2000 exceeded the number of Americans hired, resulting in a net loss of 50 American staff over the last 4 years. In its strategic framework for 2000 to 2015, FAO projected a staff turnover of 70 percent in the next 15 years. In light of this expected turnover, FAO’s medium-term plan for 2002 to 2007 called for effective workforce planning and recruitment efforts to ensure that skills and competencies of staff who are retiring are not lost. The U.N. Employment Information and Assistance Unit has maintained a roster of highly qualified American citizens who wish to be considered for senior positions but, according to State officials, updating the roster was put on hold earlier this year due to resource constraints. More than 2,000 names were on the roster before 1995 when State fielded candidates for both professional and senior-level positions. In 1991, when the roster was actively used, State submitted approximately 600 applications for 293 professional positions throughout the United Nations. However, in 1995 State decided to stop maintaining a central roster of candidates for most professional or technical positions and to stop screening, nominating, and offering support to American candidates for these positions. About 300 names for senior positions are currently registered on the roster. Over the past 3 years, State has used the roster to submit slates of 3 or 4 candidates for about 40 senior positions. The State Department has no recruiting strategy or action plan to guide its efforts to support Americans for employment in the United Nations and against which to measure its performance. The Bureau of International Organization Affairs’ performance plan includes the employment of American citizens in U.N. organizations as an important objective, but this objective is not included in State’s overall annual performance report prepared in response to the Government Performance and Results Act. The act requires agencies to pursue performance-based management, including strategic planning and goal-setting, that is results-oriented and measures performance. State does report annually to the Congress on efforts by international organizations to improve U.S. representation levels, but the report is limited to actions taken by the U.N. organizations and does not include the Department’s own efforts. The annual report includes information on those agencies that have established geographic distribution formulas, as well as a few other organizations that are of particular interest to the United States due to the size of U.S. contributions and level of representation. State does not officially provide the report to the heads of U.N. agencies to press those organizations with persistent U.S. underrepresentation to respond with appropriate targeted strategies to improve levels of U.S. representation. A State official told us that while some State and U.S. mission officials use the Department’s annual report to the Congress in discussions with U.N. agencies about underrepresentation, this practice does not occur consistently. Although State officials acknowledge that promoting U.S. representation at U.N. and other international organizations must be a collaborative effort between State and other federal agencies, coordination of U.S. governmentwide efforts over the last several years has largely been done on an informal, ad hoc basis. In a special report to State’s Bureau of International Organization Affairs in August 1992, State’s Office of Inspector General found a lack of understanding among U.S. agencies on what they can do to help with the recruitment effort. Accordingly, the Inspector General recommended that the Bureau develop memorandums of understanding between State and other U.S. government agencies to facilitate better cooperation, support, and effectiveness in recruitment. In its November 1994 response to the Inspector General’s recommendations, the Bureau stated that this was an excellent recommendation and began to work with the various federal agencies to develop memorandums of understanding with at least 13 of them. The memorandums were to have been completed by the end of 1994. However, when we asked State officials about them, they could not provide evidence that any memorandums were in place. We found that U.S. governmentwide efforts to recruit and place Americans in specific areas within the U.N. system that are of particular importance to U.S. interests are done primarily on an ad hoc, case-by-case basis, such as when a key post critical to the United States needs to be filled. It appears that formal mechanisms to organize and coordinate U.S. government activities in the past have not worked without consistent high-level management attention and support. For instance, an Inter-agency Contact Group of working-level agency staff has not been active for many years. Instead, various U.S. government agencies, particularly those that deal regularly with international organizations, have staff assigned to serve as the liaison for international recruitment activities. These include, among others, staff from the Foreign Agricultural Service within Agriculture; the Bureau of International Labor Affairs within Labor; and the Office of International and Refugee Health within the U.S. Department of Health and Human Services (HHS). However, related activities within each of the U.S. agencies are often decentralized to several offices and units that work with international organizations on specific areas. Furthermore, staff assigned as liaisons typically have other duties and responsibilities, and they told us that they are unable to devote the attention necessary to address U.N. employment matters in a comprehensive, systematic way because of resource constraints and other limitations within their own departments. Nonetheless, on a specific area—in this case, food and agricultural issues— Agriculture has recently taken the initiative to reconstitute an informal, interagency international recruitment network, primarily for information- sharing purposes and to help identify qualified candidates for key vacancies. Executive Order 11552 of August 24, 1970, calls on executive branch agencies to assist in and encourage details and transfers of federal employees to international organizations to the maximum extent possible and with due regard to the agencies’ manpower requirements. According to U.S. agency officials, placing federal employees on details and transfers to international organizations can be an effective way to provide significant input on policy and technical issues of interest to the United States. In fiscal year 2000, 17 federal agencies had 165 employees on detail or transferred to the United Nations and other international organizations, according to State Department records. Of this total, the agencies with the largest number of federal employees assigned to international organizations were: HHS, 59 employees; the State Department, 20; the Departments of Transportation and the Treasury, 18 each; Agriculture, 15; the Department of Energy, 6; and Labor, 4. An official from HHS attributed that Department’s level of participation to the fact that the agency considers its contributions to international organizations an integral part of the Department’s mission to combat diseases such as polio and Acquired Immune Deficiency Syndrome. According to this official, public health specialists in HHS vigorously vie for opportunities to gain international work experience, which they view to be not only meaningful and important but also career-building. However, several Americans we interviewed, particularly those from other federal agencies, suggested that executive agencies can do more to promote opportunities and provide incentives for work in international organizations and to help employees apply for these jobs. In 2000, the representation levels of other major contributors to the United Nations varied in the four organizations in our study that had formal geographic targets—the Secretariat, FAO, ILO, and WHO. The five countries for which we identified representation levels were Canada, France, Germany, Japan, and the United Kingdom. Japan, which is the second largest contributor to the United Nations, was significantly underrepresented in each of the four organizations. Germany, the third largest contributor, was underrepresented in three organizations and equitably represented in one organization. Canada, France, and the United Kingdom were either equitably represented or overrepresented in the four organizations. For more information on the representation trends for these selected countries, see appendix IV. Japan and Germany, which have higher representation targets because of their higher contributions, devote more resources toward achieving equitable representation than France, the United Kingdom, and Canada, which are within equitable levels or are overrepresented. For example, Germany has established formal mechanisms, including a high-level Office of the Coordinator for International Personnel, to organize and coordinate efforts to place its nationals in key positions within the U.N. system and other international organizations. Japan—which has historically been significantly underrepresented—has full-time staff at its mission in Geneva dedicated to promoting U.N. employment of Japanese nationals. The United States, like Japan and Germany, is generally underrepresented but is not as active as these two countries in promoting its citizens for U.N. employment. As the largest contributor to the United Nations, the United States has higher representation targets to fill than Japan or Germany, but it takes a less active approach in assisting its citizens to gain U.N. employment. Ultimately, responsibility for hiring decisions and achieving equitable representation rests with U.N. officials. However, it does not appear that given the slow progress in improving U.S. representation over nearly 10 years, U.S. representation levels will significantly improve without changes in the United Nations’ and United States’ actions. For a more detailed presentation of selected member states’ efforts to promote U.N. employment for their nationals, see appendix V. The United Nations and its affiliated entities face the dual challenge of attracting and retaining staff who meet the highest standards of efficiency, competence, and integrity while maintaining the international character of the organizations by ensuring equitable geographic balance in the workforce. Nevertheless, U.N. organizations have made slow progress in addressing U.S. concerns about underrepresentation, and except for the U.N. Secretariat in New York, the organizations with representation targets that we studied have not achieved equitable employment of Americans since 1992. Although the U.N. organizations are ultimately responsible for achieving fair geographic balance among its member countries, the State Department, in coordination with other U.S. agencies, plays a role in ensuring that the United States is equitably represented. U.N. organizations have not fully developed long-range workforce planning strategies, and neither State nor the U.N. agencies have formal recruiting and hiring action plans to improve U.S. representation in the U.N. system. Without these measures, the United States’ ability to even maintain the number of Americans employed in the United Nations could be hampered. Regular planning sessions with human resources directors could help State identify areas in which to focus its recruitment of American candidates and ensure that U.S. levels of representation do not decline as a result of American retirements without corresponding increases in new hires. High-level State Department attention and intervention is needed to elevate the importance of this matter to the United States and to reemphasize the seriousness of this concern to State, U.S., and U.N. officials. Finally, sustained efforts and actions by State to facilitate employment of Americans for professional- level positions, as well as senior-level and policymaking positions, will be required to ensure progress toward the goal of equitable U.S. representation. Because equitable representation of Americans employed at the U.N. organizations has been determined to be important to U.S. interests, we recommend that the Secretary of State: develop, with other U.S. government agencies, a comprehensive U.S. strategy for achieving equitable representation of Americans in U.N. employment that includes efforts to improve interagency coordination and specifies performance goals, time frames, and resource requirements, and incorporate these goals and progress achieving them into State’s Annual Performance Plan and Annual Performance Report, respectively; work with human resources directors of U.N. organizations in which Americans are underrepresented or are close to being underrepresented, particularly in light of anticipated retirements in the next several years, to help ensure that long-range workforce planning efforts include measures targeted to achieve equitable U.S. representation within a specified time frame; develop guidelines that define State’s goal of securing an equitable share of senior-level and policymaking posts, and use these guidelines to assess whether the United States is equitably represented in high- ranking positions in U.N. organizations; and provide heads of U.N. agencies, for their appropriate attention and action, with copies of State’s annual report to the Congress on efforts by the United Nations and other international organizations to employ Americans. In commenting on a draft of this report, State generally agreed with our findings and conclusions, and agreed with most of our recommendations. However, State disagreed that it should develop guidelines that define its goal for obtaining an equitable share of high-level positions for Americans and use these guidelines to help assess whether the United States is equitably represented. State said it should not develop separate guidelines for defining its goal of obtaining an equitable share of Americans in senior- level and policymaking positions but rather that it should focus on equitable representation at all levels. While we agree that State should be concerned about achieving equitable employment for Americans at all levels in U.N. organizations, we believe it is important to emphasize achieving an equitable share of senior-level and policymaking positions. We further believe that without guidelines defining equitable share, State lacks a mechanism for assessing whether its top recruitment priority— equitable representation of Americans in high-level positions—is being achieved. In addition, the Department of State’s Bureau of International Organization Affairs and officials from the Departments of Agriculture, Health and Human Services, and Labor who deal with international recruitment provided technical comments on this report, which we incorporated as appropriate. U.N. human resources offices also reviewed a draft of this report for technical accuracy. (State’s written comments, along with our evaluation of them, are in app. IX.) To analyze trends in the overall representation levels of Americans and nationals of other selected countries and Americans in senior-level and policymaking U.N. positions, we performed various statistical analyses of personnel data provided by the State Department and the U.N. entities that fully cooperated with our review—the U.N. Secretariat and UNDP in New York; ILO, UNHCR, and WHO in Geneva; and FAO and WFP in Rome. These organizations represent about 60 percent of the professional staff in the U.N. system and have about 80 percent of the positions in the U.N. system that are subject to geographic distribution. We did not independently verify the accuracy of the data provided to us. In some cases, the data in the State Department’s annual report to the Congress were not the same as data that the U.N. organizations provided to us. (For a detailed discussion of the statistical methods we used, see app. VIII.) To assess U.N. efforts to employ nationals of countries that are underrepresented or close to becoming underrepresented, we reviewed various U.N. documents and met with the human resources directors at the headquarters of the U.N. entities we reviewed. In addition, we met with officials from the U.N. Joint Inspection Unit, the International Civil Service Commission, the Administrative Committee on Coordination, the U.N. Office of Internal Oversight Services, and the U.N. Board of Auditors. We also met with representatives of the Washington, D.C., liaison offices of FAO, ILO, UNHCR, WFP, and WHO. To examine State’s and other U.S. agencies’ efforts and resources devoted to assisting the United Nations in achieving equitable U.S. representation, we met with State Department officials from the Bureau of International Organization Affairs and the U.S. missions in New York, Geneva, and Rome. We also spoke with officials from the U.S. Departments of Agriculture, Labor, and Health and Human Services who deal with international recruitment. To describe other member countries’ activities to assist employing their nationals in the U.N. system, we met with representatives of the British, Canadian, French, German, and Japanese missions to the United Nations in New York, Geneva, and Rome. In addition, we met with several American citizens employed in each of the U.N. organizations in our study to obtain their views about U.N. and U.S. efforts to recruit Americans. We conducted our review from December 2000 to June 2001 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Chairman, Senate Committee on Foreign Relations; the Chairman and Ranking Minority Member, Subcommittee on Commerce, Justice, State, and the Judiciary, Senate Committee on Appropriations; the Ranking Minority Member, House Committee on International Relations; the Ranking Minority Member, Subcommittee on the Middle East and Asia, House Committee on International Relations; and the Chairman and Ranking Minority Member, Subcommittee on Commerce, Justice, State, the Judiciary, and Related Agencies, House Committee on Appropriations. We are also sending copies of this report to the Honorable Colin Powell, Secretary of State. Copies will be made available to others upon request. If you or your staff have any questions about this report, please contact me on (202) 512-4128. Other GAO contacts and staff acknowledgments are listed in appendix X. This appendix provides information on the methods that the U.N. Secretariat, Food and Agriculture Organization (FAO), International Labor Organization (ILO), and World Health Organization (WHO) used to calculate equitable representation targets for member countries and thus determine the representation status of each organization’s member countries. The other organizations in our study—the United Nations Development Program (UNDP), United Nations High Commissioner for Refugees (UNHCR), and World Food Program (WFP)—do not calculate or use equitable representation ranges to determine a country’s representation status. The Secretariat takes into consideration three factors—assessed contribution, membership, and population—in calculating the equitable representation targets for member countries. In determining the number of positions attributed to each of these factors, the Secretariat uses a base number as the total number of positions, rather than the actual number of filled positions. In 2000, the base number used was 2,600, while the number of filled positions subject to geographic distribution was 2,389. Table 7 shows the weight assigned to each of the three factors and the number of positions assigned to each factor when multiplied by the base number. For each member country: The number of positions allocated for the assessed contribution factor (1,430) is multiplied by the member country’s percentage assessment to the Secretariat. The number of positions allocated for the membership factor (1,040) is divided by the number of member states (189). The number of positions allocated for the population factor (130) is divided by the world population and multiplied by the member country’s population. For each country, the resulting numbers of positions attributed to each factor are added together to produce the midpoint of that country’s equitable representation range. The upper and lower limits of each range are 15 percentage points above and below the midpoint, respectively, or a minimum of 4.8 positions from the midpoint. The minimum range for member countries is 1 to 14. In 2000, the midpoint for the United States was 369, and the upper and lower limits of the U.S. range were 424 and 314, respectively. In 2000, there were 325 Americans in positions subject to geographic representation. FAO determines each member country’s representation status using a system that weighs the level of positions, rather than focusing on the number of positions targeted for each country. In this system, point values are assigned to grade levels, with the higher grades being worth more points. This system, therefore, attempts to measure a country’s level of influence rather than just the number of positions it holds. Table 8 shows the point values that FAO assigns to each grade level. A country’s representation status is determined by dividing the number of points from the positions held by that country’s nationals by the total number of points of all filled regular budget positions. The resulting percentage then is compared with the country’s equitable representation range, which is also expressed as a percentage. In calculating the equitable representation targets for member countries, FAO takes into consideration only one factor—contribution. The contribution factor is used as follows: If a country contributes 10 percent or less of the budget, it is considered equitably represented if its representation ranges from 25 percent below to 50 percent above its contribution percentage. If a country contributes between 10 percent and 20 percent of the budget, it is considered equitably represented if its representation ranges from 25 percent below to 25 percent above its contribution percentage. If a country contributes more than 20 percent of the budget, it is considered equitably represented if its representation ranges from 25 percent below to 0 percent above its contribution percentage. In 2000, the United States was in the third category, with a target representation range of 18.75 percent to 25 percent. The actual U.S. representation level was 12.5 percent. ILO takes two factors into consideration—contribution and membership— in determining the equitable representation targets for member countries. For the membership factor, ILO uses an equitable range of one to two positions for countries that contribute 0.2 percent or less of the ILO budget. In 2000, 142 of ILO’s member countries contributed 0.2 percent or less of the budget, and their total budget contribution was 4.03 percent. The number of positions set aside for these minimum contribution countries can vary from year to year, depending on the number of countries that fit the criteria. For countries that contribute more than 0.2 percent of the budget, equitable geographic targets are determined by the contribution factor. For these countries there is one further differentiation: In 2000, for countries that contributed between 0.2 percent and 10 percent of the budget, a midpoint was calculated using the following formula: After the midpoint is calculated, the equitable range is obtained by adding and subtracting 25 percent from the midpoint. The formula presented above is also used for countries that contribute 10 percent or more of the budget. However, the number that is calculated using the formula becomes the maximum of the country’s range. The minimum of the range is obtained by subtracting 25 percent from the maximum number. Because the United States contributed 25 percent of the ILO budget in 2000, its geographic range was calculated using the latter method. The equitable range for the United States in 2000 was 101 to 135, and there were 87 American staff in geographically counted positions during that year. WHO’s method for determining member countries’ representation status is based on the system used by the U.N. Secretariat, although there are some differences. As with the Secretariat, WHO uses three factors (contribution, membership, and population), with 55 percent of the positions being tied to the contribution factor, 40 percent tied to the membership factor, and 5 percent tied to the population factor. The midpoint for each country is obtained by adding the number of positions attributed to each of these factors. The minimum and maximum of the range are set by subtracting and adding 15 percent to the midpoint. Like the Secretariat, WHO also uses a base number for the total number of positions subject to geographic distribution rather than using the number of filled positions. In 2000, WHO used a base number of 1,450, while there were 1,138 filled positions subject to geographic distribution. A major difference between the systems used by the Secretariat and WHO is that WHO includes positions financed by extrabudgetary resources as geographically counted positions. However, the contribution factor includes only contributions made to the regular budget, not extrabudgetary contributions. The number of positions assigned to each factor was as follows: 580 positions were set aside for the membership factor (3.02) per 797.5 positions were set aside for the contribution factor (7.975 positions for each 1 percent contributed); and 72.5 positions were set aside for the population factor (0.012 positions for each 1 million of population). The United States’ equitable range was 174 to 237, and there were 152 American staff in positions subject to geographic distribution. This appendix details the U.S. staffing situation at each of the seven U.N. organizations we examined—the U.N. Secretariat, FAO, ILO, WHO, UNDP, UNHCR, and WFP. The Secretariat, located in New York, has met its targets for employing Americans each year from 1992 to 2000, and Americans are represented in senior-level and policymaking positions at a level commensurate with the average of selected major contributors relative to their contributions to the Secretariat. From 1992 through 1997, the number of Americans in geographically targeted positions was near the midpoint of the range, which the Secretariat describes as the desirable representation, until about 3 years ago when the number of Americans declined to the minimum portion of the range (see fig. 4). During this period, hiring rates did not compensate for the number of separations of Americans in the Secretariat. From 1992 through 2000, the total number of geographically targeted positions in the Secretariat decreased by more than 200 positions to about 2,400, representing about an 8.4 percent decline. The United States’ assessed contribution to the Secretariat from 1998 through 2000 averaged 25 percent of total contributions. In 2001, the range for the United States was lowered as a result of the decrease in the U.S. assessment to 22 percent. Because of the lowered range, it is expected that in 2001 Americans will remain represented in the lower portion of the geographic range. Americans are represented in senior-level and policymaking positions at a level commensurate with the average for selected major contributors relative to their contributions to the Secretariat. Combining the percentages of Americans in policymaking (Assistant Secretary-General (ASG) and Under Secretary-General (USG)) positions and senior-level (D1- D2) positions for the periods ending 1994, 1997, and 2000 shows Americans holding 11.5 percent, 14 percent, and 13.6 percent of these positions, respectively. (Fig. 5 provides information, by grade category, on the percentage of the total number of positions held by Americans. The period covered is from 1992 to 2000, with each bar representing staffing grade information as an average over a separate 3-year period between 1992 and 2000. The number in the 1998 to 2000 bar is the average annual number of staff positions during 1998 to 2000 for each grade level.) For the period of 1998 to 2000, the United States had its highest representation at grade levels equivalent to middle management positions (P4-P5 equivalencies). Table 9 shows the financial contributions and senior-level and policymaking representation of the United States and four other selected countries with regard to the Secretariat. This table also shows the ratio of each country’s representation to its assessment, and the average ratio for the four other selected countries. As shown in table 9, the U.S. representation-to-assessment ratio is approximate to the average ratio for the four selected countries. Although modest progress in employing Americans has been made in recent years at FAO, headquartered in Rome, Americans continue to be significantly underrepresented overall and are represented in senior and policymaking positions at levels that are below the average for four major contributors, given their contribution to FAO. (Fig. 6 provides information on the trends in overall U.S. representation compared with FAO’s geographic representation range for the United States.) Since 1992, FAO has increased its staff by 42 to 992, which is equivalent to an annual average growth rate of 0.5 percent compared with an annual average growth rate of 4.5 percent for the United States. During this period, the number of Americans in geographically targeted positions increased by 38 to 126. Because FAO uses a position-weighting system to calculate each member country’s representation percentage, the equitable ranges were derived using this weighting system. The United States’ assessed contribution to FAO from 1998 through 2000 averaged 25 percent of total contributions. Although the minimum range for the United States decreased in 2001 as a result in the decrease in the U.S. assessment, the United States is still expected to remain significantly below the minimum range. In contrast to the high level of underrepresentation of Americans, about 80 countries were overrepresented in FAO over the last 3 years. (Refer to app. III for a list of the top five overrepresented countries.) Americans are represented in senior and policymaking positions at levels that are below the average of four major contributors, given their contribution to FAO. (Fig. 7 provides information, by grade category, on the percentage of the total number of positions held by Americans. The number in the 1998 through 2000 bar is the average annual number of staff positions during 1998 through 2000 for each grade level.) Combining the percentages of Americans in policymaking positions—the Assistant Director-General (ADG) and the Deputy Director-General (DDG)—and senior-level positions for the periods ending 1994, 1997, and 2000 shows that Americans held 11.1 percent, 9.5 percent, and 9.4 percent of these positions, respectively. Table 10 shows the financial contributions and senior-level and policymaking representation of the United States and four other selected countries with regard to FAO. This table also shows the ratio of each country’s representation to its assessment and the average ratio for the four other selected countries. As shown in table 10, the U.S. representation-to- assessment ratio is below the average ratio for the four selected countries. Progress toward achieving equitable representation of Americans has been made at ILO, located in Geneva, where the United States has been underrepresented during the period under review, 1992 to 2000. Nonetheless, U.S. representation in high-ranking positions has declined. Americans continue to be underrepresented overall and are represented in senior-level and policymaking positions at levels that are below the average of four major contributors given their contribution. (Fig. 8 provides information on the trends in overall U.S. representation from 1992 to 2000, compared with ILO’s geographic representation range for the United States.) Overall, since 1992, geographic positions in ILO have increased by 5 to 659. With the average annual growth rate for the United States (about 3 percent) exceeding the ILO’s (about -0.3 percent), the number of Americans in geographic positions has increased and accordingly brought the United States closer to its minimum geographic range in 2000. By contrast with historical U.S. underrepresentation, 45 member states are overrepresented. (Refer to app. III for a list of the top five overrepresented countries.) The United States’ assessed contribution to ILO from 1998 to 2000 averaged 25 percent of total contributions. Beginning in January 2002, the geographic representation range for the United States is expected to be lowered, from 101 through 135 to 89 through 119 positions, as a result of the decrease in the U.S. assessment to 22 percent effective in the next biennium. U.S. representation in senior levels (D1-D2) has declined and U.S. representation in senior-level and policymaking positions (ADG-DDG) is below that of the average of four major contributors given their contribution. (Fig. 9 provides information, by grade category, on the percentages of the total number of positions held by Americans. The period covered is from 1995 to 2000, with each bar representing staffing grade information as an average over a 3-year period.) Combining the percentages of Americans in policymaking positions and senior-level positions for the periods ending 1997 and 2000 shows Americans holding 12.1 percent and 9.7 percent of these positions, respectively. Table 11 shows the financial contributions and senior-level and policymaking representation of the United States and four other selected countries with regard to ILO. This table also shows the ratio of each country’s representation to its assessment and the average ratio for the four other selected countries. As shown in this table, the U.S. representation-to- assessment ratio is below the average ratio for the four selected countries. WHO, based in Geneva, continues to have Americans represented below the equitable geographic targets for the United States, which has been underrepresented there since 1993. In addition, there has been a decline in policymaking positions, and combined U.S. representation in senior-level and policymaking positions is below the average of the four major contributors, given their contributions. (Fig. 10 provides information on the trends in overall U.S. representation levels from 1992 to 2000 compared with WHO’s geographic representation range for the United States.) In 1992, U.S. representation was at the minimum level of the equitable range. However, since that time, there have been declines in the level of U.S. representation; in 2000, the United States was underrepresented. In contrast to U.S. underrepresentation at WHO, 22 countries were overrepresented in 2000. (Refer to app. III for a list of the top five overrepresented countries.) By and large, from 1992 to 2000, the total number of geographic positions decreased by 174, or 13 percent, to 1,138, for WHO, and similarly the number of geographic positions filled by Americans declined by 14 percent. In 2001, the U.S. assessment decreased from 25 percent to 22 percent, and accordingly, the geographic target for the United States will be reduced for 2002. There has been a decrease in U.S. representation at the top policymaking positions (Ungraded (UG) is equivalent to the ASG and USG positions) and U.S. representation in senior-level and policymaking positions is below the average for four of WHO’s major contributors, given their contribution level. (Fig. 11 provides information, by grade category, on trends in U.S. representation by grade, compared with WHO’s U.S. geographic representation target. The time period covered is from 1992 through 2000, with each bar representing staffing grade information as an average over a 3-year period.) While the percentage of Americans in D1 to D2 positions has been relatively constant from 1992 through 2000, there has been a significant decline in the percentage of Americans in policymaking positions. The most recent year that an American held a top-ranking position in WHO was in 1998. Combining the percentages of Americans in policymaking and senior-level positions for the periods ending 1994, 1997, and 2000 shows Americans holding 8.1 percent, 8.0 percent, and 8.0 percent of these positions, respectively. Table 12 shows the financial contributions and senior-level and policymaking representation of the United States and four other selected countries with regard to WHO. This table also shows the ratio of each country’s representation to its assessment, and the average ratio for the four selected countries. As shown in table 12, the U.S. representation-to- assessment ratio is below the average ratio of the four selected countries. The United States appears to be equitably represented at UNDP. Because UNDP, headquartered in New York, does not have a geographic representation target for the United States, we did not have an established criterion with which to assess U.S. representation there. However, when comparing U.S. representation with U.S. contributions to UNDP, from 1995 to 2000, the U.S. representation percentage at UNDP was higher than the U.S. contribution percentage for most of these years. As shown in figure 12, from 1995 to 2000, the percentage of Americans in professional positions remained relatively constant, declining slightly. Over the broader 9-year period, the U.S. contribution to UNDP varied, ranging from a high of 14 percent of the budget in 1993 to a low of 6 percent in 1996. Figure 13 provides information, by grade category, on the percentage of the total number of positions held by Americans and presents this information as a 3-year average. The percentage of Americans in senior-level positions (D1-D2) and lower level professional positions (P1-P3) remained close to 14 percent throughout the period we covered. Although an American held the top position at UNDP from 1993 through 1999, beginning in 2000, no Americans were represented in policymaking positions (equivalent to ASG and USG). Combining the percentages of Americans in policymaking and senior-level positions for the periods ending 1997 and 2000 shows Americans holding 13.9 percent and 14.2 percent of these positions, respectively. Overall, Americans have been underrepresented at UNHCR. Moreover, little progress has been made in hiring Americans. Because voluntary contributions by member states provide the funding for UNHCR, it does not have formal targets for achieving equitable geographic representation of the nationals of its member states. However, since 1995, UNHCR has had an informal target of 13 percent of its international professional positions for the United States, from which it received about one-third of its resources over the last 3 years. (Refer to fig. 14 for the trend in the level of representation of Americans.) Despite the existence of this informal target, UNHCR has not come close to meeting it, and, for almost a decade, the percentage of Americans employed by UNHCR compared with the total of its international professional positions has not improved. During 1992 through 2000, UNHCR staffing levels have grown by 380 to 1,159, an annual growth rate of 4.1 percent. The annual average growth rate for the United States has been virtually the same at 4.3 percent. For the period 1993 to 1998, not one American was at the policymaking level, although subsequently, an American was hired for one of these three high-ranking positions at UNHCR. (Refer to fig. 15, which provides information, by grade category, for the percentage of the total number of positions held by Americans and presents this information as a 3-year average.) Combining the percentages of Americans in policymaking positions (High Commissioner, Deputy High Commissioner, and Assistant High Commissioner) and senior-level positions for the periods ending 1994, 1997, and 2000 shows Americans holding 10.6 percent, 10.8 percent, and 9.2 percent of these positions, respectively. Americans have been underrepresented at WFP, located in Rome, but gains have been made in hiring more Americans in senior-level and policymaking positions. Because voluntary contributions by member states provide the funding for WFP, it does not have formal targets for achieving equitable geographic representation of its member states. However, in 1997, WFP established informal targets for donor countries in order to address an imbalance in the representation levels between donor countries and program countries. Accordingly, WFP set an informal target of 20 percent of its international professional positions for the United States from which it received almost one-half of its resources over the last 3 years. Despite establishing an informal target in 1997, the percentage of Americans employed as international professional staff has not improved. (Refer to fig. 16, which presents data on U.S. contributions, percentage of Americans, and the informal target for the United States.) From 1996 through 2000, annual employment growth rates for WFP and the United States were 10.5 percent and 5.5 percent, respectively, with the size of WFP’s international staff increasing by 255 positions to 831. WFP has made progress in hiring Americans in senior-level (D1-D2) positions since 1996. (Fig. 17 provides information, by grade category, on the percentage of the total number of positions held by Americans.) Combining the percentages of Americans in policymaking positions (equivalent to ASG and USG) and senior-level positions for the periods ending 1997 and 2000 shows Americans holding 14.1 percent and 24.1 percent of these positions, respectively. For each organization, the top five overrepresented countries for 1998 to 2000 are listed on the basis of the number of staff exceeding the maximum of the country’s equitable range. The total numbers of overrepresented countries at each organization are also listed for the years 1998 to 2000. (See tables 13-20.) The use of a base number, rather than actual employment figures, to calculate target ranges may tend to reduce the number of countries that are classified as underrepresented. The larger upper targets for the Secretariat and WHO may partially explain why they have fewer overrepresented countries than FAO and ILO (see app. VIII). Figures 17 to 22 provide information on trends in staffing levels for selected countries at the seven U.N. organizations we studied—the U.N. Secretariat, FAO, ILO, WHO, UNDP, UNHCR, and WFP. The selected countries are Japan, Germany, France, the United Kingdom, and Canada, which are all major contributors. We also present combined staffing data for the European Union countries. The figures provide information on the trends in each country’s total staff compared with its geographic target and contribution to the U.N. organization, as well as the trends in that country’s representation at different grade levels. The grade level groupings used in the figures are P1 to P3 (entry-level and mid-level professionals, equivalent to GS-9 to GS-13); P4 to P5 (mid-level professionals, equivalent to GS-13 to GS-15); D1 to D2 (equivalent to Senior Executive Service positions); and Assistant Secretary-General to Under Secretary-General (ASG-USG) (policymaking positions). In the figures, grade level employment percentages are presented as 3-year averages for the non-overlapping periods 1992 to 1994, 1995 to 1997, and 1998 to 2000. The numbers in the 1998 to 2000 bars are the 3-year average of the number of nationals employed at the respective U.N. organization for the designated grade levels. The line that represents a country’s financial assessment or contribution percentage share is a 3-year average for 1998 to 2000. Similarly, the target range is a 3-year average for 1998 to 2000. This appendix describes the overall representation status of selected major contributors in the U.N. Secretariat and the specialized agencies in our study and discusses some of the approaches they employ to support their citizens seeking U.N. employment. In this study, we included Japan, which was admitted to the United Nations in 1956; Germany, which became a member in 1973; and France, the United Kingdom, and Canada, all original members of the United Nations. Japan is the second largest contributor to the U.N. secretariat and the specialized agencies in our study but is significantly underrepresented in each of these U.N. organizations. (See table 21.) According to a Japanese mission representative, the government of Japan seeks to achieve representation levels that reflect its financial contributions to these organizations, which are about 20 percent, second only to the United States. Japanese officials with whom we met noted that although seriously underrepresented in U.N. organizations, Japan has made slow progress in improving its representation. Within its foreign ministry in Tokyo, Japan has a recruitment center for international organizations with about a half dozen staff. In addition, in Geneva there is an officer in the Japanese mission who works full time on personnel management issues, including promoting the employment of Japanese citizens in U.N. organizations. This officer and her counterparts in Japan’s missions in Rome and New York spend a substantial amount of their time prescreening résumés of Japanese citizens interested in U.N. employment, providing interested parties with information and advice about employment in international organizations, and following up with U.N. officials on behalf of individual applicants. The Japanese government uses the junior professional officers program systematically because it is viewed to be an effective recruitment tool for entry-level positions. Japan sponsors about 50 to 60 junior professional officers annually for 2- to 3-year terms; therefore, there are about 160 junior officers working in various U.N. organizations at any given time. Germany, which is the third largest contributor in these organizations, generally falls short of its representation targets in most of the U.N. entities we reviewed. (See table 22.) Concerned about its overall representation status in international organizations, the German government addresses the issue on various levels, starting with a high-level working group of top officials from several ministries, which meets regularly at the Chancellor’s Office to discuss German participation in international organizations. In light of continuing concerns, Germany has in the past year established a new office within the foreign ministry—the Office of the Coordinator for International Personnel—to organize its recruitment efforts. The new office focuses its efforts on junior and senior-level positions alike. The Coordinator for International Personnel is ranked at the ambassador level. In addition, Germany’s Federal Employment Agency has an office that deals with promoting the employment of German citizens in international organizations, mostly for professional and technical positions. The German government also provides support for junior professional officers programs, annually funding anywhere from 25 to 30 new officers, who serve for 2 to 3 years. As shown in table 23, France, the fourth largest contributor, is equitably represented across all of the U.N. organizations we examined. The French foreign ministry has an office in Paris that promotes employment in international organizations. This office prescreens candidates and forwards applicants’ files to the French missions that have responsibility for U.N. organizations. In some cases, Mission officials may support French applicants by sending a letter in support of the candidate to, or meeting in person with, the relevant U.N. hiring official. In addition to funding about 40 junior professional officers per year, mostly in field locations, the French government has also agreed to sponsor a limited number of junior officers from developing countries. As shown in table 24, the United Kingdom is generally well-represented, falling within or exceeding its desirable levels of representation in major U.N. agencies. According to representatives of the British missions with whom we met, geographic representation is not a particularly important concern to their government, especially in light of U.K. representation levels. These officials told us they are primarily concerned about efficient management of the United Nations and a competent workforce and do not consider geographic representation a key issue. For this reason, the United Kingdom generally makes no special effort to promote the employment of its citizens. Canada, as shown in table 25, is generally well-represented in the United Nations. The Public Service Commission of Canada is responsible for coordinating the Canadian government’s efforts to identify professional Canadians for jobs in international organizations. The Commission’s international programs office works in concert with the Department of Foreign Affairs and International Trade in targeting key positions considered attainable and of strategic interest to Canada and identifying Canadian candidates for them. According to Canadian mission representatives, the Director of International Programs visits the human resources directors of U.N. organizations about once a year to establish contacts, verify information, and plan to search for suitable candidates. Although Canada provides only limited support for junior professional officers programs, Canada’s Department of Foreign Affairs and International Trade has a Youth International Internship Program that provides young people, ages 18 to 29, with an opportunity for international work experience for a period of 6 to 8 months. Several U.N. organizations have recently developed human resource management strategies to address a broad range of human capital issues they face, some of which affect their efforts to achieve equitable geographic balance. The following section discusses selected human capital issues that provide insight into some factors that may affect recruiting qualified Americans in greater numbers for U.N. employment. Many of the American citizens with whom we met cited these among the contributing factors to difficulties recruiting and retaining Americans in the U.N. system. Following the Fourth World Conference on Women in September 1995, the U.N. Secretary-General established a goal that the United Nations will strive to achieve 50-percent representation of women in its workforce by 2000. The United Nations has since determined that this target will not be met until 2012. In accordance with this goal, some U.N. organizations have similarly adopted policies to reach specific gender balance targets. For example, in 1997, WHO established a target of 50-percent employment of women on its staff. UNDP expects that by the end of this year, the gender ratio for senior management positions at headquarters will be at least 4 women to 6 men, and that 38 percent of resident representative positions and 40 percent of the deputy resident representative positions will be occupied by women. In its written personnel policies, UNHCR aims to ensure that women constitute two-thirds of recruits until equal representation of women is achieved. Several U.N. officials with whom we met noted that the United States may have an advantage in recruiting qualified women candidates. State officials acknowledged that, to the extent possible, the State Department tries to make qualified American women aware of U.N. vacancies and assists in forwarding their applications. All of the U.N. entities we examined follow the U.N. Common System of Salaries, Allowances, and Benefits established by the International Civil Service Commission (ICSC). Salaries and benefits are based on the application of the Noblemaire principle, which states that compensation be set on the basis of the highest paid civil service—historically, the United States. The Commission is currently undertaking a major review of the pay and benefits system and is expected to propose recommendations to the General Assembly in 2002. According to ICSC documents and Commission officials with whom we met, the objective of the review is to devise a compensation system, more flexible than the current one, that will, among others, (1) enable U.N. organizations to attract and retain highly qualified staff, including senior management personnel and professional and technical staff that are in short supply, and (2) provide staff with career progression opportunities. U.N. officials and many of the American citizens with whom we met suggested that certain studies have shown that the United States civil service may no longer be the highest paid civil service. A 1995 study of the ICSC reported that the compensation package for the German civil service was 15.2 percent higher than the U.S. civil service—primarily because, although U.S. salaries were generally higher, German compensation was superior in terms of retirement and health insurance, leave, and other benefits. However, ICSC officials told us that Germany’s standing has since slipped due to significant budgetary obligations facing the government, and the Commission will be scheduling the next Noblemaire study shortly. Although noncompetitive compensation was a common concern among American employees, there were other compensation issues raised by certain groups. For example, Americans who were transferred or detailed to U.N. agencies expressed concerns about pension and related benefits. They believed that the U.S. government could be more supportive of those who accept a detail or transfer to an international organization by allowing them to continue as active members of the Thrift Savings Plan for U.S. federal employees, thereby allowing them to continue making regular payments and choosing their own investment options. American employees in New York called for extending education grant benefits to U.S. professional staff at U.N. headquarters and proposed several methods to do so without costing the organization more money. These employees argued that the system—originally designed to provide equality for staff serving at foreign duty stations away from their home countries—has evolved into one that discriminates against professional staff at headquarters by virtue of their nationality. Because of the rise in dual income families and dual career couples, employment opportunities for spouses are an important factor in recruiting and retaining staff, according to U.N. documents and many people with whom we met. In the last several years, a number of organizations, including ILO, UNDP, and WFP, have taken steps to address the issue of spousal employment, including adopting policies and programs to facilitate employment of spouses. This issue appeared to be of particular concern to American citizens employed at FAO in Rome because, unlike the other U.N. organizations we examined—including WFP, which also is in Rome—FAO still prohibits spouses from employment within the organization. According to American staff with whom we met, while the association of professional staff at FAO favors spousal employment, the issue has been extremely contentious because the union for the general services staff strongly opposes allowing spousal employment. General service staff are concerned that their positions, which include secretaries and file clerks, would be taken by spouses. Thus, FAO management has not made the policy changes for spousal employment that other U.N. organizations have. To ensure the international character of U.N. organizations, fluency in a second U.N.-designated language is typically a requirement for employment. Many view this requirement as an obstacle for Americans and certain other nationals who are less likely than the French, Canadians, and others to be multilingual. However, human resources directors told us that waivers may be granted for candidates viewed to be best qualified in all areas except for the second language requirement. American citizens employed in the United Nations had mixed reactions regarding the need for a second language. Along with some U.N. officials, many of the American citizens with whom we spoke told us that English is the language commonly used within agencies and that at certain locations, such as Geneva, one can get by without fluency in a second language such as French. Although the requirement for a second language may be waived, this practice is not widely known; therefore, it is unclear how many Americans interested in U.N. employment choose not to even apply because they do not meet the requirement. Many of the American citizens with whom we spoke expressed the need to advance reforms that promote greater transparency and accountability in the human resource management practices of U.N. agencies. While citing some progress in recent years, American staff characterized the organizational culture within several of the agencies to be “very bureaucratic,” “highly centralized,” and “authoritarian.” According to these staff, this organizational attitude can lead to a high level of frustration among Americans, who are accustomed to greater organizational efficiency and more participatory management styles. A particular problem mentioned by some Americans we interviewed was the need to expedite the lengthy recruitment and selection process, which can take as long as 1 year. Recognizing this impediment, several human resources directors told us they are taking steps to streamline the recruitment process. For example, at FAO and WFP, officials claimed they cut the recruitment time for professional positions by half in the last few years—reducing it from 1 year to 6 months for FAO and from 8 to 10 months to 4 to 5 months for WFP. The methodology section describes the data used in our analysis and highlights some of the methodological issues and approaches that we use. It also includes a discussion of the use of a base number by some U.N. organizations to calculate a country's representation target range and possible implications. Most U.N. organizations included in our study provided the annual total number of geographic staff positions filled for the organization and for selected countries for 1992 to 2000. Annual financial country assessments or contributions and the organization’s regular budget were also supplied. Information was provided for the United States, Canada, Japan, and each of the 15 member countries of the European Union. The four organizations that have formal geographic equitable staff representation targets–the U.N. Secretariat, FAO, ILO, and WHO–provided these annual targets. Employment data generally refer to the end of the calendar year, except for the Secretariat, which was for June 30. Four organizations provided annual data on the number of geographic staff employed by grade level for the organization as a whole and for the selected nationalities for the 9-year period. ILO and UNDP provided these data for 1995 to 2000 and WFP for 1996 to 2000. To facilitate comparisons across time and across countries, financial assessments/contributions, equitable representation targets, and grade level staff are expressed as percentages. For example, the high and low equitable representation target staff numbers for each country are divided by the respective organization's total number of geographic staff used in the calculation of these targets. For the Secretariat and WHO, this is a specified base number, which includes actual filled positions and vacancies. For ILO, it is the number of filled positions. FAO provides its targets as a position-weighted percentage. In order to compare a country's actual employment to the target range, the total number of national staff employed is divided by the organization's total number that was used to calculate the annual targets. For organizations that do not have formal targets–UNDP, UNHCR, and WFP–the organization's total number of filled international professional positions is used. For the figures in appendixes II and IV, grade level employment percentages are presented as 3-year averages for the non-overlapping periods of 1992 to 1994, 1995 to 1997, and 1998 to 2000. Only 5 years of grade level data are available for WFP, 1996 to 2000. For this organization, the black bar in the figures describing country representation is a 2-year average, 1996 to 1997. The numbers in the 1998 to 2000 bars are the 3-year average of the number of nationals employed at the respective U.N. organization for the designated grade levels during 1998 to 2000. The sum of grade level employment numbers may not equal the total number due to rounding. The line that represents a country’s financial assessment or contribution percentage share is a 3-year average for 1998 to 2000. Similarly, the target range is a 3-year average for 1998 to 2000. To calculate the grade level representation percentage, a country’s grade level employment is divided by the organization’s total employment for the corresponding grade level. For the Secretariat and WHO, the organization’s grade level employment number is scaled up by the ratio of base number employment to actual total employment for each year. Thus, grade level employment percentages are constructed in a comparable fashion to actual total representation percentages and target range percentages. We compared U.S. representation in senior-level and policymaking positions with those of four major contributors—Japan, Germany, France, and the United Kingdom. For the period of 1998 to 2000, we calculate the average ratio of each country's percentage representation of these high- level positions to the country's annual average assessment at the four U.N. organizations with formal geographic targets. The resulting number can be interpreted as the country's percentage representation at senior-level and policymaking positions per 1 percent of its assessment. For illustrative purposes, consider table 10 in appendix II describing representation at senior-level and policymaking positions at FAO. U.S. representation in these high-level positions is 9.4 percent, and its average assessment is 25 percent. Dividing 9.4 by 25 results in 0.38 percent, the U.S. representation of high-level positions per 1 percent of U.S. assessment. In a similar fashion, 0.14 percent is the Japanese representation per 1 percent of its assessment, and 1.48 percent is the French representation per 1 percent of its assessment. The average representation for the four selected countries is 0.76 percent per 1-percent assessment. In table 4, in the report we multiplied this four-country average representation by the U.S. assessment to derive a hypothetical comparative representation level, under the assumption that U.S. representation in senior-level and policymaking positions was proportionate to the average of these four major contributors. For example, if the United States, given its 25-percent assessment at FAO, were to have representation proportionate to the 0.76 average ratio for the four selected countries, then its representation would be 19.1 percent. To describe U.S. representation over time, both the actual number and relative number of American staff in each organization are presented. For example, see figures 4 and 5 in appendix II, which describe U.S. representation at the U.N. Secretariat. A relative number, a ratio of the number of total country staff employed expressed as a percentage of the organization's total staff, allows the reader to examine the change in country staff size over time while taking into consideration the change in the total organization staff size. However, because of different means of measuring an organization's total staff size, care should be taken when interpreting this information. For U.N. organizations that use a base number rather than the actual number of filled staff positions, there may be a significant difference in national representation trends and the trend of total national employment as a percentage of total actual organization employment. In some situations, as described below for WHO, one trend may be positive and the other negative. For example, annual U.S. representation at WHO during 1998 to 2000 can be interpreted as follows: As shown in figure 10 in appendix II, the gap between U.S. employment and the lower target range, which is calculated using a base number, is narrowing which indicates an improvement in U.S. representation. During this period, U.S. employment grew at an annual rate of 1.8 percent, while the WHO employment base number remained constant at 1,450. Thus, U.S. representation increased relative to its target range. However, during this period total actual employment at WHO grew at an annual rate of 2.9 percent. Employment of non-Americans increased at a faster rate than for Americans. The percentage of Americans actually employed declined. However, based on the representation methodology employed by WHO, U.S. representation is shown as increasing. The criteria to judge whether a country is underrepresented, overrepresented, or equitably represented at an organization are to compare the actual number of nationals employed to the target range numbers. That is the approach used for organizations with formal targets in the first of each U.N. organization’s figures for U.S. representation in appendix II. The second figure for each organization in appendix II and all of the figures in appendix IV use a percentage measure to compare actual country employment with representation targets. Except for FAO, which uses a position-weighted percentage to calculate target ranges and actual representation, our percentage approach is not the official method used by the U.N. organizations. Our approach enables one to compare a country’s total employment as well as grade level employment with representation target ranges. The use of a base number rather than actual employment figures to calculate target ranges tends to reduce the number of countries that are classified as overrepresented. The base number includes actual filled positions and vacancies. Since the annual base numbers for the Secretariat and WHO are greater than each organization’s respective actual number employed, the upper target figure is larger than would be derived if the actual employment number were used in the target range formula. For example, the Secretariat’s target range for the United States in 2000 is 424 to 314 when a base number employment figure of 2,600 is used. If the actual employment number of 2,389 were to have been used in the target range formula, the target range would have been 390 to 289. In this case, the United States still would have been equitably represented. However, if actual employment numbers had been used in the target range formula, Canada and the United Kingdom would have been classified as overrepresented. The larger, upper target may partially explain why the Secretariat and WHO have fewer overrepresented countries than FAO or ILO (see apps. III and V). The following are GAO's comments on the Department of State's letter dated July 19, 2001. 1. While State commented that it places a high priority on efforts to ensure the United States is represented, at all levels, in U.N. organizations, we found that its actions to achieve equitable representation do not reflect this stated priority. For example, as discussed in this report, State has reduced many of its recruitment efforts without assessing how these reductions will affect recruitment and does not have recruiting or action plans in place to support U.N. employment of Americans. 2. State disagreed with our recommendation to develop guidelines that define its goal for obtaining an equitable share of senior-level and policymaking positions for Americans and use these guidelines to help assess whether the United States is equitably represented. State said it should not develop separate guidelines for defining its goal of obtaining an equitable share of Americans in these high-level positions but rather that it should focus on equitable representation at all levels. While we agree that State should be concerned about achieving equitable employment for Americans at all levels in U.N. organizations, we believe it is important to emphasize achieving an equitable share of high-level positions. We further believe that without guidelines defining equitable share, State lacks a mechanism for assessing whether its top recruitment priority—equitable representation of Americans in high-level positions—is being achieved. In addition to the person named above, Joy Labez, Jeremy Latimer, Bruce Kutnick, Janey Cohen, Mark Speight, Mary Moutsos, and Rick Barrett made key contributions to this report. The first copy of each GAO report is free. Additional copies of reports are $2 each. A check or money order should be made out to the Superintendent of Documents. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. Orders by mail: U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Orders by visiting: Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders by phone: (202) 512-6000 fax: (202) 512-6061 TDD (202) 512-2537 Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. Web site: http://www.gao.gov/fraudnet/fraudnet.htm e-mail: fraudnet@gao.gov 1-800-424-5454 (automated answering system) | The United Nations (U.N.) and its affiliated entities face the dual challenge of attracting and retaining staff who meet the highest standards of efficiency, competence, and integrity while maintaining the international character of the organizations by ensuring equitable geographic balance in the workforce. Nevertheless, U.N. organizations have made slow progress in addressing U.S. concerns about underrepresentation, and, except for the U.N. secretariat in New York, the organizations with representation targets that GAO studied have not achieved equitable employment of Americans since 1992. Although the U.N. organizations are ultimately responsible for achieving fair geographic balance among its member countries, the State Department, in coordination with other U.S. agencies, plays a role in ensuring that the United States is fairly represented. U.N. organizations have not fully developed long-range workforce planning strategies, and neither State nor the U.N. agencies have formal recruiting and hiring action plans to improve U.S. representation in the U.N. system. Without these measures, the United States' ability to even maintain the number of Americans employed in the United Nations could be hampered. |
Financed jointly by the federal government and states, Medicaid is the nation’s health care lifeline for two statutorily defined groups of low-income residents—families, primarily women and children; and the aged, blind, and disabled. In reality, Medicaid is not 1, but rather 56 separate programs that differ dramatically across states. While federal statute mandates who is eligible for coverage and the broad categories of services that must be provided, each participating state designs and administers its own program by (1) setting certain income and asset eligibility requirements, (2) selecting which optional groups and services to cover, and (3) determining the scope of mandatory and optional services. As a result of this flexibility, Medicaid is not available to everyone who is poor. In 1993, Medicaid provided health care coverage to less than half of those with incomes below the poverty level. The Health Care Financing Administration (HCFA) within the Department of Health and Human Services (HHS) monitors each state program for compliance with federal regulations. (App. II contains more background information on the Medicaid program.) The $130 billion Medicaid program is at a crossroads. Between 1985 and 1993, Medicaid costs tripled and the number of beneficiaries increased by over 50 percent. Current projections suggest that program costs will double over the next 5 to 7 years. To constrain rising health care costs, states are increasingly turning to mandatory enrollment of some or all Medicaid beneficiaries in managed care delivery plans—arrangements that limit a beneficiary’s choice of physicians and hospitals. In many cases, these managed care plans are prepaid a fixed amount per enrollee. This financing arrangement has demonstrated the ability to lower service utilization, which in turn can hold down costs. In order to implement mandatory managed care programs, states must obtain a waiver of certain Medicaid requirements. The waiver authority that gives states the greatest flexibility is section 1115 of the Social Security Act. Section 1115 allows the executive branch to waive most federal Medicaid requirements for demonstration projects likely to assist in promoting program objectives. Since 1992, 22 states have asked to use this demonstration authority to restructure their Medicaid programs. The common thread present in what have been termed “comprehensive” 1115 demonstration waivers is (1) the switch from a fee-for-service to a managed care approach to delivering health benefits and (2) the use of anticipated savings plus other funding streams to expand coverage to groups previously ineligible for Medicaid. Eleven states with 1115 waivers approved since 1993 have undertaken an ambitious experiment to demonstrate that the Medicaid program can actually save money while simultaneously expanding coverage. The administration has entered into 5-year budget commitments that allow each state to reinvest managed care savings and redirect other funds in order to expand coverage to currently uninsured individuals. Compared to expenditure trends for the predemonstration program, states suggest that the net result of waivers will be lower costs—even though managed care savings are being reinvested. Eleven more waivers are pending, and all but a few applicants are pursuing a similar managed care cost-containment/coverage expansion strategy. Only Illinois, Oklahoma, and Kentucky (the state’s 1995 demonstration application) propose using 1115 waiver authority to reduce both state and federal Medicaid expenditures without expanding coverage. The use of 1115 waivers to restructure state Medicaid programs has been facilitated by a new federal flexibility in assessing the budget neutrality of such demonstrations—particularly, the administration’s avowed openness to “new methodologies” to estimate what the continuation of a state’s existing Medicaid program would have cost. By redefining the terms of budget neutrality, the administration has made it easier for states to demonstrate that waivers will cost less than their existing Medicaid programs. The administration asserts, nonetheless, that all approved 1115 waivers are budget neutral and that the demonstration authority is not being used to expand entitlement spending. Oregon’s 1991 application—a major component of a broader reform of its health care system—was the first request since 1982 to operate a comprehensive, statewide demonstration program. After a year of review, the Bush administration rejected the application on the grounds that the state’s proposed benefits package might violate the Americans With Disabilities Act. A report prepared for the National Governors’ Association criticized the handling of Oregon’s application, noting that the review process did not give due weight to the state role in Medicaid, had a “chilling” effect on innovative proposals, and imposed budget neutrality requirements that were too narrow. The Clinton administration subsequently announced plans to streamline and expedite the review process for 1115 waivers. Oregon revised and resubmitted its waiver application in late 1992 and the following March became the first state in over 10 years to obtain approval for a comprehensive 1115 demonstration. Since then, 10 additional waivers have been approved. Another 11 states have applications pending, and others have expressed interest in submitting requests for 1115 waivers. States with approved and pending waivers account for about 49 percent of the nation’s Medicaid beneficiaries and 52 percent of total Medicaid expenditures. As of July 1995, however, only five states—Oregon, Hawaii, Tennessee, Rhode Island, and Minnesota—had begun implementation. Appendix III summarizes the status of all approved and pending comprehensive 1115 demonstrations submitted since 1992. Requirements intended to preserve quality by protecting a Medicaid beneficiary’s freedom to choose a provider have limited states’ ability to mandate enrollment in HMO-style managed care. HMO-style health plans are prepaid a fixed amount based on the number of enrollees rather than reimbursed after each service is rendered. Such prepayment on a per capita basis is often referred to as “capitation.” A convergence of trends—spiraling Medicaid expenditures coupled with a stronger interest on the part of mainstream HMOs in serving the Medicaid population—has given impetus to as well as facilitated the adoption of a managed care cost-containment strategy by states. And rather than turning to physician gatekeeper arrangements that dominated past managed care experiments, many states are using the flexibility gained under 1115 Medicaid waivers to adopt capitated alternatives. Reacting to quality-of-care, marketing, and other problems that surfaced in a number of Medicaid managed care programs, the Congress enacted provisions in 1976 with the general goal of encouraging HMOs to provide public clients a quality of care comparable to that available to private clients. At the time, HMOs were the prevalent form of managed care. One provision discouraged the creation of HMOs serving only Medicaid beneficiaries by requiring that at least a certain percentage of the patients be privately insured. The participation of private-paying patients, who presumably have a choice of health plans, was instituted as a proxy for quality. A second provision added in 1981 allows recipients to terminate enrollment in an HMO at any time. From the beneficiary’s perspective, these provisions offer protection against enrollment in an HMO seeking excessive profit at the expense of quality. From the HMO’s perspective, however, unrestricted freedom to disenroll makes it difficult to plan financially and therefore renders the enrollment of Medicaid recipients less attractive. This provision added to the hesitancy of many mainstream HMOs to participate in Medicaid, further restricting states’ ability to experiment with fully capitated health plans. In 1993, about 4.8 million beneficiaries, or about 12 percent of the Medicaid population, were enrolled in some type of managed care.Though a number of voluntary and mandatory managed care options are available to states, the enrollment of Medicaid beneficiaries has lagged behind national trends. Without an 1115 waiver, states essentially have three managed care options: voluntary enrollment in an HMO, in which case the beneficiary must also have a choice of obtaining services on a fee-for-service basis and be allowed to disenroll at will; mandatory enrollment in an HMO, provided the beneficiary can choose from among a number of competing HMOs, with disenrollment allowed on a monthly basis (or every 6 months if an HMO meets certain federal requirements); and voluntary or mandatory enrollment in a physician gatekeeper system in which either the physician’s charges are partially capitated or the physician is reimbursed under fee-for-service. The last two options require waivers of Medicaid provisions that have been widely provided under section 1915(b) of the Social Security Act. As of July 1994, 37 states operated 1915(b) waiver programs. These programs were primarily substate (that is, in a limited geographic area), voluntary, and involved physician gatekeepers rather than HMOs. Until 1993, only two states—Arizona and Minnesota—operated mandatory HMO managed care programs under the authority of an 1115 waiver. Table 1.1 delineates the additional flexibility available under an 1115 waiver compared with 1915(b) authority. Though all approved 1115 waivers expand eligibility, the nature and extent of coverage expansion varies. Waivers use income standards to define and, in effect, limit who is eligible, but states further restrict the number of individuals that can actually obtain coverage through explicit enrollment caps, other barriers, and even premiums. Because of greater than anticipated enrollment, several states are taking additional steps to limit the number applying for coverage. Most states are adding groups who were previously ineligible for Medicaid—single adults and childless couples. However, it is important to recognize that some categories of newly eligible individuals in one state may already be enrolled in Medicaid in another because of differences in the qualifying income levels established by states for families and optional coverage expansions allowed by statute. Moreover, states may have previously provided health coverage to some new eligibles outside of Medicaid—that is, through state-funded programs. For example, Kentucky’s planned expansion under its now suspended 1993 waiver includes both previously ineligible individuals and individuals who could have been included in Medicaid at state option. In Rhode Island, Hawaii, and Minnesota the expansions either are limited to or include individuals who could have been Medicaid- eligible at state option. Both Hawaii and Minnesota offered state-funded coverage to many included in their waivers. Table 1.2 summarizes the coverage expansion goals of seven states with approved 1115 waivers. Generally, expansion goals are stated in terms of the number of newly eligible individuals expected to be covered under the waiver at the end of the 5-year period of each demonstration. Enrollment in year 1 may be less than the 5-year enrollment goal, since states typically anticipate reaching “full enrollment” gradually. State goals should be viewed as targets subject to a number of constraints, especially financing. Some waivers indicate that the state will limit enrollment if funding proves to be inadequate. At least one state, Tennessee, has already done so. At one end of the expansion continuum, Tennessee’s waiver program has no eligibility income limit and requires only those enrollees above 400 percent of the poverty level to pay the full premium. Tennessee set an original enrollment cap of 500,000 on new eligibles and excluded individuals who were insured before a certain cutoff date to forestall a migration from private insurance. The state lowered its cap in December 1994, in effect limiting the expansion to the approximately 400,000 previously uninsured individuals already enrolled. In contrast, Oregon’s expansion goals are less ambitious because, in part, the employer mandate was expected to cover low-income workers. The waiver expands eligibility up to 100 percent of the poverty level, requires no premiums from participants, and has no explicit enrollment cap. In order to address budgetary constraints, the legislature enacted several changes that the state began implementing on October 1, 1995. However, HCFA has yet to approve Oregon’s request to require premiums of some newly eligible participants. Some 1115 waivers, such as Hawaii’s, target individuals who were already covered by state-funded expansion programs outside of Medicaid.Consequently, Hawaii did not anticipate much additional enrollment as a result of its waiver. Unlike Hawaii, Minnesota’s waiver application did not include single adults and childless couples covered under state-funded MinnesotaCare. State officials told us that requesting a federal match for this group would have created a budget neutrality problem because of the cost. Instead, the approved waiver shifts children covered under MinnesotaCare into Medicaid—a group that could have been included in the program at state option. Finally, Rhode Island’s expansion group is limited to pregnant women and children who could also have been covered at state option without an 1115 waiver. Embedded in many comprehensive 1115 demonstrations is a controversial philosophical shift in the way publicly supported health care is provided to the poor—a shift (1) inherent in the adoption of managed care delivery systems and (2) visible in the treatment of those newly eligible under the demonstration. The cumulative effect of these changes is to place more responsibility on the individual beneficiary. Advocacy groups for the poorand waiver states disagree on the extent to which low-income beneficiaries can shoulder these responsibilities. Advocacy groups typically see Medicaid beneficiaries, as well as many of the working poor to whom coverage is being extended, as a vulnerable, high-risk, and sicker segment of the population. They are concerned about the ability of the poor to access services in a managed care system. As noted earlier, some critics of managed care argue that it creates a “perverse incentive” to deliver fewer or less costly services than may be needed. Advocacy groups also worry that managed care will (1) further reduce the historically low Medicaid reimbursement levels, (2) diminish quality of care, and (3) curtail access to providers that have traditionally served the poor. Finally, they see a disincentive for the poor to participate in waiver programs when premiums, though subsidized, are high relative to income. States, on the other hand, point out that the waivers require them to implement significant quality assurance programs such as collecting and analyzing encounter data and conducting annual satisfaction surveys. They contend that access and quality were never optimal under a fee-for-service delivery system in which choice was guaranteed but not necessarily available and high emergency room use was an underlying symptom of access problems. Finally, states generally see employment as a proxy for health and evidence for distinguishing between the newly eligible working poor and the more vulnerable beneficiaries typically enrolled in Medicaid. The “mainstreaming” of new eligibles—that is, the attempt to treat them as if they were purchasers of private insurance—is perhaps the hallmark of most state 1115 demonstrations. For the newly insured, states have attempted to break Medicaid’s psychological link with welfare by establishing eligibility criteria and enrollment mechanisms distinct from those that apply to traditional beneficiaries, many of whom qualify for Medicaid by virtue of receiving cash assistance. For example, most waivers eliminate the asset test, often criticized as intrusive and expensive to administer, and rely instead on a gross income test. Moreover, rather than the frequent redeterminations of eligibility associated with Medicaid, many newly eligible individuals are enrolled for periods ranging from 6 to 12 months. In some states, enrollment of new eligibles is not handled by the agency that administers Medicaid. In fact, Florida plans to hand this task over to insurance agents—further underscoring the similarity to a private insurance product. In general, application forms are simpler and in some states can even be mailed. Newly eligible individuals usually receive the full acute care benefit package available to traditional Medicaid recipients. Only in the case of Florida is the benefit package more restrictive. Finally, many states require individuals with incomes above the poverty level to contribute toward the cost of health care coverage by charging premiums, co-payments, and deductibles. For the traditional Medicaid population, the major change associated with 1115 waivers is the wholesale movement from fee-for-service to some type of managed care—even in rural areas and, often, even for those who are aged, blind, or disabled. For some, such as low-income families in Oregon and Minnesota who were already enrolled in mandatory managed care programs, the change may be imperceptible. Under most 1115 waivers, eligibility requirements are unchanged and benefits remain the same or are more generous. For example, Tennessee lifted service restrictions on its Medicaid benefit package. Only Oregon altered benefits to help finance coverage expansion. The redefined package, commonly known as the “prioritized list,” eliminates some costly health services while adding a broad array of preventive care. A notable feature of the growing number of 1115 waivers is their divergent techniques for using Medicaid as a springboard to achieve some degree of reform in state health care systems. Numerous states that have submitted waiver applications are recognized leaders representing diverse approaches to health care reform. Though many waivers were conceived when national reform appeared imminent, the recent retrenchment from broader reform goals suggests that Medicaid waivers have become a more important component of state health care reform. Appendix IV compares several states across a range of indices that are relevant to understanding the diversity evident in waiver designs. The 1115 waiver is health care reform in Tennessee. The state’s emphasis on managed care promises to increase penetration by that delivery system in a region long resistant to such a change while at the same time significantly reducing the number of uninsured. The success of this policy hinges on the adoption of a stringent cost-containment strategy with regard to health care financed through the waiver. In contrast to Tennessee’s nascent reform program, Florida’s as yet unimplemented waiver represents a logical progression from earlier small market reforms intended to provide access to affordable insurance for the working poor. The state hopes to use its waiver to achieve a dramatic enrollment expansion in the state’s voluntary, small business-oriented purchasing cooperatives and a significant reduction in its estimated 24-percent uninsured rate. Florida stands alone in the extent to which it distinguishes between traditional and newly eligible Medicaid recipients. While the former are required to choose between different forms of managed care, newly eligible recipients may select any health plan offered by state-supported purchasing cooperatives with the sole proviso that the enrollee is responsible for any difference between the subsidy and the plan premium. Florida’s 1992 health reform legislation established a goal of universal coverage, and the legislature promised to revisit the choice of a voluntary over a mandatory approach unless there was a significant reduction in the number of uninsured. In Minnesota, Oregon, and Hawaii, the waiver is only one element of a much more ambitious reform agenda—an agenda that some state officials believe has been brought into question since the 1994 health care debate. All three states have universal coverage as a goal. Hawaii already has a limited exemption from the requirements of the Employee Retirement Income Security Act of 1974 (ERISA) that allows it to require employers to offer health insurance to their workers. Oregon’s Medicaid waiver is also built around an ERISA exemption to permit enactment of an employer mandate. Obtaining that exemption is now considered unlikely. In contrast, Minnesota had been attempting to finance universal coverage with an individual mandate, though state officials told us that this approach is no longer considered a possibility. Both Hawaii and Minnesota have relatively small uninsured populations and, prior to the 1115 Medicaid waiver, had already taken steps to address this problem through the establishment of state-funded coverage expansions. All three states have significant managed care penetration. Moreover, Oregon and Minnesota have a decade of experience with Medicaid managed care. An important element of the administration’s commitment to streamline and expedite the review of 1115 waivers was the promise to maintain the principle of waiver budget neutrality “more flexibly than has been the case in the past.” Despite this commitment, a number of factors have contributed to a lengthening of the process, including extensive negotiations over financing. In fact, both administration and state officials told us that budget neutrality is often the most contentious issue. Though a policy of budget neutrality has been in effect since the early 1980s, previous 1115 Medicaid demonstrations were usually small-scale experiments targeted at specific populations (for example, pregnant drug-users on Medicaid) or implemented in a limited geographic area. As a result, the potential impact on state and federal expenditures was more circumscribed and the task of devising a cap to ensure cost neutrality was less challenging. Oregon’s 1991 waiver application was the first of a new breed of “comprehensive” 1115 demonstrations—complex proposals that were sometimes controversial and often tied to broader health reform agendas. HCFA officials told us that the number, scope, and complexity of such comprehensive demonstrations in effect elevated the importance of budget neutrality while making it more difficult to evaluate and enforce. In a memo preceding promulgation of a more flexible approach to budget neutrality, HHS officials recognized the incentive for states to shift costs to the federal government and the need to constrain such behavior. Nonetheless, they outlined several arguments for a less strict approach. For example, they pointed out that the federal government might want to (1) share in the risks and costs of testing innovations that were ultimately in its own interest; (2) set the stage for health reform by supporting changes that should not wait even if they are somewhat more costly; and, finally, (3) provide some fiscal relief to states overburdened by the rising number of uninsured, increasing charity care requirements, and federally mandated expansions. Most importantly, the memo recognized that whatever policy was adopted needed to be clear and consistently applied. There are two key aspects to the administration’s revised budget neutrality policy. First, states are allowed to demonstrate budget neutrality over the life of the waiver rather than on a yearly basis, allowing more time to recoup any associated start-up costs. Second, recognizing the difficulty in estimating the costs of continuing the prewaiver program over the period of the demonstration and the inherent element of judgment in undertaking such an estimate, the administration announced that it was open to state suggestions on the development of a new baseline methodology. According to HHS and Office of Management and Budget (OMB) officials who share responsibility for implementing this revised policy, there are three critical steps in determining baseline costs: (1) selecting a base year, (2) developing a trend factor for growth from the base year to the first year of implementation, and (3) developing a trend factor for baseline costs over the period of the waiver. The method used to develop baseline costs is important because it is the benchmark against which the administration assesses waiver costs. The higher the baseline, the easier it is for a state to demonstrate cost neutrality. The final waiver agreement consists of a set of terms and conditions that, among other things, spells out how budget neutrality will be monitored and enforced. Although there are important state-specific variations, the administration has taken two basic approaches to enforcement. Tennessee and Florida have an aggregate cap on the amount of federal matching funds available for their demonstrations, while all other states have a per capita limit. The federal government will not match state expenditures above the specified caps. Table 1.3 highlights the important differences in what the expenditure caps cover and how they work in the four states whose budget neutrality agreements we assessed. Aggregate caps are the most straightforward and uniform of the two approaches. In Tennessee and Florida, the federal government agreed to an explicit expenditure limit on demonstration costs. With the exception of certain recipient growth in Florida, the federal government will not match any costs above this cap. For states that use the per capita approach, the federal government agreed to a cost-per-recipient limit. For Hawaii, this cost limit is based on per capita fee-for-service costs from 1993 trended forward to the first year of the demonstration. If, as the state anticipates, the switch to managed care produces savings over fee-for-service rates, they can be applied to the costs of those newly eligible. In Oregon, the agreement specifies per capita cost limits for both traditional and newly eligible enrollees. However, the number of new eligibles is limited to an agreed-upon percentage of traditional Medicaid enrollment. With the exception of Tennessee, no state is held at risk for growth in the Medicaid population caused by an economic downturn. Florida has an escape valve from its aggregate cap if growth in the Medicaid population exceeds projections by 3 percent or more. We reviewed the financing arrangements for approved 1115 Medicaid demonstration waivers in several states, with a focus on (1) the relationship between the waiver and other state health reform initiatives, (2) the planned sources of funding available to finance expanded coverage, (3) the potential net impact of these waivers on federal Medicaid expenditures, and (4) the actual waiver expenditures of states with the most implementation experience. Although our study focused on 1115 waivers in Tennessee, Florida, Oregon, and Hawaii, we closely monitored other pending waivers, which we use as examples throughout this report. For a detailed description of our methodology, see appendix I. Our review was conducted from August 1994 through August 1995 in accordance with generally accepted government auditing standards. Although the administration has adopted a more flexible approach toward budget neutrality, it contends that all approved comprehensive 1115 demonstrations are in fact budget neutral. Before addressing this issue in the next chapter, this chapter describes and categorizes waiver funding strategies—strategies that states say will result in coverage expansion without increasing expenditures beyond what their smaller, prewaiver Medicaid programs would have cost. In fact, compared to the cost of continuing the existing Medicaid program, many states project that the demonstrations could actually save money. State officials estimate that the four 1115 demonstrations whose financing we examined in detail could add up to 2 million previously uninsured individuals while yielding savings of about $6 billion over 5 years. States rely on a similar mix of funding sources that, analytically, can be grouped into two major categories: (1) Medicaid resources redirected from existing programs, such as the Disproportionate Share Hospital Program (DSH), and (2) expected savings, primarily from different forms of managed care delivery. In addition, many states collect user fees—the premiums charged to new program enrollees. Finally, in a few cases, state funds used to subsidize insurance programs for low-income residents are being folded into the waiver. Based on a review of waiver applications and discussions with HCFA and state officials, table 2.2 (1) summarizes the planned funding sources for expanded coverage in four states over the 5-year terms of the demonstrations and (2) highlights the relative importance of the various categories of funding. Comparing the major funding sources across states can be tricky. For example, Hawaii’s waiver application never quantified expected managed care Tennessee’s waiver application identified premiums but not DSH as a Florida quantified its funding sources but omitted premiums because they will be used to offset state costs. Despite these obstacles, a few generalizations can be made about the magnitude and relative importance of core, coverage expansion funding. The conventional wisdom that 1115 expansions are financed largely by managed care savings is misleading. In at least two states with approved waivers, funds redirected from DSH and other programs play a more significant role. On the other hand, states with relatively small DSH allotments rely to a greater extent on managed care or other forms of savings. Finally, premiums are a less important and more uncertain source of funding. Based on a review of waiver applications and discussions with HCFA and state officials, DSH and other redirected funds in Tennessee’s and Hawaii’s demonstrations appear to be a more important coverage expansion financing source than either expected managed care savings or any capitation discount obtained from managed care organizations. As shown in table 2.3, both states had relatively large DSH programs at the time their waivers were approved. The theory behind eliminating or greatly reducing DSH payments to hospitals is that fewer uninsured will translate into less uncompensated care. Compared to other financing sources, DSH appears to be the most tangible and assured source of financing. Tennessee’s waiver also proposes to redirect funds from two additional sources—public health programs and DSH-like payments, referred to as local government charity care. As with DSH, state officials believe that routine access to health care by those currently uninsured should decrease the funding needed for programs such as those for communicable disease control and maternal and child health. Florida’s 1115 waiver caps enrollment at about 1.1 million previously uninsured individuals—less than half of the state’s uninsured population. Since hospitals would continue to face significant levels of uncompensated care, the state was reluctant to redirect all of its DSH funds. Consequently, Florida’s finance plan only shifts growth in its DSH resources toward coverage expansion. Because of the relative modesty of its DSH payments, Florida was forced to search for an alternative funding source. The state decided to eliminate Medically Needy Program coverage and to reallocate those funds to help subsidize the purchase of private health insurance. A state is not required to offer a Medically Needy Program under Medicaid. Because the Medically Needy Program pays for health services only after individuals have already incurred large liabilities, Florida considers the program to be similar to DSH. That is, it reimburses hospitals for bills that otherwise might go unpaid. Together with DSH, redirected funds are only about one-third of the financing identified in Florida’s waiver. States with relatively smaller DSH allotments like Oregon and Florida rely to a much greater extent than Tennessee and Hawaii on program savings to finance coverage expansion. Those expected savings, however, represent more than just the transition to managed care. Though all 1115 waivers anticipate managed care savings, there appears to be little unanimity on how quickly savings can be achieved or on what type of managed care delivery system is the most efficient. Without substantial DSH funding, Oregon’s expansion goals, as outlined in the waiver, rely almost exclusively on program savings. In addition to managed care efficiencies, the state also anticipates lower Medicaid costs under the waiver as a result of adopting its redefined benefit package, known as the prioritized list, and an employer mandate. The mandate would reduce state costs by requiring employers to provide health insurance coverage to low-income workers initially covered under the waiver. State estimates suggest that about 85 percent of the financing for expanded coverage is attributable to the combination of switching to managed care delivery arrangements and using the prioritized list. Although the state attributes a specific amount of savings to the list, its officials told us that, in fact, it is difficult to distinguish such savings from managed care efficiencies. About two-thirds of Florida’s financing also relies on program savings. However, almost half of those savings would result from proposed reimbursement reforms. Unlike Medicaid physician fees, other medical services in Florida have had a built-in inflation adjustment. Under the reimbursement reforms, price increases for services rendered by HMOs, pharmacies, and clinics, and on an outpatient basis at hospitals, will be lowered by limiting them to increases in the Consumer Price Index plus a declining number of percentage points with each subsequent year. Despite the common thread of reliance on anticipated managed care savings as a funding strategy, state definitions of just what constitutes managed care and their approaches toward achieving those savings differ. Thus, Tennessee uses a reimbursement strategy in the form of a capitation discount to achieve immediate savings. In contrast, Oregon offers relatively generous capitation payments but expects control over utilization of services to reduce the rate of future cost increases. These differing strategies reflect each state’s decision on how best to balance the need for savings against (1) the extent and maturity of the state’s managed care infrastructure and (2) concerns about enrollee access, quality, and choice. Demonstrations typically rely on a mix of different types of managed care delivery, though one is often predominant: HMO-style systems in Oregon, PPOs in Tennessee, and physician gatekeeper arrangements in Florida. Table 2.4 shows the actual enrollment of beneficiaries in Tennessee and Oregon, and Florida’s projection of enrollment if the state implements its approved waiver. The high penetration of HMOs in Oregon, with enrollment of almost one-third of the state’s population, facilitated the state’s decision to rely on this type of managed care delivery system. In Tennessee and Florida, enrollment in HMOs is significantly lower—6 percent and 18 percent of each state’s residents, respectively. HMOs and PPOs participating in the 1115 demonstration in all three states are reimbursed on a per capita basis, referred to as a capitation payment. Physician gatekeepers, on the other hand, are often paid on a fee-for-service basis, though some are partially capitated. What differentiates managed care from fee-for-service is not only the method of reimbursement but the attempt to control the utilization of services. Although gatekeepers in Florida would be paid for each service delivered, enrollees must get prior authorization to see a specialist. PPOs in Tennessee, on the other hand, have 3 years to employ physician gatekeepers to help control the length of inpatient hospital stays and the utilization of other services. Tennessee’s approach to managed care reflects the strategy used by large employers. The state asked for and received a substantial capitation discount from participating HMOs and PPOs. Tennessee acknowledges that its shift from fee-for-service to capitation is unlikely to result in significant utilization savings at the outset, since most traditional and newly eligible recipients are enrolled in PPOs that lack gatekeepers rather than in more structured HMO-style managed care arrangements. Despite the belief that utilization savings will be lower during this initial phase-in period, substantial capitation discount savings still accrue to the state. Tennessee officials noted that PPOs in turn often obtain significant pricing discounts from their providers. Our recent report on the Tennessee demonstration notes that a primary concern about the future of the demonstration is the poor financial performance of participating managed care plans and the willingness of physicians to contract with those plans. The demonstration’s viability, we concluded, may hinge on the continued willingness of the health care community to participate in the program in spite of the low reimbursement levels. Although analysis of access to and quality of health care under the waiver has been limited because of problems in collecting data on enrollee visits to providers, beneficiary surveys and advocacy groups both indicate that access is a problem. In contrast to Tennessee’s steep, up-front, capitation discounts, Oregon took a longer range approach that emphasizes access and quality. Concerned about the adverse impact of its already low Medicaid fee-for-service rates on the delivery of services, Oregon’s initial capitation rates represent an increase over comparable fee-for-service rates prior to the 1115 demonstration. According to state officials, this increase contributed to the decision of a large number of HMOs to participate in the demonstration. As a result, about 91 percent of the recipients covered under Oregon’s 1115 waiver are enrolled in some type of fully capitated HMO—over three times more than the state’s original estimate. Oregon assumes that more highly structured managed care will better control the utilization of services and that over time health care costs will rise at a slower rate than under the old fee-for-service reimbursement system. Finally, there appears to be a wide spectrum of opinion among 1115 waiver states about the extent of savings from alternative managed care structures. Florida assumes that a physician gatekeeper arrangement, which preserves recipient choice, will produce the greatest managed care savings and anticipates that the majority of its Medicaid population will select this option. Only one-third of the state’s Medicaid population is expected to enroll in fully capitated HMOs, the system that Oregon considers to be the most cost-effective form of managed care delivery. The gradual erosion of savings in Kentucky, which employs physician gatekeepers under a 1915(b) waiver, suggests that state enforcement and oversight of such managed care arrangements are critical. According to state officials, emergency room use has risen again after an initial decline. Kentucky’s 1115 waiver application envisioned an eventual transition to more highly structured forms of managed care. Although the waiver proposals we reviewed rely primarily on redirected funds and expected program savings to finance coverage expansions, many state financing strategies incorporate new money raised by charging premiums to certain enrollees. Such premiums appear to make a modest contribution toward overall financing, ranging from a high of about 15 percent to as little as 1 percent of the core funding strategies we discussed. Moreover, at least one state’s application recognized that not all premiums are likely to be collected. The 1115 waivers in Tennessee, Florida, and Hawaii require most recipients with incomes above the poverty level to pay premiums on a sliding scale. In addition, Florida expects a minimal premium contribution from individuals below the poverty level if they have any income. Expected premiums in Tennessee are about 8 percent of the combined total of redirected funds and the capitation discount. In Florida, premiums account for about 15 percent of the funds the state says it needs to provide insurance to a target group of about 1.1 million. Officials in Hawaii told us that premiums expected from newly eligible beneficiaries represent only about 1 percent of coverage expansion funding. Under the approved waiver agreements, a substantial portion of the premiums collected in Tennessee and Florida can be counted as state match, with no reduction in federal expenditures. In Hawaii, the state and federal governments share equally in the cost offset represented by individual premiums. Table 2.5 provides hypothetical examples of the different types of arrangements used to allocate premiums. Hawaii and Minnesota are folding existing state subsidized insurance programs for low-income residents into their waiver programs and, in the process, bringing along the state dollars that financed them. These program dollars now qualify for federal match. While some individuals in these state-sponsored expansions were eligible for Medicaid under optional programs for pregnant women and children authorized in the late 1980s, others were not. Previously, states chose to expand coverage outside of Medicaid for a number of reasons. First, men, single adults, and childless couples were generally ineligible for Medicaid unless they were elderly or disabled. Second, such programs made it easier for states to provide coverage to entire families. Third, freed from Medicaid rules, states were able to offer more modest benefits and to require participants to pay premiums, co-payments, and deductibles. At least one state, Minnesota, cited another rationale for its self-funded program, MinnesotaCare. State consultants concluded that the lack of an employer mandate would result in the migration of children from private insurance to Medicaid. Eligibility rules in MinnesotaCare were designed to prevent such a migration. Thus, MinnesotaCare enrollees must have been uninsured for the 4 months immediately preceding enrollment and may not have had access to employer-subsidized health insurance for the previous 18 months. HCFA allowed Minnesota to maintain these barriers in its approved 1115 waiver. Contrary to the administration’s assertion that approved Medicaid 1115 waivers are budget neutral, net federal spending in the four states we examined could potentially exceed projected without-waiver program costs over the 5-year duration of the demonstrations. The net additional federal funding available in these four states is small in relation to allowable demonstration spending. However, overall federal Medicaid expenditures could grow significantly if the administration shows a similar flexibility in reviewing the large backlog of pending waivers. Administration officials told us that, since some states’ Medicaid expenditures were growing faster than the national average in the past, the budget neutrality of each proposed waiver should be evaluated independently in order to capture these variations. Such an approach is difficult because of the lack of consistently generated, state-specific forecasts. Lacking such data, we relied on the only available forecasts—national projections of how the current Medicaid program would grow over the 5-year duration of waiver programs. At the same time, we reviewed waiver applications and talked with state officials to identify factors suggesting whether a state’s Medicaid expenditures would indeed exceed the national norm. We found no evidence to support the high budget caps agreed to by the administration. Medicaid 1115 waiver programs are popular because they allow the administration to grant states significant program flexibility. Since the 1980s, OMB has used its budget neutrality policy to ensure that states were not given access to additional federal funding at the same time they were provided with greater program flexibility. Rather than applying a uniform methodology to measure the budget neutrality of waiver applications approved since 1993, the administration has allowed considerable variation in growth of baseline costs from state to state. According to the administration, each of the waiver programs is budget neutral, even though the individual growth rates vary significantly. The results of the administration’s flexible, state-specific approach are shown in table 3.1, which summarizes the rates of increase allowed in the four agreements—Florida, Tennessee, Oregon, and Hawaii. Also included in the table are the administration’s projected rates of growth for Medicaid on a nationwide, current services basis over roughly the same time period. Table 3.1 shows that in three out of four states, the waiver agreements permit growth above what OMB projected for the Medicaid program as a whole at the time the waivers were approved. The growth patterns among states also vary. The growth rates of Tennessee, Florida, and Hawaii are the highest in the first year of their waiver. While Florida’s growth rate declines gradually in each subsequent year, both Tennessee’s and Hawaii’s drop dramatically in the second year and then decline more slowly in the remaining years of their demonstrations. In Oregon, however, the highest rate of growth is in the second and third years, with dramatically lower increases in the last two. Given the unique state setting of each Medicaid program, some variation in the rate of Medicaid growth among states is to be expected. However, even though OMB was predicting overall lower growth in Medicaid, state waiver applications did not identify future trends to justify their higher-than-average growth rates over the course of the demonstrations. Instead, states used a variety of arguments primarily based on history and options available under current statute to convince the administration that their particular situation warranted a high rate of growth. HCFA and state officials admit that, in some states, continued Medicaid growth at historical rates is unsustainable because of the great strain it places on state budgets. Moreover, several of the primary contributors to the growth of state Medicaid budgets over the past 5 years are no longer present. For example, some states’ use of targeted provider taxes and donations contributed to the rapid rise in DSH funding between 1989 and 1993, but recent legislation strictly limits—and in some cases caps—such growth. It also appears unlikely that states will be asked to absorb major new federally mandated expansions of populations and benefits—a practice that contributed to high growth rates in the past. As shown in figure 3.1, the assumption that higher historical rates of Medicaid growth will continue runs contrary to the administration’s own projections of nationwide Medicaid growth on a current services basis. Each successive projection since 1993 shows a decline in the rate of growth in Medicaid. In addition to pointing to the history of recent rapid growth in Medicaid expenditures, states used the so-called “hypotheticals” argument to justify higher baselines. They argued that groups who were hypothetically eligible for Medicaid coverage under existing law, but had not been included in a state’s Medicaid plan, should be considered part of the state’s baseline population for the purpose of determining budget neutrality. Including hypotheticals raises baseline costs, making budget neutrality easier to achieve. The Hawaii, Kentucky, Minnesota, Rhode Island, and Ohio waiver agreements allow hypothetical populations to be included in the baselines. To date, the inclusion of hypotheticals has been limited to those individuals who would actually be covered by the demonstration and who are optionally eligible for Medicaid under section 1902(r)(2) of the Social Security Act. Hawaii and Minnesota have covered some of this population outside the Medicaid program in the past through state-only funded programs. A Hawaii Medicaid official estimated that including the 1902(r)(2) population added approximately $56 million to the state’s waiver baseline over the 5-year life of the program—about 4 percent of total waiver agreement funding. In Kentucky, Rhode Island, and Ohio, however, hypotheticals were not covered by any state-funded program. In each waiver we reviewed that included hypotheticals in the baseline, state officials mentioned cost containment as a primary consideration in seeking 1115 demonstration authority. It is questionable, therefore, that these states would have added optional eligibility groups to their Medicaid programs without the waiver. The complexity of and variation in individual state programs makes it difficult to assess budget neutrality without a consistent frame of reference. Lacking state-specific Medicaid expenditure forecasts, we used OMB’s current services projections of growth in Medicaid for the nation as a whole. A current services projection is policy neutral and only reflects medical inflation, normal growth in the eligible population, and changes in utilization for the entire Medicaid program. To determine if the four approved waivers were budget neutral, we first estimated the cost of continuing the traditional Medicaid program—absent the demonstration—in each state. This estimate—referred to as “without-waiver spending”—was developed by adjusting for inflation in the following manner: We adjusted the cost of providing Medicaid in the year prior to waiver implementation at the rate specified by OMB in its forecast of future Medicaid current services outlays. We compared this without-waiver spending estimate to total projected costs under the waiver expenditure caps negotiated by each state and the administration. The difference between our without-waiver projection and the waiver expenditure cap in each state is the basis for our conclusion of whether an agreement is budget neutral. When the difference was positive, we examined state-specific information to determine if there was any identifiable reason why the waiver expenditure cap should exceed our without-waiver spending projection and still be regarded as budget neutral. We applied this methodology to the two types of waiver spending caps agreed to by the administration, aggregate and per capita expenditure limits. For states that use the aggregate cap—Tennessee and Florida—the waiver funding limits are specified in the terms and conditions approving the demonstration. For states with per capita limits—Hawaii and Oregon—the spending cap depends on the actual number of enrollees in the waiver program. To assess the potential budget neutrality of these per capita agreements, we used enrollment projections developed by each state and submitted to HCFA in conjunction with approval of the waiver. If actual enrollment proves to be higher than these initial projections, then the waiver agreement funding limit will generally be higher and the state will have access to more funds than we projected. Conversely, if enrollment falls below these projections, fewer additional resources would be available. For the Tennessee demonstration, the administration specified an aggregate federal funding cap, with any spending above that cap ineligible for federal match. The relatively low rates of growth under this spending limit mimic the growth caps used in the President’s 1993 health care reform proposal. The waiver agreement expenditure cap covers all aspects of Tennessee’s Medicaid program, whether or not the associated populations are being moved into managed care. Figure 3.2 shows a comparison of Tennessee’s waiver agreement spending cap and our without-waiver projection of spending. Our without-waiver estimate was derived by increasing actual expenditures in the year prior to implementation of the demonstration at the national current services growth rate projected by OMB. When compared with our without-waiver spending projection, Tennessee’s waiver expenditure cap is budget neutral. Savings in subsequent years make up for initial demonstration costs that exceed projected without-waiver spending. While the Tennessee waiver agreement is budget neutral using the current services methodology, the administration’s treatment of DSH funds raises another issue. After the first year of the waiver, DSH funding disappears as a budget item since it is built into the baseline that increases at the agreed-to rates of growth on overall Medicaid spending. However, DSH funding in Tennessee and a number of other states is capped by law because it is more than 12 percent of the state’s total Medicaid expenditures. In such states, DSH funding is only permitted to grow when it falls below this 12-percent cap. Under the waiver agreement, Tennessee’s DSH funding is allowed to grow after the first year of the waiver, even though it exceeds the 12-percent limit. Consequently, Tennessee is eligible for approximately $250 million in DSH growth that would not have been allowed without the waiver. Without this additional DSH funding, net savings to the state and the federal government under the Tennessee waiver agreement would have been higher. Since the Tennessee agreement, the administration has separated DSH funding from other aspects of waiver program funding. This approach allows the cap on DSH growth to be enforced. Moreover, HCFA officials told us that if DSH funding is growing at a slower rate than the other program elements covered by the waiver, then that lower growth rate is applied to any DSH growth. As in Tennessee, the Florida waiver agreement has an aggregate cap on demonstration expenditures. The cap only applies to the acute care and DSH portions of the state’s Medicaid program. Florida relied heavily on an historical argument to justify its higher-than-average rates of growth under the waiver, even though some state officials later told us that it was unlikely that such growth could be sustained. Figure 3.3 compares estimated waiver agreement spending and spending without the waiver. Our without-waiver estimate was derived by increasing actual expenditures in the year prior to implementation of the demonstration at the national current services growth rate projected by OMB. The comparison shows that the waiver spending cap exceeds our without-waiver estimate, with the difference equaling $4.5 billion in state and federal funding. We also analyzed the extent to which Florida’s coverage expansion goals depend on this $4.5 billion in excess funding. Our analysis shows that Florida’s enrollment plans would have to be scaled back without the excess funds provided under the waiver agreement. If the funding limits for Florida’s waiver agreement had been based on national projections of growth in the Medicaid program, both DSH and the state’s Medically Needy Program would have grown at slower rates. As a result, almost $1 billion less than the amount needed to meet the state’s expansion goals would have been available. As shown in table 3.2, the $4.5 billion in excess funding potentially available under the waiver more than covers that shortfall. We believe that the difference between the excess funds available and the shortfall—about $3.5 billion—provides a backup if state assumptions about managed care savings or other funding sources prove faulty. It is more difficult to apply our methodology to states with per capita waiver agreements, like Oregon. As implied by the term “per capita,” estimating both the waiver agreement spending cap and without-waiver expenditures requires assumptions about enrollment. Moreover, in Oregon, the mix of benefits changed in the transition from traditional fee-for-service Medicaid to the demonstration, making it more difficult to arrive at a base-year cost. In addressing these methodological challenges, we used the projected enrollment in the waiver agreement to estimate spending, and we derived a base-year cost from state reports. We discussed our methodology with Oregon officials, who agreed that it was appropriate. Figure 3.4 compares estimated waiver agreement spending and spending without the waiver. Our without-waiver projection was derived by increasing base-year estimated expenditures at the national current services growth rate projected by OMB. The comparison shows that the Oregon waiver spending ceiling exceeds our without-waiver projection. The Hawaii waiver expenditure cap is also based on per capita costs. As with the Oregon spending limit, all the pieces needed to calculate the projected waiver costs were not included in the waiver agreement documents. HCFA and Hawaii have agreed to use 1993 as the base year to calculate budget neutrality, but have not yet agreed on per capita costs for the various eligible populations. Our analysis was further complicated by the fact that Hawaii has not yet completed its final enrollment count for the base year. To make our calculation of program costs, we used a preliminary state average per capita cost and an estimate of the base-year enrollment from waiver documents. According to state officials, these were the best figures available. Figure 3.5 compares estimated waiver agreement spending and spending without the waiver. Our without-waiver projection was derived by increasing base-year estimated expenditures at the national current services growth rate forecast by OMB. The comparison shows that the waiver expenditure cap exceeds our without-waiver spending projection. Of the four waiver agreements we analyzed, only Hawaii’s included a hypothetical population in its baseline. As illustrated by figure 3.6, our analysis shows that the inclusion of this hypothetical population—made up of children that had previously been covered by state-only funded programs and who were eligible for Medicaid under section 1902(r)(2)—did not significantly affect the cost of implementing the waiver over its 5-year life. In responding to our work on budget neutrality, the administration said that the characteristics of individual states—primarily historical trends—justified waiver growth limits higher than projected national average program growth. However, none of the four waiver applications we analyzed in detail offered a rationale for the expected higher-than-average rates of growth in expenditures, enrollment, or medical inflation. OMB officials also told us that the four state Medicaid programs we analyzed in detail had been growing faster than the national average. Table 3.3 compares the national average with growth in Medicaid spending from 1988 to 1993 for Florida, Tennessee, Oregon, and Hawaii. This analysis shows that, with the exception of Florida, these states were not growing significantly faster than the national average. In fact, the trend in Medicaid expenditures in Hawaii suggests that it might be appropriate for its waiver program to grow more slowly than the national average. Federal mandates have contributed significantly to variations in state Medicaid growth rates over the last 8 years. According to a 1994 Urban Institute study, states with historically more restrictive Medicaid programs grew very rapidly during the period 1988 to 1992, with much of the growth attributable to newly eligible adults and children coming into the program under federal mandates. Such new mandates were at least partially responsible for escalating costs in Florida, a state whose Medicaid growth rate from 1988 to 1993 was significantly higher than the national average. Thus, previously ineligible adults, children, elderly, and disabled individuals accounted for more than 30 percent of the increase in Medicaid spending between 1989 and 1990. According to state officials, the establishment of an optional Medically Needy Program—which totaled $98 million by 1993—also contributed to state expenditure growth. More significantly, it had the unintended consequence of helping to greatly expand enrollment of low-income families. Florida officials explained that an outreach program designed to increase participation in the Medically Needy Program uncovered many low-income families eligible for Medicaid. Enrollment of low-income families rose nearly 24 percent per year from 1990 to 1993, with associated expenditures more than doubling from just under $500 million to nearly $1.2 billion. Finally, state officials told us that the recession in 1991 also contributed to growth in the number of low-income families enrolled in Medicaid. Although these factors contributed to the sharp rise in Florida’s Medicaid expenditures in the early 1990s and resulted in waiver growth rates significantly higher than the national average, even Florida officials do not expect a continuation of past trends. Actual experience appears to support their predictions. For example, while the waiver agreement estimated that acute care expenditures would grow at 17 percent in 1994, the base year, actual spending increased by only 12 percent without implementation of the waiver. Moreover, Florida officials told us that enrollment growth among low-income families has leveled off at around 4 or 5 percent over the past 18 months. The Florida waiver agreement estimates that low-income family enrollment growth will fluctuate between 2 and 3 percent over the life of the waiver. While the administration contends that each of the waiver agreements we reviewed is budget neutral, our analysis of both national and state-specific data shows that most of the agreed-upon rates of growth are too high. As a result, the agreements provide these states with access to significant additional federal Medicaid funding. Table 3.4 compares the waiver agreement spending caps and our without-waiver expenditure projections (based on national Medicaid growth rates), aggregated over the 5-year duration of the programs. The $1.9 billion in net additional federal funds should not be interpreted as a precise prediction of the amount of additional funds available under these four waivers; rather, it reflects the significant magnitude of the differences between the two projections. We analyzed preliminary financial results from 1115 demonstrations in Tennessee, Oregon, and Hawaii—three states with significant waiver implementation experience. The data suggest that waivers will continue to evolve as states attempt to balance coverage expansion goals against systemic cost-containment pressures. Changing political/fiscal realities in all three states and the potential for an acceleration in the rate of medical inflation underscore the challenges in implementing fixed-cost agreements in a variable-cost environment. Enrollment of previously uninsured individuals in both Oregon and Hawaii surpassed state estimates. Oregon was able to meet greater than expected demand without exceeding its waiver agreement expenditure cap. Hawaii, however, projects demonstration spending will be about 23 percent higher than permitted by its waiver agreement—costs it will have to offset in future years if it is to live within the expenditure cap. After maintaining open enrollment for a full year and achieving about 80 percent of its coverage expansion goal, Tennessee abruptly cut off enrollment because of a budget crisis it attributes to the demonstration. In contrast to Hawaii, Tennessee’s first-year demonstration costs were 14 percent below its waiver agreement spending cap. While Tennessee’s waiver program covered several hundred thousand previously uninsured individuals, total expenditures were on a par with its significantly smaller prewaiver program. Despite the slowdown in medical inflation, all three states face pressures to contain future waiver costs. Oregon and Hawaii have announced a number of initiatives to do so, including higher cost sharing and new eligibility rules. Since resources up to a state’s waiver funding cap are available until the end of the demonstration, expenditures to date may not be a reliable indication of demonstration costs—particularly if medical inflation accelerates. Greater than anticipated managed care savings allowed Oregon to offer insurance to about 50 percent more new enrollees than anticipated during 1994—without breaching the waiver funding agreement. Though the exact amount of the cap is in dispute, HCFA data show that waiver expenditures of $347 million were about $34 million less than the administration’s estimate of the waiver agreement ceiling. As shown in table 4.1, actual 1994 expenditures were remarkably close to the 1993 cost estimates that formed the basis of the federal-state financing agreement—within about $600,000. However, as this table also demonstrates, traditional Medicaid beneficiaries were less expensive than the state estimated. Table 4.2 provides our analysis of costs for traditional Medicaid beneficiaries and those newly eligible under the waiver on a per-person-per-month (PPPM) basis. On average, traditional eligibles cost 25 percent less than anticipated. Those newly eligible, however, cost 36 percent more. Oregon officials attribute the higher costs of new eligibles, in part, to the fact that many are sick when they apply for coverage. Thus, hospitals are signing up individuals for health benefits under the waiver as soon as they are admitted. Currently, eligibility for benefits commences with the submission date rather than with the subsequent approval of the application. Until the newly eligible individual is enrolled in a managed care plan, providers are reimbursed on a fee-for-service basis, further increasing state costs. Higher costs for newly eligible individuals, however, were offset by additional managed care savings of $38 PPPM for each traditional Medicaid recipient. In part, state officials credit increased savings to the fact that all but 8 of 36 counties are served by fully capitated, HMO-style health plans. As a result, about 91 percent of waiver enrollees, rather than the estimated 28 percent, are receiving services from what the state believes is the most cost-effective form of managed care. We also believe that the current ebb in medical inflation contributed to lower than expected costs. Despite greater-than-expected managed care savings in Oregon, state officials are concerned about the financial implications of current cost/enrollment trends. The concern stems from the fact that the traditional Medicaid population determines the funding base for covering new eligibles. Under the per capita cost agreement, federal matching funds for new eligibles are tied to a fixed ratio of new to current eligibles. Thus, for every four current eligibles, Oregon can claim a federal match for one new eligible in the first year of the waiver. In the first year, unexpected enrollment by new eligibles and higher-than-anticipated costs for this group was accompanied by a drop in the number of low-income families—the major component of the coverage expansion funding base. Should these trends continue, fewer federal dollars than needed would be available to meet future waiver costs. In mid-1995, Oregon officials asked HCFA for approval to implement a number of cost-reduction initiatives. As of October 1995, Oregon had received approval to change waiver eligibility rules and delay full implementation of mental health services. HCFA has yet to approve the state’s request to reduce benefits and require premiums/some co-payments for newly eligible individuals. In addition, state officials told us that greater-than-anticipated managed care efficiencies may allow them to reduce the capitation rate. Other, more general, fiscal concerns in Oregon stem from the impact of a 1991 tax initiative, new state priorities that reflect the outcome of the 1994 elections, and uncertainty about the fate of the employer mandate. Under the tax initiative, any shortfall in education funding that results from a mandated reduction in the property tax rate must be offset by general revenues. Funding for the 1115 waiver also comes from general revenues—rather than from a dedicated tax paid by a specific group. Similarly, a number of new priorities, such as prison construction, may further increase the competition for state funds. The employer mandate plays an important role in Oregon’s waiver finance plan. Oregon estimates that the mandate, originally scheduled to be phased in during the last 2 years of the waiver, would reduce both the number of traditional Medicaid beneficiaries and newly eligible individuals covered under the waiver. In addition, program costs will be reduced for low-wage workers who obtain employer-provided coverage but have incomes below the poverty level. For these individuals, Medicaid will only pay for costs not covered by the employer-provided insurance. Growing business opposition to the mandate coupled with a political realignment in the state legislature creates considerable uncertainty about the future of this funding source. In 1993, the legislature postponed implementation of the mandate, potentially increasing state costs in the process. Although state legislation requires that the mandate be repealed unless the Congress grants Oregon an exemption to ERISA by January 1996, the legislature recently sent the Governor a bill that would have repealed the mandate outright. He vetoed the bill in July 1995. According to state officials, the administration has indicated that no adjustments will be made to the waiver financing agreement if the employer mandate is not implemented. And without the mandate, waiver costs will increase, forcing the state to make up the difference or to develop additional cost-containment strategies. In 1994, Oregon estimated that the employer mandate accounted for about 16 percent of the funds necessary to finance coverage expansion under the waiver. Hawaii believed that state-funded programs subsumed under the waiver had already identified most of those newly eligible—the so-called gap group that included those who were not eligible for Medicaid and those who were either dependents or part-time workers not covered by the state’s limited employer mandate. During the first year of operation, however, Hawaii enrolled about 36,000 newly eligible individuals who had not participated in the former state-funded programs. According to state officials, a significant number of these new recipients are hypothetically eligible at state option under section 1902(r)(2) —pregnant women or children—who had not enrolled in the previous state-funded program but instead were covered by private insurance; the state believes these individuals dropped private insurance in favor of less expensive coverage through the waiver. These officials also attributed the unexpected high enrollment to Hawaii’s current economic slowdown. Table 4.3 compares estimated and actual enrollment under the waiver for both traditional and new eligibles. Hawaii officials project that as a result of this higher-than-expected enrollment, the waiver will exceed the federal budget limit for 1994-95 by approximately 23 percent—$47 million. Under the waiver agreement, higher costs in one year can be offset by lower costs in another—as long as expenditures over the 5-year life of the waiver do not exceed the cap. Hawaii officials told us that the state expects waiver costs to be slightly under the cap for the full 5 years of the program as a result of state efforts to reduce program expenditures. The following changes in eligibility standards and premiums were effective on August 1, 1995: (1) the point at which enrollees will be charged the full premium will be reduced from 296 percent of the federal poverty level to 201 percent, (2) individuals eligible for coverage under the employer mandate but who meet demonstration income requirements will be disenrolled, (3) self-employed individuals will be required to pay a minimum of 50 percent of the premium—regardless of their stated income, and (4) parental income will be taken into consideration when determining the eligibility of students under age 21. The state suspects that these last two groups either understate income or do not appropriately account for parental income. Officials in Hawaii told us that premium collections are keeping pace with expectations. During its first year of waiver implementation, Tennessee enrolled about 418,000 previously uninsured or uninsurable individuals. Although its waiver application proposed an open enrollment period once a year, the state actually accepted and processed enrollment requests throughout 1994. Moreover, Tennessee liberalized a restriction that had disqualified participation by individuals with access to insurance as of March 1993 by moving the effective date to July 1994. In late December 1994, however, the state unexpectedly announced an end to open enrollment for individuals not traditionally eligible for Medicaid. Enrollment—including both traditional Medicaid and new eligibles was about 39,000 less than the state’s 1994 enrollment cap of 1.3 million. Tennessee also informed HCFA that the enrollment cap for the remainder of the demonstration would be 1.3 million rather than 1.5 million beneficiaries. State officials attributed the freeze in enrollment of new eligibles to a budget crisis caused, in part, by demonstration costs. HCFA reports indicate that the state spent about $443 million (14 percent) less than allowed under the waiver agreement cap. Nonetheless, Tennessee covered several hundred thousand newly eligible individuals while increasing expenditures by less than half a percent from SFY 1993 to SFY 1994. Table 4.4 compares SFY 1993 enrollment and expenditures with those in SFY 1994, the first year in which the waiver became effective. Moreover, as shown in table 4.5, the state is now projecting lower waiver expenditures that could increase federal savings over earlier estimates. In the first 3 years alone, lower expenditures could more than double the state’s previous estimate of savings due to the waiver. Both the (1) gap between 1994 waiver expenditures and the federal cap on spending and (2) projected reduction in waiver expenditures to well below the amount permitted under the state’s 1115 financing agreement may be linked to problems in identifying state matching funds for DSH. HCFA officials told us that, from the outset, they anticipated Tennessee would have difficulty in drawing down federal funds up to the maximum allowed under the waiver agreement. They pointed out that although the Tennessee DSH program was available to provide a major source of funding for coverage expansion, the state discontinued its hospital tax with the onset of waiver implementation. This tax had been a source of state match for federal DSH funds. Undoubtedly, the shortfall in premiums collected from newly eligible enrollees and counted as part of state matching funds also contributed to Tennessee’s financing problems. Tennessee has encountered serious problems in collecting enrollee premiums. Initially, the state estimated that it would collect about $21 million in premiums during the first 6 months of the waiver as new eligibles gradually signed up for the program; premiums would increase up to $117 million in the last year when full enrollment had been achieved. However, for the first 6 months, Tennessee only collected $2.4 million, forcing it to find other sources of state matching funds. Lower-than-expected premium revenues in Tennessee are due, in part, to a series of administrative glitches. Even though enrollment of the uninsured began in January 1994, initial premium notices were not mailed until June 1994. The notice informed enrollees that premium booklets would be mailed soon for monthly payments beginning with July. Then, the state contractor failed to mail up to 80,000 premium booklets, an error that was not discovered until November 1994. In February 1995, the state sent letters to nearly 60,000 households notifying them of past due premiums totaling $31 million. Approximately 62,000 individuals—about 15 percent of new eligibles—had been disenrolled from the program as of June 1995 and upwards of 20,000 more were within the 30-day notification period for termination. Another 17,000 families were placed on payment plans to address overdue premiums. Though the three waivers discussed in this chapter were approved during a period of economic recovery and a slowdown in medical inflation, the recession of the early 1990s coupled with rapid medical price increases serve as a reminder of the risks posed by fixed-cost agreements in variable-cost environments. While states have benefited from recent economic trends, the potential for a resurgence in medical inflation, a recession, and large numbers of traditional and/or new eligibles could create problems for Tennessee, Oregon, and Hawaii. In Tennessee, the 1115 agreement provides the state with a fixed budget to serve both traditional Medicaid and newly eligible recipients. Though the state appears to have a tight lid on cost increases, it is already under pressure to raise capitation rates that most providers consider unrealistically low. A slowdown in economic growth and the associated increase in Medicaid enrollment due to rising unemployment could further exacerbate the state’s current budget crisis and provide additional ammunition to already aggrieved providers. Increased medical inflation and a recession could pose a somewhat different dilemma for Oregon and Hawaii. Under the terms of their waiver expenditure caps, these two states are not at risk for changing economic conditions that could increase the number of traditional Medicaid beneficiaries. Thus, the limit on demonstration costs floats upward with enrollment, permitting increased federal and state Medicaid expenditures. If increased state costs associated with covering more traditional beneficiaries is accompanied by an acceleration in medical price increases, however, the additional budget resources required could threaten Oregon’s and Hawaii’s coverage expansion plans. Comprehensive 1115 Medicaid demonstrations have given states flexibility to test innovative approaches for the delivery of publicly funded health care services. While the waivers were intended to give states program flexibility, it is not clear whether the administration’s decision to simultaneously provide budgetary flexibility is consistent with the current emphasis on reducing the federal budget deficit. Under the four approved waivers we analyzed, the federal government is potentially at risk for a net increase of about $2 billion in Medicaid expenditures. While Tennessee’s waiver agreement meets the test of budget neutrality, those of Florida, Oregon, and Hawaii do not. The agreements in these three states represent the antithesis of the budgetary certainty that the Congress appears to be moving toward in social program spending. We believe the granting of additional section 1115 waivers merits close scrutiny for several reasons. First, the potential budget impact of 1115 waivers may increase if the administration continues to show budgetary flexibility in its review of additional state proposals. The administration has granted a number of additional waivers since Florida’s, the most recently approved waiver whose budget neutrality agreement we examined in detail. Moreover, the number of pending waivers continues to grow and now includes New York, whose Medicaid expenditures represented about 16 percent of national program costs in fiscal year 1993. Second, given the priority attached to reducing the deficit, it may be appropriate to consider whether or at what point taxpayers should benefit from managed care savings that are currently being reinvested to expand Medicaid coverage to millions of additional individuals. Finally, though comprehensive 1115 Medicaid waivers were approved during a period of economic recovery and a slowdown in medical inflation, the recession of the early 1990s coupled with rapid medical price increases serve as a reminder of the risks posed by fixed agreements in variable-cost environments. The combination of higher medical inflation, a recession, and large numbers of traditional and newly eligible Medicaid enrollees could pose equally unattractive alternatives for both the federal government and states: (1) increasing funding or (2) reducing benefits/denying coverage to hundreds of thousands of people newly enrolled under the waivers. Consequently, we question whether demonstration waivers granted for a limited period are the best approach to reducing states’ uninsured populations. The Department of Health and Human Services and OMB disagreed with our conclusion that the waiver funding caps for Oregon, Hawaii, and Florida are not budget neutral. We continue to believe that the administration’s waiver funding caps for these states may result in increased federal spending. We do not believe that our methodology is the only appropriate method to estimate budget neutrality baselines, and agree that using a tailored, state-specific approach would be more appropriate. We did tailor our methodology to the specific services covered by the demonstrations and did reflect current DSH rules. We saw no evidence, however, that the administration itself adopted this approach. The only state-specific data evident in the negotiating record were historical trends, which were clearly not expected to continue. The acute and long-term care cost projections cited in the administration’s comments are not consistent with OMB’s published forecast of overall growth in the Medicaid program. While OMB characterized its own approach to budget neutrality as “ad hoc,” we adopted a consistent and uniform methodology that challenges the administration to support its contention that these demonstrations should grow at such high rates. To date, the administration’s own methodology remains shrouded in generalities. We believe that potential program cost increases of hundreds of millions of dollars should be based on a more clearly specified methodology. Second, contrary to the administration’s assertion, state variation in Medicaid programs and expenditures was a central component of our assessment of budget neutrality. After using OMB’s national forecasts to project without-waiver expenditure trends, we examined the waiver negotiating record and asked state officials to identify why future state Medicaid expenditures should exceed the national norm. As noted, we found no state-specific evidence to support the high budget caps agreed to by the administration. Even in the case of Florida, whose Medicaid program had been growing faster than the national average, the state’s own estimates show that key factors contributing to past growth were not expected to be sustained. OMB maintains that “it is more appropriate to use a current law rather than a current services baseline for adjudicating budget neutrality.” Yet, it points out that “the President’s budget does not differentiate between the two.” We do not question OMB’s authority to estimate the baseline, including anticipated behavioral changes in mandatory programs where such changes are allowable under current law. We do question whether in this case such an adjustment is appropriate, based on our review of state practices in these programs. The only explicit use of current law evident in the waiver approval process is OMB’s decision to include those hypothetically eligible for Medicaid under current law within their baseline. Of the four states we reviewed, OMB’s approach only affected the baseline for Hawaii, as is reflected in figure 3.6. Since no attempt was made in Hawaii’s or in other states’ waivers to suggest that they would have expanded Medicaid eligibility to hypothetical groups if their 1115 demonstrations had not been approved, we chose not to include hypotheticals in the baseline. Finally, the administration questioned the basis for our estimate of expenditures under the waiver funding agreements for Oregon and Hawaii, states with per capita funding limits. We asked and were told by administration officials that no estimates had been made of potential expenditures under those caps. Consequently, we worked closely with state officials to develop such estimates. State Medicaid officials reviewed and agreed with our methodology, described in detail in appendix I. | Pursuant to a congressional request, GAO examined the financing arrangements for four approved section 1115 Medicaid demonstration waivers. GAO found that: (1) the approved spending limits for demonstration waivers in Oregon, Hawaii, and Florida are not budget neutral and could increase federal Medicaid expenditures; (2) Tennessee's 1115 waiver agreement should cost less than the continuation of its prewaiver program and result in savings; (3) although additional federal funding is relatively lower than demonstration spending under federal expenditure caps, federal Medicaid expenditures could increase rapidly if similar flexibility in reviewing state 1115 financing strategies is allowed; (4) five waivers have been approved since late 1994, and the backlog of pending waivers includes three states with large Medicaid programs; (5) additional federal funding is available to protect against the uncertainties states face in implementing demonstrations; and (6) it remains unclear whether the states implementing demonstrations will exceed their 1115 waiver funding caps. |
In the 1990s, Congress constructed a statutory framework to address long-standing weaknesses in federal operations, improve federal management practices, and provide greater accountability for the use of resources and achieving results. This framework included as its essential elements the Government Performance and Results Act of 1993 and key financial management and information technology reform legislation: the Chief Financial Officers Act of 1990—as expanded by the Government Management Reform Act of 1994—and the Paperwork Reduction Act of 1995 and the Clinger-Cohen Act of 1996, respectively. In 1993, NPR recommended to the President that agencies reduce by half the costs related to central management control positions, by 1999. NPR targeted administrative costs and positions, such as managers, personnel specialists, budget analysts, procurement specialists, and other headquarters staff positions to reduce administrative layers at headquarters and streamline field structures. NPR estimated that these central control positions cost about $35 billion a year in salaries and benefits. To achieve NPR’s streamlining goals, in 1994, the Office of Management and Budget (OMB) required agencies to prepare streamlining plans detailing, in addition to other things, how they planned to reduce these targeted positions. The typical federal personnel office carries out a wide range of functions related to the management of an organization’s people, from the time they apply for a position to the time they leave. This includes establishing policies and carrying out activities, many of which are prescribed by federal law. The range of personnel functions generally includes, but is not limited to, recruitment and employment (including workforce diversity), classification (i.e., determining the appropriate grade and classification series of a position), merit promotion, and employee and labor relations. A personnel office collects and maintains data related to the employment process. Personnel activities include such tasks as advertising positions to be filled, verifying candidate information, processing paperwork on health insurance and other employee benefits, and processing paperwork on employee discipline and promotions. Although agencies use automation to store and analyze various pieces of personnel information (e.g., employees’ occupations, grades, and performance ratings) and process payroll data, personnel administration has been largely a paper-based, labor-intensive operation, as often is the case with administrative functions. Each year, hundreds of federal personnel offices process millions of personnel actions that affect the federal workforce of almost 1.9 million civilian, nonpostal employees. For example, nearly every official personnel action affecting a specific employee, such as a promotion, begins with the preparation of a Standard Form 52, “Request for Personnel Action.” And when the request is approved, it is followed by the preparation of a Standard Form 50, “Notification of Personnel Action.” Figure 1 shows various processes that typically are included in personnel operations. Federal efforts to reduce administrative overhead positions, including personnel, somewhat parallel streamlining efforts in the private sector. For example, human resource managers in the private sector have been asked to integrate the company’s personnel management practices with its business goals and objectives while also providing cost-effective, traditional personnel services. Private sector human resource managers increasingly are expected to quantify their operations’ return on investment or what “value-added” the function provides. In the federal sector, cost concerns have forced managers to reexamine the role of the personnel function and its relationship as a support function to the mission of the agency. For example, the Results Act recognizes the importance of human resource management as a key element for achieving performance goals as part of agencies’ strategic and annual performance plans. We have suggested that agencies’ performance plans that contain a description of how workforce knowledge, skills, and abilities can contribute to the achievement of program performance goals would be most useful to congressional decisionmakers. In addition to the reexaminations that are taking place about the role of the personnel function and its relationship to mission accomplishment, the departments’ restructuring efforts also were taking place within a context of evolving concerns about the federal human resource management system’s statutory and regulatory framework. These concerns, which have been expressed by agencies, OPM, NPR, and Congress, center on striking the best balance among the priorities of managerial flexibility and decentralization on the one hand, and systemwide consistency and adherence to merit principles on the other. How these priorities are balanced and any changes to current regulatory or statutory requirements may have important implications for federal human resource management and personnel offices, as well as how personnel services are provided to line managers. In planning how to restructure personnel operations and what personnel processes to automate, agencies are now required by the Clinger-Cohen Act of 1996 to reassess their work processes to determine whether their administrative and mission-related business processes should be improved before investing in major information systems to support them. As federal agencies decide how to streamline administrative support functions, they must choose among options for providing automated personnel and payroll services. Such options include purchasing personnel and/or payroll services from another government agency (or franchise, also called cross-servicing) or contracting with the private sector. To meet our first objective in this self-initiated review—to describe the activities that have taken place in restructuring personnel offices and operations—we first surveyed 24 CFO agencies (as designated by the Chief Financial Officers Act of 1990), which employ most executive branch employees—to identify those that were restructuring personnel operations. These 24 CFO agencies represent about 97 percent of the nonpostal, full-time workforce of the executive branch. From among those that were restructuring personnel operations, we reviewed USDA, DOI, HHS, and VA to obtain further information about restructuring activities at these agencies. We selected these agencies primarily because they said they were using business process reengineering as an approach to restructuring and/or were providing or planning to provide personnel and payroll services to other agencies. We interviewed personnel officials from the four departments and selected component agencies to obtain information on the reasons for restructuring, the planning in preparation for restructuring, the activities undertaken to restructure, and the status of restructuring efforts. We also reviewed the restructuring plans of the four departments and component agencies. (The component agencies we reviewed are listed in app. I.) To address our second objective—to ascertain what, if any, performance measures are in place to gauge the results of restructuring activities—we discussed with responsible officials of the four departments and component agencies whether their organizations had or were developing measures to assess the performance of the restructured personnel offices and operations. Where measures were said to exist, we reviewed the documentation that described and supported the measure. In addition, to better understand the major issues associated with restructuring personnel operations and performance measurement, we reviewed current literature on the two subjects and spoke with performance measurement experts from the National Academy of Public Administration (NAPA) and the Saratoga Institute. In connection with our second objective, we computed one common measure—the personnel servicing ratio—to assess progress in restructuring. To compute the ratios, we obtained September 1993 and September 1997 data from OPM’s Central Personnel Data File (CPDF) on the number of employees and personnelists at the 24 agencies we surveyed. These personnelists were in the federal Personnel Management and Industrial Relations occupational group—GS-200s—that NPR specifically targeted for reduction. We used the NPR definition of personnel specialist with the understanding that some agencies classify some employees working in personnel offices in other occupations, such as program analysts (GS-345) or management analysts (GS-343). In addition, all personnel specialists in the GS-200 group may not have worked in personnel offices; some may have worked in allied offices, such as training and counseling. To address our third objective—to identify issues agencies may commonly encounter as they consider purchasing automated personnel and payroll services—we interviewed officials from the departments and component agencies who were involved in the development or purchase of computer hardware and/or software for use in personnel/payroll operations. We obtained information from these interviews on the decision processes for acquiring new technology, the challenges that surface in acquiring new technology, and the status of implementing the new technology at their departments and agencies. We also met with officials from OMB and OPM and representatives of two governmentwide councils to discuss governmentwide efforts to streamline personnel operations, including the use of technology to automate personnel processes. (For additional information on our objectives, scope, and methodology, see app. I.) We did our work in the Washington, D.C., metropolitan area and at several other locations listed in appendix I between October 1996 and January 1998 in accordance with generally accepted government auditing standards. We requested comments on a draft of this report from the Directors of OMB and OPM, the Secretaries of DOE, DOI, HHS, USDA, and VA, or their designees. A discussion of their comments appears at the end of this letter, and their written comments are included in appendixes II through VIII. The four departments we reviewed generally approached the restructuring of their personnel offices with the intent of achieving staff reductions. Although all four departments reduced the number of personnelists they employed by 14 percent or more, the personnel servicing ratio for three of the four departments did not change as much. Another key component of the departments’ restructuring plans was to install new technology—hardware and/or software—to automate paper-based personnel processes and thereby improve the responsiveness and quality of personnel services. However, for various reasons, such as an agency deciding to do additional system testing, these automation efforts had all fallen behind schedule. The four departments we reviewed had all developed restructuring plans. One of the primary goals of those plans was to reduce administrative staff, including the number of employees working in personnel offices. In reducing their administrative staffs, the departments were responding to a number of factors. One major impetus was the 1993 NPR recommendation to reduce administrative staff. Other major factors were the governmentwide reality of operating with reduced budgets, exemplified by a succession of budget agreements between Congress and the administration, as well as the requirement in the Federal Workforce Restructuring Act to reduce governmentwide full-time equivalent positions. USDA was also responding to 1994 legislation that directed it to reorganize and to reduce its workforce. There were also cases, such as VA, where the departments or their agencies started their restructuring efforts to improve customer service before governmentwide efforts began in the 1990s. In deciding how to restructure, each department had to confront its own particular set of circumstances and challenges. As of late 1997, officials in each of the four departments characterized the status of their personnel office restructuring as generally nearing the end of its initial stages of implementation. A brief summary of those restructuring efforts is presented next. Between September 1993 and September 1997, USDA reduced its personnel staff departmentwide from 2,463 to 2,035 employees, a decrease of about 17 percent. One of the primary reasons for this restructuring was a major, departmentwide reorganization and downsizing required by the Federal Crop Insurance Reform and Department of Agriculture Reorganization Act of 1994. After reducing personnel staff, USDA initiated an HR project using a business process reengineering approach to (1) define and document the existing business framework through which personnel offices performed their mission, (2) identify any problems that were present in personnel operations, and (3) identify opportunities for improving those operations. This project was part of an initiative—Modernization of Administrative Processes Program—that USDA had begun in 1989 to streamline administrative processes and supporting systems departmentwide. Although several of its projects would likely continue under other USDA organizations, the modernization initiative itself was terminated in 1997 by the Acting Assistant Secretary for Administration because the initiative had only modest accomplishments. For example, only two of seven active projects to improve the administrative function had reached the pilot stage. Certain USDA agencies had begun to restructure their personnel operations apart from the 1989 initiative and the 1994 legislative mandate to reorganize. For example, the Forest Service had been consolidating personnel operations in its 10 regions since the mid-1980s, and had eliminated 56 of its 160 personnel offices as of September 1997. It planned to further reduce the 104 offices to fewer than 40. HHS reduced its personnel staff by about 320 employees over the period from September 1993 to September 1997, a decrease of about 14 percent.HHS’ restructuring efforts focused on reorganizing and consolidating the department’s personnel offices. The individual agencies within HHS developed separate plans to restructure their personnel offices in conjunction with the departmentwide reorganization. According to HHS personnel officials, the NPR recommendations, budget constraints, and specific changes required by legislation were the primary motivators for restructuring personnel operations. Other factors cited by HHS officials that influenced HHS’ restructuring decision included OMB exerting pressure on the department to improve its administrative processes and the findings of two organizational studies conducted by HHS in 1993 and 1995. HHS’ streamlining and reinvention strategy included three parts. The first part of the strategy was to separate personnel policy from personnel operations at HHS headquarters, which was accomplished in 1995. The second part of the strategy was to create the Program Support Center, which was established in 1995. The Center operates the automated personnel and payroll system for the Department and provides personnel administration services for the Office of the Secretary, the Administration on Aging, and for the Center’s employees. According to HHS officials and documents, establishing the Center has helped HHS reduce duplicative administrative services and the number of administrative employees. The third part of HHS’ restructuring strategy was to delegate authority in personnel and other administrative and management operations to its component agencies. For example, as part of HHS’ broader restructuring efforts, HHS delegated to the health agencies that formerly comprised the Public Health Service their own delegation of HR authorities. DOI reduced its personnel staff from 1,787 to 1,062 employees between September 1993 and September 1997, which was a decrease of about 41 percent. DOI’s nine bureaus mainly restructured their personnel offices through consolidating offices, reorganizing bureaus, and downsizing the workforce through attrition and reductions-in-force. For example, the personnel office of DOI’s Office of Surface Mining agreed to provide personnel services to the Bureau of Indian Affairs (BIA). After the agreement was reached, DOI eliminated BIA’s personnel policy and operations staff at its central office in Washington, D.C., which had provided service to the Eastern Area. BIA also shifted coverage of personnel services for the Eastern Area to the Anna Darco, Oklahoma, area office and for BIA’s Education Division to the Albuquerque, New Mexico, area office. DOI departmental and bureau officials cited two reasons for restructuring personnel operations in the department—budgetary constraints and NPR recommendations and guidelines. In October 1994, after the bureaus rejected an earlier proposal to regionalize all personnel operations, DOI issued a plan for the department that detailed objectives, principles, approaches, and strategies for streamlining administrative operations. According to the plan, the bureaus were asked to review their organizations to identify strategies to reduce management layers, increase the span of control for supervisors, and reduce their headquarters’ functions by as much as 50 percent. Each bureau was to devise its own plan to meet the departmental goals. Under the streamlining plan, authority for personnel matters would be delegated to line managers of DOI’s nine bureaus so that they could accomplish operating missions. According to departmental and bureau officials, this delegation has been made but with varying degrees of success. According to officials at one bureau, the concept of managers assuming personnel work was not realistic without fundamentally changing the personnel requirements and the associated processes to fulfill those requirements. Between September 1993 and September 1997, VA reduced its personnel staff from 2,880 to 2,387 employees, a decrease of approximately 17 percent. According to VA officials, although VA’s personnel staffing has been reduced, customer satisfaction with personnel services was the primary factor that led VA to restructure its personnel operations. VA’s initial restructuring of personnel offices began in the Veterans Health Administration and the Veterans Benefits Administration, which together employ most of the VA workforce. Since then, VA has taken a departmentwide approach to restructuring its personnel and payroll operations, referred to as “HR LINK$.” Key features of this departmentwide approach include a national “shared service center” to process personnel transactions for all of VA and a newly designed three-tiered approach to address the questions and concerns of employees and managers. At the first tier, a generalist is to answer routine inquiries and process simple transactions. If an inquiry goes beyond the assistance the generalist can provide, it goes to a specialist at the second tier who is to provide problem-solving, issue resolution, and advice or counsel based on the specific needs of the case. If assistance is needed above the specialist’s expertise, then a small staff of experts at the third tier is to provide or facilitate answers on department policy, program design, or resolve complex case work. VA had a four-phase strategy for implementing the remaining activities of its restructuring plan and was in the second phase as of late 1997. VA officials planned to complete departmentwide implementation by December 1999. According to VA officials and documents, VA’s aim in developing its approach was to improve the delivery of personnel service and to have the personnel function more directly assist program managers in accomplishing the mission of the organization. To determine how personnel services could be improved and made more useful to managers, VA compared its personnel operations with the personnel operations of leading private and public sector organizations and used a business process reengineering approach to streamline its personnel processes. Expanding on that effort, VA’s September 1997 HR managers’ conference focused on how the human resource function can become a strategic partner in supporting managers and employees in accomplishing VA’s mission. The purpose of the conference, as stated in conference materials, was “to develop effective strategies and accountable action plans, with relevant stakeholders, to optimize value-added and measurable human resource services for the changing VA, and to clarify responsibilities in the new HR/Payroll model.” Personnel officials we interviewed referred to their personnel servicing ratios as a key indicator when they spoke about restructuring personnel operations. As previously stated, governmentwide reductions of personnelists totaled about 8,900 employees or about a 21-percent reduction. The reductions in the number of personnelists at the four departments we reviewed ranged from 14 to 41 percent, or an average of about 22 percent. In contrast to the large reductions in the number of personnelists, however, the personnel servicing ratios for the departments, except for DOI, did not change as substantially from September 1993 to September 1997 because of downsizing in other parts of the agencies. For example, although USDA reduced the number of personnelist by 17 percent, USDA’s personnel servicing ratio decreased from 55 employees served by 1 personnelist (55:1) to 54 employees served by 1 personnelist (54:1), which was still below the federal average of 56 employees served by 1 personnelist (56:1). DOI reduced its number of personnelists by 41 percent and improved its servicing ratio from 48:1 to 68:1. VA’s 1993 and 1997 servicing ratios were well above the federal average at 95:1 and 103:1, respectively. Table 1 shows the ratios for the four departments and the ratios for the 24 CFO agencies combined. As mentioned previously, the 24 CFO agencies employ most of the federal civilian workforce. The personnel servicing ratios for the four departments did not increase more because, at least in part, the overall number of employees served also decreased between September 1993 and September 1997. In addition to reducing personnel staff, each department also downsized other parts of its workforce. For example, according to data from OPM’s CPDF, USDA had about 25,700 fewer employees in September 1997 than it did in September 1993, a decrease of about 19 percent. In comparison, the number of personnelists at USDA decreased by 17 percent. As part of their restructuring efforts, the four departments planned that new hardware and/or software technology—designed to reduce paperwork and workload for personnel staff—would be in place before personnel staff reductions were made. To this end, each department was developing or purchasing new technology for automating personnel transactions. In some cases, the departments had begun to automate the processes for classifying and staffing positions, which streamlined those processes and reduced the time necessary to process certain transactions, such as employee hiring and promotions. However, across all four departments, much of the new automation was not in place even though personnel staff reductions had occurred. As of late 1997, the departments were behind their original milestones for implementing the new personnel and payroll systems. For example, USDA officials were deciding whether to provide an automated “front-end processing” supplement to its core payroll/personnel system by developing software in-house or purchasing commercially available software. Pilot tests of both software products were planned to develop information on which to base the decision. HHS’ Program Support Center, which is to serve all of HHS, was converting its existing system to use commercially available software to upgrade its personnel and payroll system, as well as testing the converted system. DOI had been developing a system for processing personnel and payroll transactions, including automating SF-52s, since the late-1980s, but it was not fully operational departmentwide as of January 1998. VA had rescheduled the opening of its national service center from September 1997 to March 1998 to allow more time for programming and testing the new information system. However, VA officials remained confident that the new system would be implemented departmentwide by December 1999, as projected, because key implementation steps were being done in parallel rather than in sequence. Officials of the four departments and their agencies told us that efforts to upgrade technology have been resource intensive and have taken longer than expected. Specifically, some officials said that when restructuring efforts began they had not fully appreciated the need to (1) assess existing automated systems before making changes, (2) have technology in place before downsizing personnel staff, and (3) allow sufficient time for testing the new technology. One option these officials recommended to other agencies to facilitate the conversion process was to consider purchasing commercially available software rather than building new personnel information and payroll systems in-house. Few commercial software programs suitable to the departments’ needs, according to officials at two departments, were available when the departments began to develop their automated systems in-house. Further complicating the system delays in the agencies is their need to comply with the Year 2000 date conversion. In both the public and private sectors, the way dates are recorded and computed in many computer systems is at the root of the Year 2000 compliance problem. For the past several decades, systems have typically used two digits to represent the year, such as “97” representing 1997, to conserve electronic data storage space and reduce operating costs. With this two-digit format, however, the year 2000 is indistinguishable from 1900, 2001 from 1901, and so on. As a result of this ambiguity, system or application programs that use dates to perform calculations, comparisons, or sorting may generate incorrect results. Payroll and personnel information systems and programs clearly fit those categories. All four departments were aware of this problem and were taking steps to address the issue. For example, according to DOI officials, the personnel information and payroll system they are developing is designed to be Year 2000 compliant. DOI plans to validate and test the new system’s compliance in 1999. The four departments we reviewed had only limited measures in place to assess the performance of personnel offices and operations but were developing further measures. A growing trend in industry and more recently in government, according to HR experts, is the expectation that the personnel function needs to quantify its operations’ return on investment or what value-added the function provides to an organization.In addition, as we previously reported, without measures of performance, it will be difficult to track the impact of recent activities to streamline personnel operations and to know whether the intended results were achieved. Focusing the measurement of personnel operations on results represents a major shift for HR managers in the federal government. A 1993 study of federal personnel offices, by the U.S. Merit Systems Protection Board (MSPB), highlighted the fact that personnel offices in the federal government have long been evaluated on the basis of compliance with laws, rules, and regulations and not on service delivery or results. The MSPB found little in the way of performance indicators of service delivery in personnel operations. In our survey of the 24 CFO agencies, we found that there had been little progress since the MSPB study was conducted. The 24 CFO agencies reported little if any performance measurement activity. More specifically, when we spoke with personnel officials from the four departments, they told us that they had few measures in place across the department to track performance or to indicate what value-added services personnel offices bring to the organization. These departments had not routinely gathered the data needed to gauge operational efficiency and effectiveness. For example, data were not usually gathered to measure the costs of personnel and payroll processes or the level of satisfaction customers had with the quality and timeliness of the services they received. A 1996 USDA study identified 360 operational activities associated with the delivery of personnel services but identified performance measures for only 6 of them. While not common, we did observe that some agencies had performance measures in place that were not routinely being used elsewhere. For example, at USDA’s Animal and Plant Health Inspection Service (APHIS), officials said they had performance standards in place for a number of years. As part of its performance standards, APHIS tracks how long it takes to carry out certain activities, such as 34 days to complete the processing of paperwork for promotions. One performance measure that agencies’ personnel officials consistently used was the personnel servicing ratio, as discussed earlier. For example, DOI issued guidelines to the bureaus to attain a servicing ratio of 100 employees to 1 personnelist. VA had projected a target servicing ratio of 110 to 125 employees to 1 personnelist. The servicing ratio, while providing a broad measure of efficiency and an indicator of progress in restructuring, does not indicate how well an agency’s personnel office meets the needs of its customers—managers and employees—or its contribution to mission accomplishment. Performance indicators can aid agencies’ efforts to improve service delivery, efficiency, and quality—key goals of agencies’ restructuring efforts. Agency officials we interviewed in all four departments recognized the need for measurement and were beginning to develop appropriate measures to assess the performance of personnel offices. For example, officials of HHS’ National Institutes of Health said they were working with NAPA to develop specific measures to track the delegation of authority to line managers and whether line managers believed that the personnel systems were flexible and easier to use. According to HHS officials, HHS also conducts an HR management indicators survey, which provides managers with data on employee perceptions of organizational effectiveness. VA sought to quantify the costs and performance of its personnel activities as it was developing its restructuring initiative to identify specific opportunities for improvement. Moreover, VA also recently developed performance measures that it circulated for comment to its personnel managers, including measures of users’ satisfaction with the new automated personnel system and cost per employee for operating the new human resource system. At USDA, the Natural Resources Conservation Service also planned to use performance measures, for example, to determine the time personnel staff take to provide lists of eligible candidates to managers to fill vacant positions. A 1997 NAPA study was commissioned by a number of federal agencies, including HHS and VA, to help personnel offices design useful measurement systems and to provide information and tools for that purpose. While the study emphasized that there is no one-size-fits-all system of measurement, it did identify four aspects of HR that should be measured. The four aspects were (1) financial measures, such as cost per employee hired and litigation costs; (2) customer satisfaction measures, such as those associated with responsiveness and quality; (3) workforce capacity measures, such as employee satisfaction and education; and (4) process effectiveness, such as cycle time and productivity. In restructuring its personnel operations, a federal agency may decide to purchase personnel and payroll services rather than operate its own systems. Congress and the current administration, as with prior administrations, have encouraged federal agencies to provide administrative services to other agencies on a reimbursable basis. The Director of OMB was authorized by the Government Management Reform Act of 1994 to designate a number of agencies that can establish pilot franchise funds to provide common administrative support services. Federal agencies may also contract with private companies for personnel and payroll services. Among the issues that agencies may encounter if purchasing personnel and payroll services is the inability of service providers to deliver services when scheduled. Another issue is the lack of a common framework in which to (1) compare the service quality of personnel and payroll services that franchise and other federal agencies will provide to agencies seeking services and (2) permit the efficient exchange of automated personnel data between agencies and service providers. Each of the four departments is selling or planned to sell automated personnel and/or payroll services to other federal agencies, which was one reason why each department was upgrading its payroll and/or personnel information system. Three of the four departments (DOI, HHS, and VA) were franchise pilots, and USDA’s National Finance Center already provided personnel and payroll services of some extent to 45 agencies, including us, as of August 1997. As previously stated, the departments had all fallen behind schedule in bringing their proposed systems to operational status. This situation had already affected the plans of certain agencies to obtain services. For example, DOI had agreed to provide payroll services to DOE if it were feasible to build an interface with DOE’s human resource information system under development using commercially available software. Upon completion of a feasibility study, DOI estimated that it would take at least 15 months beyond the scheduled delivery date to provide payroll services to DOE because of the need to develop a computer interface. DOI estimated that the interface would cost at least $3.4 million to develop and between $450,000 and $675,000 annually to operate. Because of the estimated time lag in the delivery of services and the associated costs, DOE decided to cancel its agreement with DOI. DOE plans to upgrade its existing payroll system and develop its own interface to DOE’s new HR system, which, according to DOE officials, is Year 2000 compliant. The situation of an agency waiting for an uncertain length of time to receive automated services is further complicated by the need for all agencies to comply with the Year 2000 date conversion. According to DOE officials, one reason why the Department decided to purchase payroll services from DOI was because its existing personnel information and payroll systems were not Year 2000 compliant. The officials said that DOE will now have to upgrade its payroll system to make it Year 2000 compliant. Other agencies may face similar situations if they cannot obtain personnel and payroll services in a timely manner from outside providers. A common concern among the department and agency officials we interviewed was the lack of a common framework for restructuring personnel processes and information systems. The officials suggested that it would be useful to have, before entering into a cross-servicing arrangement, descriptions of the services agencies are offering. The descriptions could provide cost, performance, and other information about a service that would help an agency to decide whether to develop the service in-house or buy the service from another agency or the private sector. According to USDA, several agencies have expressed to the governmentwide Human Resource Technology Council that costs are not comparable from one service provider to another because different services are provided and different assumptions for including costs are used to determine billing for these services. As we reported in October 1997, experiences in private sector organizations in purchasing automated administrative services show the need to understand the cost drivers and performance requirements to make effective “outsourcing” decisions. In our survey of the 24 CFO agencies, several agencies reported that they were considering various options for obtaining personnel and payroll services, such as cross-servicing and outsourcing. However, agency officials told us that the available information on operational performance and costs for personnel and payroll services from other federal agencies were limited (e.g., information on whether the systems work together without costly interfaces). This lack of information may be due in some measure to the less-than-fully operational status of new systems that agencies may be installing to provide cross-servicing or franchise services, such as was the status in the four departments we reviewed. The four departments had limited processes to routinely capture specific costs of their personnel and payroll activities but were beginning to capture more cost data. For example, VA and USDA officials were beginning to use activity-based costing to determine what the costs were to conduct certain activities and were using this information to help target improvements in their personnel operations. Department and agency officials we interviewed said it would be useful as well to have a standard technical format for data that agencies are likely to exchange with service providers. Standard technical formats, they said, would enable an agency and its service provider to readily exchange automated data. In April 1997, we reported on agencies’ concerns about the lack of core requirements for automated personnel and payroll systems. OPM recently began taking positive steps to address these concerns by rechartering the Federal Personnel Automation Council as the Human Resources Technology Council. OPM has tasked the Council with developing a set of core data elements and requirements for personnel information systems in recognition of the need to develop a governmentwide strategy for using automation technology. To improve the overall efficiency of agency human resources operations, the President’s Management Council tasked the Human Resources Technology Council to (1) review ongoing development and modernization of human resource systems across the government and (2) define and standardize essential functional or information requirements. The Human Resources Technology Council issued a report in November 1997 detailing its findings from a governmentwide survey of human resources information systems. These findings include the following: Human resources and payroll information systems should accommodate the flexibility and discretion needed by agency management. Agencies should make every effort to adopt standard data elements and descriptions to provide a degree of interoperability and compatibility of human resources information systems across the government. Analytical processes should be used to critically examine, rethink, and redesign agency human resources management programs before embarking on the development of new information systems. Agencies should review other existing agency information systems to determine if any one of them can satisfy their needs before making a decision to purchase or develop a new system. Agencies’ decisions about how and when to replace current systems should be based on a business case analysis. The Human Resources Technology Council’s November 1997 report recommends that the Council and OPM undertake further study to develop a strategy to move toward governmentwide electronic human evaluate the cost of implementation and maintenance of human resource evaluate the best practices of other government entities and the private ensure that up-to-date functional requirements and data elements are identified in the payroll area. In addition, in June 1997, the President established an Administrative Management Council, acknowledging that administrative management matters deserve attention across agency lines. Initial efforts to restructure personnel operations at USDA, HHS, DOI, and VA were aimed at reducing personnel office staff and improving automated systems. Upgrading system technology was a primary element of the restructuring plans because the departments planned to increase operating efficiencies and improve services by automating paper-based personnel processes. Each department reduced the number of personnelists it employed, with reductions ranging from 14 percent at HHS to 41 percent at DOI. Each department as well was working to improve its automated systems. However, the automation efforts were not completed as planned before reductions in personnel staffing occurred. Automation efforts had not been fully implemented throughout the departments, as of late 1997. Although some agencies were beginning to develop and implement performance measures for personnel operations, it was difficult for them to assess the performance of their restructured personnel offices because the offices generally lacked baseline measures to gauge changes in performance. The Government Performance and Results Act of 1993 requires federal agencies to assess how well they are performing and to do so with appropriate performance measures. Without performance measures, departments and agencies will be unable to determine the timeliness of personnel services, the satisfaction levels of those who use the services, and other attributes that they may associate with personnel operations. Because personnel offices, regardless of department or agency, generally carry out the same activities, some performance measures would appear to have widespread application across agencies, could be used to compare performance among agencies, and could help to identify best practices in the delivery of federal personnel services. Performance measures also provide a benchmark to assess the effectiveness of reform efforts such as those taken by the four departments we examined. The lagging schedule at the four departments in upgrading the personnel and payroll systems has had consequences beyond the four, since each department is providing or plans to provide personnel and payroll services to other agencies. An agency may sign up to use these services, in part, because its own personnel information and payroll systems are not Year 2000 compliant. As discussed earlier, DOE changed its plans to use DOI’s payroll services. One of the factors, which influenced that decision, was the high cost to develop and maintain the DOI interface with DOE’s new HR information system. The second factor was DOE’s lack of a “comfort zone” between the projected date to complete the interface and the year 2000, in the event delays were encountered in developing and testing the interface, since DOE’s payroll system was not Year 2000 compliant. It is imperative that payroll and personnel information systems, which use dates for many computations and analyses, be Year 2000 compliant or that the agencies have some backup means of accurately making the necessary computations when 2000 arrives. As agencies decide to use alternative approaches for delivering personnel and payroll services, such as cross-servicing arrangements, they will need to be assured that the services they are to receive under these arrangements can and will meet their data and information needs. The administration has recognized that a governmentwide framework for cross-servicing arrangements is needed as agencies restructure personnel operations. OPM’s Human Resources Technology Council has begun to focus interagency efforts to develop such a framework. Agency officials have suggested that the framework could include consistent policies, data formatting requirements, and pricing structures for cross-servicing. The Council’s current efforts do not include developing common performance measures. These initial efforts appear to be a good start and, with further refinement, would assist agencies in providing common administrative functions across the federal government as envisioned under the franchise fund pilot program authorized by the Government Management Reform Act of 1994. We recommend that the Director of OMB require agencies to develop performance measures for personnel operations. The measures to be developed should assess key areas, such as the costs of personnel processes, customer satisfaction with personnel services, workforce capacity, and process effectiveness. To develop measures that would have widespread application, we recommend that the Director of OPM, in conjunction with the President’s Administrative Management Council, lead an initiative that helps agencies develop common measures that could be used to make performance and cost comparisons of personnel operations within agencies and across government. We obtained written comments on a draft report from OMB, OPM, and the four departments (DOI, HHS, USDA, and VA) whose personnel restructuring efforts we reviewed. We also obtained written comments from DOE because it initially was evaluating alternatives, including using DOI’s payroll services, for providing more efficient services to its employees. The agencies’ written comments are included in appendixes II through VIII. OMB’s Acting Deputy Director for Management said that our draft report adds considerably to the governmentwide knowledge base on implementation of new administrative systems, lessons to be learned, and the need to employ appropriate measures to determine their effect on organizational and workforce performance. OMB likewise supported the need to achieve these objectives and was in general agreement with our recommendations that agencies develop performance measures for their personnel operations. OMB agreed that agencies should employ performance measures in assessing the operations of human resources management operations. However, OMB also suggested it is premature to require individual agencies to develop such measures. Moreover, OMB suggested in its response that we consolidate our recommendations to focus attention on OPM’s role in developing a set of common performance measures for human resource management operations. While we are sensitive to OMB’s position, a common framework is important to help guide agencies’ efforts and we do not agree that it is premature to require agencies to develop such measures, given their progress to date. In fact, to be most effective, we would expect that work on our two recommendations would be done in tandem, thus building synergies from efforts at both agency and governmentwide levels. As OMB points out in its letter, the Merit Systems Protection Board has noted that 24 federal agency strategic plans identified at least one specific human resource management objective and one or more implementing strategies, and about half of those plans included performance measures that could be used to assess whether the objectives were being met. We also point out in our report that agencies were making progress in developing performance measures for their personnel operations. Given the level of investment in new HR information systems and the movement to cross-servicing among agencies for HR and payroll services, we continue to believe that it is important that agencies move quickly to develop baseline measures to gauge their progress and performance. We agree with OMB that OPM must play a central leadership role in helping to improve the overall quality and responsiveness of human resource management in agencies. However, OMB has a leadership role to play as well. OMB issues the guidance for agencies’ annual performance plans and is a key recipient and user of those plans. The Director of OPM said that OPM shares an interest in working with the Interagency Council on Administrative Management and other organizations throughout the government to develop appropriate performance measures, as our report recommends. The Director cited OPM’s ongoing efforts with the agencies to develop a human resources accountability model. OMB’s and OPM’s written comments are included in appendixes II and III, respectively. HHS’ Inspector General, DOI’s Assistant Secretary for Policy, Management and Budget, and USDA’s Director for the Office of Human Resource Management said that we had accurately reflected their HR restructuring efforts over the past several years. The agencies provided information to clarify and update the draft report, which we incorporated into this report where appropriate (see written comments and marginal notations in apps. IV through VIII). On the other hand, in VA’s May 22, 1998, letter, the Assistant Secretary for Policy and Planning said that the draft report fell short in depicting the scope, magnitude, and complexity of VA’s primary human resource restructuring initiative—the “HR LINK$” project. He also stated that this initiative is a model for the federal government. We believe that we have accurately described VA’s personnel restructuring efforts. We agree with VA that the “HR LINK$” project is a significant, large, and complex undertaking. However, as the draft indicated, VA still faces significant challenges in implementing its approach across the nation, including incorporating technology upgrades and addressing important operational details. VA was still in the prototype stage of the project and had not fully implemented its project throughout the department at the conclusion of this review. Because “HR LINK$” is in the prototype stage and implementation challenges still remain, we believe it would be premature to characterize the initiative as a model for the rest of the federal government. VA’s written comments are included in appendix VIII. We are sending copies of this report to the Chairman and Ranking Minority Members of the Senate Committee on Governmental Affairs and its subcommittees on International Security, Proliferation and Federal Services and Oversight of Government Management, Restructuring and the District of Columbia; the House Committee on Government Reform and Oversight and its subcommittees on Civil Service and Government Management, Information and Technology; the Secretaries of Agriculture, Energy, Health and Human Services, the Interior, and Veterans Affairs; the Director, OPM, and other interested parties. We will also make copies available to others upon request. Major contributors to this report are listed in appendix IX. Please contact me at (202) 512-8676 if you have any questions concerning this report. We had three objectives in this self-initiated review. Our first objective was to describe the activities that have taken place in restructuring federal personnel offices and operations. Our second objective was to ascertain whether performance measures are in place to gauge the results of the restructuring efforts. Our third objective was to identify issues agencies may commonly encounter when, in restructuring their personnel operations, they consider purchasing automated personnel and/or payroll services from another agency or the private sector. To address our first objective (i.e., to describe activities that have taken place in restructuring personnel offices and operations), we identified federal agencies that were restructuring their personnel offices and operations. We identified and focused on the 24 agencies that have financial reporting responsibilities under the Chief Financial Officers (CFO) Act. These 24 agencies represent about 97 percent of the career, full-time employees of the executive branch, and account for over 99 percent of the federal government’s net dollar outlay in fiscal year 1996. We surveyed officials in the 24 agencies, asking a series of questions such as (1) which administrative functions, if any, were being restructured and what methods were used to restructure; (2) how they were measuring or planned to measure the results of these efforts; and (3) whether new technology (computer hardware and/or software) was part of the restructuring plan. Information the officials provided to our questions served as the basis for selecting the four departments we reviewed. We used information obtained from the four departments to address all three of our objectives. We reviewed USDA, HHS, DOI, and VA because they reported (1) using business process reengineering as an approach to restructuring, (2) developing or purchasing new technology, and (3) providing or planning to provide personnel and payroll services to other agencies.Because the personnel restructuring activities at USDA, HHS, and DOI were decentralized, we obtained information from several of their respective component agencies. We also obtained information from the three agencies within VA, although the VA’s restructuring efforts were more centralized. We generally selected those agencies in the four departments that had the largest number of employees. Table I.1 lists by department the component agencies we selected and reviewed. In addressing our first objective further, we interviewed personnel officials of the four departments and the selected component agencies to obtain information on (1) when restructuring began, (2) the rationale for restructuring, (3) the plans developed for restructuring, (4) the activities undertaken to restructure, and (5) the status of implementation. The personnel officials we interviewed were from the central offices of the departments and agencies, and regional and other field offices. Specifically, at the field level, we interviewed personnel officials of the Bureau of Reclamation in Denver, Colorado; the Bureau of Land Management, Forest Service, Natural Resources Conservation Service, Bureau of Indian Affairs, and Indian Health Service in Albuquerque, New Mexico; the Bureau of Land Management’s state office in Santa Fe, New Mexico; and the Veterans Health Administration in Bath, New York. In addition, we reviewed the restructuring plans and other documentation on restructuring provided by the four departments and their agencies. For example, we examined the “Reengineering Blueprint” that details the restructuring plans of the Natural Resources Conservation Service at USDA. We also attended planning conferences held by VA for its human resource managers. To address our second objective (i.e., to ascertain whether performance measures are in place to gauge the results of the restructuring efforts), we discussed with responsible officials whether the departments and agencies had developed or were developing performance measures, whether the measures were “benchmarked” against leading organizations, and whether the performance measures were linked to the mission of the department or agency. Where departments and agencies had developed performance measures, we examined documents to determine what measures had been developed. In addition, since the restructuring and integration of human resource management is an evolving area in the private and public sectors, we reviewed current literature and spoke with experts in the human resource management area, including officials from NAPA and the Saratoga Institute, to develop an understanding of the major issues associated with restructuring personnel operations and performance measurement. In discussing performance measures with the officials, we learned that the one measure the departments and agencies all used was the personnel servicing ratio, which compares the number of employees to the number of personnelists serving them. To compute personnel servicing ratios for the four departments and governmentwide and to determine how those ratios may have changed because of restructuring, we obtained September 1993 and September 1997 data from OPM’s Central Personnel Data File (CPDF). The CPDF is a database that contains individual records for most civilian federal employees and is a primary source of information on the civilian workforce of the executive branch. Data in the CPDF are supplied by the individual departments and agencies. We did not verify the data we obtained from the CPDF database, although we have a review in process that is examining the reliability of the CPDF database in general. In obtaining information on staffing from the CPDF, we extracted data governmentwide and for each of the 24 CFO agencies, which employ most of the nonpostal civilian employees in the executive branch. In addition, when extracting data on the staffing of personnel offices, we identified only employees in occupational series GS-200-299, Personnel Management and Industrial Relations, which was the personnel series that NPR had targeted for downsizing. We did not determine whether all of those who were in the occupational series worked in a personnel office; some unknown number may have worked in other human resource organizations such as training offices. On the other side, we did not identify employees who worked in personnel offices but who were not in the GS-200 occupational series; for example, we did not identify secretaries and clerks who worked in personnel offices. We extracted CPDF data on all employees, including part-time and temporary employees. The staffing numbers we use in this report provide approximate rather than exact reflections of the changes in staffing (overall and in personnel offices) at the four departments and governmentwide. Alternative definitions of whom to count as personnelists could change the personnel servicing ratio. Finally, to address our third objective (i.e., to identify issues agencies encountered as they purchased automated personnel and payroll services from another agency or the private sector), we interviewed officials from the departments and component agencies who were involved in the development and/or purchase of new technology (hardware and software) for personnel and/or payroll operations. From these interviews, we obtained information on decision processes for acquiring new technology, the challenges that surface in acquiring new technology, and status of technology implementation. To observe agencies’ new technology, we visited the Natural Resources Conservation Service’s automation test site in Riverdale, Maryland, and the operations of automated administrative service centers in Topeka, Kansas (operated by VA); Denver, Colorado (operated by DOI); and Rockville, Maryland (operated by HHS). We also met with officials from OMB and OPM and representatives from the CFO Council’s Joint Systems Solutions Team and the former Federal Personnel Automation Council to discuss governmentwide efforts to streamline personnel operations. The four departments and the component agencies had not completed their personnel restructuring efforts as of late 1997. Thus, the information we collected from them can provide only a view of their restructuring efforts to date. Since the implementation efforts have not been completed, we cannot conclude the outcome of their efforts. Furthermore, the findings from the four departments and their component agencies may or may not be representative of the remaining CFO agencies and other federal agencies that may be restructuring their personnel offices and operations. These findings, however, provide some indication of the kinds of issues other agencies could face. We obtained written comments from the Directors of OMB and OPM, the Secretaries of DOE, DOI, HHS, USDA, and VA or their designees. We obtained written comments from DOE because it initially was evaluating alternatives, including using DOI’s payroll services, for providing more efficient services to its employees. A discussion of their comments appears at the end of the report and their written responses are included in appendixes II through VIII. The following is GAO’s comment on the Office of Personnel Management’s letter dated June 8, 1998. 1. OPM notes in its response that OPM calculates the servicing ratio differently than we did and suggests that we change the computation of the ratios in our report. OPM also said that we used a broader definition of personnelists than theirs in our ratio calculation. First, we include the personnelists, as employees, in the calculation of total employees to present a more complete measure of the personnelists’ workload. Personnelists must still process personnel actions and payroll for their own staff in the same manner as they would for other employees; and therefore, we believe it is a more complete way to calculate the ratio. Including personnelists in total employees serviced increases the servicing ratios by one (e.g., VA’s 1993 ratio is 95:1 with personnelists included in total employees versus 94:1 without personnelists included in total employees). Second, we used the definition of personnelists as defined by the National Performance Review. Contrary to OPM’s comment, we did not include military personnel specialists in our calculation of the servicing ratios (see app. I). We included part-time employees in our calculation to, again, give a fuller efficiency measure of the personnelists’ workload, since processing personnel actions for part-time employees generally requires similar amounts of effort as required for full-time employees. As stated in our report, we believe that the servicing ratio is a rough measure of efficiency but does not capture the quality of the work performed. The following is GAO’s comment on the Department of Agriculture’s letter dated June 3, 1998. 1. While agencies have cited concerns about the need for changes to the federal human resource management system’s statutory and regulatory framework to assist the streamlining of their personnel operations, we have previously reported that agencies are not always aware of the range of flexibility they have, or have not taken full advantage of the available flexibility. Nevertheless, as we noted in our report, any changes to current regulatory or statutory requirements may have important implications for federal human resource management, personnel offices, and how personnel services are provided to line managers. The following are GAO’s comments on the Department of Health and Human Services letter dated May 26, 1998. 1. While agencies have cited concerns about the need for changes to the federal human resource management system’s statutory and regulatory framework to assist the streamlining of their personnel operations, we previously reported that agencies are not always aware of the range of flexibility they have, or have not taken full advantage of the available flexibility. Nevertheless, as we noted in our report, any changes to current regulatory or statutory requirements may have important implications for federal human resource management, personnel offices, and how personnel services are provided to line managers. 2. HHS noted in its response that they believe the HHS’ ratio would be clearer if SSA’s population was excluded in both 1993 and 1997. We included SSA in the calculation of HHS’ 1993 ratio for HHS because SSA’s field staff were serviced by HHS’ personnelists. If we were to calculate the 1993 ratio for HHS without SSA’s employees, the HHS’ ratio would be understated. 3. We agree with HHS’ statement that personnel offices perform different functions in different work environments. This is part of the rationale for our statement that the servicing ratio, although a general measure of efficiency, does not adequately capture how well the work is performed, since some offices may provide more services than others. The following are GAO’s comments on the Department of Veterans Affairs letter dated May 22, 1998. 1. VA states that our report criticizes all agencies, including VA, for falling behind schedule in efforts to restructure personnel operations. VA states that “HR LINK$” is not simply an initiative to replace an aging legacy human resources/payroll system. VA further explains that it is completely reinventing and reengineering its entire HR and payroll processes. However, VA also acknowledges that it has experienced some delays in opening its shared service center, which it considers minimal. We have included the factual information about agencies’ schedule delays in our report because of its importance to Congress and to decisionmakers in other federal agencies who also are making decisions about changes to their personnel operations. We feel this is important, given the short time frames to implement complex technology changes in HR and payroll operations before the year 2000. Our draft also noted that, despite the delays, VA remains confident of meeting its scheduled December 1999 completion date. 2. VA believes that (1) we did not adequately depict its experience in developing performance measures and (2) servicing ratios are not critical measures for determining its project’s success. On the contrary, the draft noted that all four departments we reviewed recognized the need for more performance measures to better assess the results of personnel operations and described some of the agencies’ efforts to develop performance measures. We pointed out that VA recently developed performance measures that it circulated to its personnel managers for comment. In our exit conference with VA officials, they acknowledged that their performance measures (referred to in VA’s letter) were not implemented throughout the Department. In regards to the servicing ratio, we agree with VA that servicing ratios are not a critical measure for determining the project’s success. We noted in our draft report that “the servicing ratio, while providing a broad measure of efficiency and an indicator of progress in restructuring, does not indicate how well an agency’s personnel office meets the needs of its customers—managers and employees—or its contribution to mission accomplishment.” 3. VA said we took a narrow view of all agencies’ projects, especially VA’s. VA states that its plan is to achieve savings as different phases of the new delivery model are implemented. VA acknowledges that staff reductions have occurred before the delivery of new technology. As discussed in our report, agencies’ plans called for new technologies and streamlining of processes in order to achieve cost savings from staff reductions. Since staff reductions have occurred before new technologies are in place, those personnel staff remaining are doing the same work without gaining the efficiencies that were expected from using the new technology. James Rebbe, Attorney Advisor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO reviewed the effects of reductions in personnel positions at the Departments of Agriculture (USDA), Health and Human Services (HHS), the Interior (DOI), and Veteran Affairs (VA), focusing on: (1) the activities the agencies have undertaken in restructuring personnel offices and operations; (2) what performance measures are in place to gauge results of the restructuring efforts; and (3) issues agencies may commonly encounter when, in restructuring their personnel operations, they consider outsourcing automated personnel or payroll services to another agency or the private sector. GAO noted that: (1) although the focus of agencies' restructuring efforts differed across the four departments, their streamlining plans included reducing the number of employees working in personnel operations and automating paper-based personnel processes to improve the responsiveness and quality of personnel-related services; (2) the reduction in the number of personnelists at the four departments ranged from 14 to 41 percent between September 1993 and September 1997; (3) even with reductions of this magnitude, the personnel servicing ratios for three departments did not change substantially; (4) the departments sought to boost the efficiency of their personnel offices by automating their largely paper-based operations; (5) to achieve this increase in efficiency, the departments generally planned to have new equipment and software in place before staff reductions were made; (6) however, that did not occur, and the departments fell behind their original milestones for implementing new personnel and payroll systems while initial personnel staff reductions occurred; (7) according to personnel officials, the four departments had few measures in place to gauge the results of their personnel operations before restructuring; (8) however, officials in all four departments recognized the need for measurement, were developing performance measures to assess future efforts, and, in some cases, were seeking to more fully assess current costs and performance to identify specific targets for improvement; (9) in addition to providing personnel services to their component agencies, the four departments were developing or purchasing automated personnel systems with the intention of selling payroll or other key personnel services to other agencies; (10) agency officials suggested that a framework was needed with which agencies could obtain information on the personnel services offered by other federal agencies, the cost of those services, and their performance characteristics, including service-level standards; (11) agency officials also suggested the need for a standard technical format and a core set of requirements for personnel data that agencies are likely to exchange with each other; and (12) since April 1997, the Office of Personnel Management (OPM) has rechartered the mission of the Federal Personnel Automation Council and tasked it to develop a set of core data elements and requirements for personnel information systems. |
The PMA issued in 2001 targeted improper payments as an area with opportunities for improvement. The PMA included five governmentwide initiatives—one of which is improved financial management, which expressly addresses improper payments as a priority. This initiative called for the administration to establish a baseline on the extent of erroneous payments. Under it, agencies were to include in their 2003 budget submissions to OMB information on improper payment rates, including actual and target rates where available, for benefit and assistance programs over $2 billion. The PMA also noted that using this information, OMB will work with agencies to establish goals to reduce improper payments identified in their programs. In July 2001, as part of its efforts to advance the PMA initiative, OMB revised Circular No. A-11 to require 16 federal agencies (15 of the then 24 Chief Financial Officer’s (CFO) Act agencies and the Railroad Retirement Board) to submit improper payment data, assessments, and action plans for about 50 programs to OMB with their initial budget submissions. Specifically, the circular required that agencies submit information including estimated improper payment rates, target rates for future reductions in these payments, the types and causes of these payments, and variances from targets or goals established. In addition, agencies were to provide a description and assessment of the current methods for measuring the rate of improper payments and the quality of data resulting from these methods. Agencies were to first include this improper payment information in their initial fiscal year 2003 budget submissions. A June 2002 revision to the circular removed the Agency for International Development from the list and reduced the number of programs for which improper payment information was required to 46. (App. II lists the agencies and programs.) In November 2002, the Congress passed the IPIA. The law requires agency heads to annually review all programs and activities that they administer and identify those that may be susceptible to significant improper payments. Once agencies identify their susceptible programs, the act requires them to estimate and report on the annual amount of improper payments in those programs and activities. For programs for which estimated improper payments exceed $10 million, agencies are to report annually to the Congress on the actions they are taking to reduce those payments. The report is also to include a discussion of the causes of the improper payments identified, actions taken to correct those causes, and the results of the actions taken to address those causes. The act further requires OMB to prescribe guidance for federal agencies to use in implementing the act. OMB issued this guidance in Memorandum M- 03-13 in May 2003. It requires use of a systematic method to annually review and identify those programs and activities that are susceptible to significant improper payments. OMB guidance defines significant improper payments as annual improper payments in any particular program exceeding both 2.5 percent of program payments and $10 million. The OMB guidance then requires agencies to estimate the annual amount of improper payments using statistically valid techniques for each susceptible program or activity. For those agency programs determined to be susceptible to significant improper payments and with estimated annual improper payments greater than $10 million, the IPIA and related OMB guidance require each agency to report the results of its improper payment efforts in the Management Discussion and Analysis (MD&A) section of its PAR for fiscal years ending on or after September 30, 2004. The IPIA requires the following information in their reports: a discussion of the causes of the improper payments identified, actions taken to correct those causes, and results of the actions taken to address those causes; a statement of whether the agency has the information systems and other infrastructure it needs in order to reduce improper payments to the agency’s targeted levels; if the agency does not have such systems and infrastructure, a description of the resources the agency has requested in its most recent budget submission to obtain the necessary information systems and infrastructure; and a description of the steps the agency has taken and plans to take to ensure that agency managers (including the agency head) are held accountable for reducing improper payments. OMB’s guidance in M-03-13 requires that three additional things be included in the report: a discussion of the amount of actual erroneous payments that the agency expects to recover and how it will go about recovering them; a description of any statutory or regulatory barriers that may limit the agency’s corrective actions in reducing erroneous payments; and provided the agency has estimated a baseline erroneous payment rate for the program, a target for the program’s future erroneous payment rate that is lower than the agency’s most recent estimated error rate. On July 22, 2004, OMB, working with the CFO Council’s Improper Payments Committee, issued a standardized reporting format, or framework, for reporting IPIA information. This framework was included as Attachments 2 and 3 to OMB Memorandum M-04-20, “Fiscal Year 2004 Performance and Accountability (PAR) and Reporting Requirements for the Financial Report of the United States Government.” To satisfy the reporting requirements of the IPIA for fiscal year 2004, the framework instructed agencies to provide a brief summary of both what they have accomplished and what they plan to accomplish in the MD&A portion of the fiscal year 2004 PAR. All other required reporting details are to be included in an appendix to the PAR. The framework for the information reported in the appendix incorporates the requirements set forth in the law and further illustrates the reporting format required in OMB’s implementation guidance. Under accelerated financial reporting requirements of the PMA, agency fiscal year 2004 PARs were due November 15, 2004. Accordingly, the first set of reports representing the results of agencies’ assessing improper payments for all federal programs in accordance with the IPIA and OMB guidance were due in November 2004. In August 2004, OMB established Eliminate Improper Payments as a new program-specific initiative. With this new program initiative, agencies are to measure their improper payments annually, develop improvement targets and corrective actions, and track the results annually to ensure the corrective actions are effective. This initiative is also to have its own scorecard requirements and rating beginning with fiscal year 2005. With the establishment of this new program-specific initiative, agency efforts to address improper payment issues will no longer be tracked under the governmentwide initiative, Improved Financial Performance. In our December 2004 report on the U.S. government’s consolidated financial statements for the fiscal years ended September 30, 2004 and 2003, which includes our associated opinion on internal control, we reported that while most agencies acknowledged the IPIA reporting requirements in their PARs, they did not always indicate whether they had completed agencywide assessments, and they did not estimate improper payments for all of their susceptible programs. In response to the new requirements of the IPIA, agencies overall made progress in identifying programs susceptible to the risk of improper payments. At the same time, our reviews of the fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government’s consolidated financial statements suggest that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, certain agencies have not yet performed risk assessments of all their programs. Appendix III lists the agencies included in this review. In its guidance on implementing the IPIA, OMB required agencies to institute a systematic method of inventorying all programs and activities and identifying those the agency believes are susceptible to the risk of significant error. OMB further instructed agencies to describe, in their PARs, the risk assessments performed. We determined that 23 of the 29 agencies reviewed reported that they had completed risk assessments for all programs and activities. Of the 15 agencies with prior reporting requirements under OMB Circular No. A-11, 12 reported that they had performed comprehensive inventories and assessed the risk of improper payments for all their programs and activities. Three of the 15 agencies stated that their risk assessments were not complete for all programs and activities. Of those 14 agencies without prior reporting requirements, 11 agencies reported that they had completed risk assessments for all programs and activities, whereas 3 agencies reported that they had not. Recognizing weaknesses in agency risk assessments, three agency auditors cited noncompliance with the IPIA in their annual auditor’s reports included in the agency PARs. For example, two agency auditors each reported that their agency’s risk assessment did not consider all payment types or programs. Another auditor reported the agency did not institute a systematic method of reviewing all programs and identifying those it believed were susceptible to significant erroneous payments. Once agencies have identified programs that may be susceptible to significant improper payments, developing statistically valid estimates of the amounts of improper payments for their programs and activities has been a further challenge. Appendix IV lists the 29 agencies and 70 programs for which we reviewed fiscal year 2004 PARs for improper payment reporting. In the 29 agency PARs included in our review, 17 agencies reported over $45 billion of improper payments in 41 programs. This represented almost a $10 billion, or 27 percent, increase in the dollar amount of improper payments reported by agencies in fiscal year 2003. However, we determined that this increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in the Department of Health and Human Services’ Medicare Program. The 24 agency programs with no prior reporting requirements reported improper payment estimates that did not significantly increase the governmentwide total. As discussed earlier, OMB Circular No. A-11 has required certain agencies to report selected improper payment information on 46 programs to OMB beginning 3 years ago with their fiscal year 2003 budget submissions. We found that for 34 of the programs, agencies reported estimates in their fiscal year 2004 PARs or stated that improper payment amounts were insignificant. As shown in table 1, the governmentwide estimate did not include the remaining 12 programs with total outlays of $248.7 billion in 2004. This included some of the largest risk-susceptible federal programs, such as the Department of Health and Human Services’ Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education’s Title I Program, with outlays of over $10 billion annually. The table further shows that of these 12 programs, 8 reported that they would be able to estimate and report on improper payments sometime within the next 4 years, but could not do so now. The other 4 programs in 4 agencies did not estimate improper payment amounts for their programs and were silent as to whether they would report estimates in future reports. As a result, improper payments for several large risk-susceptible programs will not become transparent for several or an undetermined number of years, although these agencies were required to report such information since their fiscal year 2003 budget submissions. Moreover, by only looking at those agencies significant to the U.S. consolidated financial statements, this estimate does not include all of the agencies subject to the IPIA. OMB reported that in certain risk-susceptible programs, agencies were unable to determine the rate or amount of improper payments due to measurement challenges as well as time and resource constraints, which OMB expects to be resolved in the future. Although OMB reported that the $45 billion in improper payments will be used as a baseline on which short- and long-term program improvements and strategies will be based, it recognizes that fiscal year 2005 reductions in improper payments will be affected by outlay changes as well as the identification of new improper payments as additional programs are measured and methodologies for currently measured programs are enhanced. Measuring improper payments and designing and implementing actions to reduce or eliminate them are not simple tasks. The ultimate success of the governmentwide effort to reduce improper payments depends, in part, on each federal agency’s continuing diligence and commitment to comply fully with the requirements of the act and the related OMB guidance. The level of importance each agency, the administration, and the Congress place on the efforts to implement the act will determine its overall effectiveness and the level to which agencies reduce improper payments and ensure that federal funds are used efficiently and for their intended purposes. Without such efforts, the likelihood of designing and implementing actions governmentwide to reduce or eliminate improper payments is doubtful. Fulfilling the requirements of the IPIA will require sustained attention to implementation and oversight to monitor whether desired results are being achieved. We are making three recommendations to help ensure the successful implementation of the Improper Payments Information Act of 2002 and its goal of enhancing the accuracy and integrity of federal payments. Specifically, we recommend that the Director of OMB: Require those agencies that did not address the IPIA requirements or did not perform risk assessments of all of their programs and activities to establish time frames and identify resources needed to perform risk assessments and satisfy reporting requirements. Develop a plan to address the resource needs of those agencies that did not perform risk assessments or satisfy reporting requirements. Consider as part of the budget process, for any agency that OMB deems to have not taken the IPIA requirements seriously or that has lagged behind, the feasibility of disincentives for poor performance, such as reductions in funds for the program involved or adding incentives such as gain sharing for making substantive progress. In its written comments on a draft of this report, which are enclosed in appendix V, OMB emphasized that in fiscal year 2004, federal agencies established a strong foundation for measuring improper payments, identifying and implementing the necessary corrective actions, and tracking success over time. OMB’s response further discussed key findings included in its report, Improving the Accuracy and Integrity of Federal Payments, which was issued on January 25, 2005. With regard to our first recommendation that agencies establish time frames and identify resources needed to perform risk assessments and satisfy reporting requirements, OMB stated that pursuant to the PMA initiative called Eliminate Improper Payments, federal agencies are already required to submit relevant time frames and account for the resources necessary to complete planned actions. Further, OMB stated that the remaining risk assessments to be completed correlate to programs with relatively small outlays. While we view the PMA initiative as a positive action, it applies to 15 agencies, 3 of which we found had not yet assessed all their programs. Three other agencies—the Farm Credit System Insurance Corporation, the National Credit Union Administration, and the Pension Benefit Guaranty Corporation—which are not included in the PMA initiative and therefore are not required to establish time frames and account for needed resources, have outlays that are significant to the U.S. government’s consolidated financial statements and were silent with respect to IPIA requirements in their fiscal year 2004 PARs. In addition to these three agencies, the PMA initiative would also not cover those agencies that while not significant to the U.S. government’s consolidated financial statements, are subject to the IPIA. Our recommendation is directed to the broader range of agencies. Regarding our second recommendation that OMB develop a plan to address resource needs of agencies that did not perform risk assessments or satisfy reporting requirements, OMB stated that agency plans for addressing IPIA reporting requirements are closely considered in identifying agency resource needs and preparing the President’s Budget. While we agree with OMB on that point, as discussed in our response to OMB’s comments on the first recommendation, certain agencies are not required to submit plans that include time frames and resource needs to OMB. As a result, resource needs may not be addressed in the budget process. With respect to our third recommendation that it consider using incentives and disincentives, as applicable, for quick and timely action for meeting the IPIA requirements, OMB offered the view that the requirements of the PMA and inspector general reviews of agency IPIA activities provide sufficient incentive for ensuring that agencies meet the necessary requirements. We agree that these requirements will help ensure that agencies take the IPIA seriously. Our recommendation is directed at any agency that does not do so or agencies that may benefit from incentives such as gain sharing to fund efforts to reduce improper payments. Again, as discussed above, while the major 15 agencies are covered by the PMA, 3 of these had not yet assessed all their programs and a number of agencies not covered under the PMA initiative, but significant to the U.S. government’s consolidated financial statements, were silent with respect to the IPIA requirements. OMB’s written comments and our evaluation of one comment not addressed above are presented in appendix V. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its date. At that time, we will send copies of the report to interested congressional committees. We will also be sending copies to the Director of the Office of Management and Budget and the heads of the agencies included in our scope of review. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-6906 or williamsm1@gao.gov. Additional contacts and major contributors to this report are provided in appendix VI. This report is based on our review of agency fiscal year 2004 Performance and Accountability Reports (PAR). We reviewed the fiscal year 2004 PARs of 29 of 35 agencies that are significant to the U.S. government’s consolidated financial statements to obtain information on the status of their implementation of the Improper Payments Information Act of 2002 (IPIA) and the related Office of Management and Budget (OMB) implementation guidance. We paid particular attention to the 15 agencies with prior improper payment reporting requirements for 46 of their programs under OMB Circular No. A-11, Section 57. A list of the agencies with prior reporting requirements is presented in appendix II. In addition, we reviewed relevant agency documents, including strategic plans, agency performance plans and reports, agency audit reports, and reports from agency program partners. We completed reviews of fiscal year 2004 PARs for 29 agencies identifying 70 key programs. Appendix III lists the agencies and programs included in this review. To supplement our review and analysis, we contacted agencies to clarify responses, requested additional information, and updated the initial responses. We did not determine the validity of representations made or the documentation provided. We performed our work in Washington, D.C., from November 2004 through February 2005 in accordance with U.S. generally accepted government auditing standards. 2003 (in millions) X 2003 (in millions) X 2003 (in millions) Will estimate within the next 6 years 28. State Children’s 29. Child Care and 30. All programs and 31. Low Income Public 32. Section 8 Tenant 33. Section 8 Project Development Block Grant (Entitlement Grants, States/Small Cities) X 2003 (in millions) Will estimate within the next 6 years 37. All programs and 39. Federal Employees’ 41. All programs and 42. All programs and Education Grants and Cooperative Agreements 44. All programs and (Civil Service Retirement System and Federal Employees Retirement System) X 2003 (in millions) Will estimate within the next 6 years 48. All programs and 51. 7(a) Business Loan Security Income Program 2003 (in millions) Narcotic and Law Enforcement Affairs- Narcotics Program Information Program-U.S. Speaker and Specialist Program 65. Earned Income Tax 10 Agency did not address improper payments or the IPIA requirements for this program in its fiscal year 2004 PAR. The following is GAO’s comment on OMB’s letter dated March 25, 2005. 1. In our review of these agencies’ fiscal year 2004 PARs, we determined that assessments were not completed for all programs and activities. In addition to those named above, Lisa Crye, Bonnie McEwan, and Donell Ries made important contributions to this report. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Fiscal year 2004 marked the first year that federal agencies governmentwide were required to report improper payment information under the Improper Payments Information Act of 2002 (IPIA). The increasing scope of reporting over the past several years has demonstrated that improper payments are a significant and widespread problem in federal agencies, and in the past a limited number of agencies reported in their Performance and Accountability Reports (PAR) annual payment accuracy rates and estimated improper payment amounts. Because of your continued interest in addressing the governmentwide improper payments issue, you asked GAO to report on (1) the extent to which agencies have performed the required assessments to identify programs and activities that are susceptible to significant improper payments and (2) the annual amount estimated for improper payments by the agencies. The federal government made progress in identifying programs susceptible to the risk of improper payments in response to the new IPIA requirements. The fiscal year 2004 PARs for 29 of 35 federal agencies that are significant to the U.S. government's consolidated financial statements show that even with the enhanced emphasis on improper payment reporting fueled by the new legislation, 6 agencies reported that they did not perform risk assessments of all their programs. The magnitude of the governmentwide improper payment problem is still unknown, because agencies have not yet prepared estimates of improper payments for all of their programs. In the 29 agency PARs included in GAO's fiscal year 2004 review, 17 agencies reported over $45 billion of improper payments in 41 programs governmentwide. This represented almost a $10 billion, or 27 percent, increase in the amount of improper payments reported by agencies in fiscal year 2003. This increase was primarily attributable to changes in the method for estimating and reporting improper payment amounts in one major program. Looking forward, future estimates are likely to trend higher because the governmentwide estimate did not include 12 programs with outlays of $248.7 billion in fiscal year 2004 that were required to annually report improper payments under OMB Circular No. A-11 during the past 3 years. This included some of the largest risksusceptible federal programs, such as the Department of Health and Human Services' Medicaid Program, with outlays exceeding $175 billion annually, or the Department of Education's Title I Program, with outlays of over $10 billion annually. |
The federal government recognizes 562 Indian tribes, which are located in 33 states, and vary greatly in size, economic status, and land ownership. According to the Bureau of Indian Affairs, the tribes range in size from villages in Alaska that have fewer than 50 members to tribes with over 240,000 members. The economic status of tribes also varies, ranging from those with unemployment rates that are more than 90 percent to those with unemployment rates that are below 10 percent. Some tribes also have significant economic opportunities for tribal members, including employment or payments provided to tribal members. With regard to land ownership, reservation lands ranged from 16 million acres to less than 100 acres. Overall, American Indians and Alaska Natives living in IHS areas have lower life expectancies than the U.S. population as a whole and face considerably higher mortality rates for some conditions. For American Indians and Alaska Natives ages 15 to 44 living in those areas, mortality rates are more than twice those of the general population. American Indians and Alaska Natives living in IHS areas have substantially higher rates for diseases such as diabetes, as well as a higher incidence of fatal accidents, suicide, and homicide. IHS arranges for the provision of health care to American Indians and Alaska Natives who are members of federally recognized tribes. Specifically, in 2007, IHS funded health care delivered to approximately 1.5 million American Indians and Alaska Natives. IHS consists of a system of more than 650 IHS-funded facilities organized into 12 geographic areas of various sizes. Within the 12 areas, direct care services are generally delivered by IHS-funded hospitals, health centers, and health stations. Tribes have the option of operating their own direct care facilities. Thus, direct care is provided by IHS-funded facilities that are either IHS operated or tribally operated. Services not available through direct care at IHS- funded facilities may be purchased by the facilities through arrangements with outside providers; these services are referred to as contract health services. Eligibility requirements for direct care and contract health services differ. In general, all American Indian and Alaska Native tribal members are eligible to receive direct care at IHS-funded facilities free of charge. To be eligible for contract health services, however, American Indians and Alaska Natives must reside within a contract health services delivery area that is federally established and either (1) reside on a reservation within the area or (2) belong to or maintain close economic and social ties to a tribe based on such a reservation. IHS-funded facilities will not authorize or pay for contract health services for individuals who are eligible to obtain such services through other sources, such as Medicare or Medicaid. Medicare finances health services for approximately 44 million elderly and disabled individuals and consists of several different components, namely: Medicare Part A, Hospital Insurance—which helps cover inpatient care in hospitals. There is typically no premium for Part A. Medicare Part B, Medical Insurance—which covers doctors’ services, outpatient care, and certain other services, such as physical and occupational therapy and medical supplies. In 2008, the monthly premium for Part B is $96.40 for most individuals. Medicare Part C, or Medicare Advantage—which provides coverage for Medicare Parts A and B services through private health plans. Medicare Part D, or Prescription Drug Coverage—a voluntary insurance program for outpatient prescription drug benefits. Most Medicare drug plans charge a monthly premium. However, beneficiaries eligible for both Medicare and Medicaid (dual-eligibles) are generally not required to pay a premium, and certain low-income beneficiaries are eligible for premium subsidies. IHS has the authority to pay Medicare Part B premiums on behalf of individuals eligible to receive direct care, although the agency has not yet utilized that authority. Some Indian tribes pay the Medicare Part B or Part D premiums of their members. American Indians and Alaska Natives may also be eligible for health care benefits under Medicaid, a joint federal-state program that finances health care for certain low-income children, families, and individuals who are aged or disabled. Generally, the federal government and the states share in the cost of the Medicaid program. However, the federal government pays 100 percent of the Medicaid program’s cost to provide services to American Indians and Alaska Natives at IHS- or tribally operated facilities. In fiscal year 2007, Congress appropriated approximately $3.2 billion for IHS, which included funding for the provision of direct care at IHS-funded facilities, contract health services, and other functions. In addition to IHS’s federal appropriation, IHS-funded facilities can be reimbursed by other payers, including Medicare and Medicaid, for the services the facilities provide. IHS-funded facilities are allowed to retain reimbursements without an offsetting reduction in their IHS funding. Thus, revenues from Medicare and Medicaid can increase the financial capacity of IHS-funded facilities to provide needed medical services. According to IHS data, the amount of Medicaid and Medicare reimbursement that IHS has collected has increased over time (see fig. 1). In fiscal year 2007, IHS reported approximately $516 million in Medicaid reimbursement and $161 million in Medicare reimbursement, for a total of $677 million. These data do not account for all collections by IHS-funded facilities because tribally operated facilities are not required to report such information. In recognition of the unique government-to-government relationship between the federal government and Indian tribes, federal agencies are required by Executive Order to consult with Indian tribes on “policies that have tribal implications.” The order states that “ach agency shall have an accountable process to ensure meaningful and timely input by tribal officials in the development of regulatory policies that have tribal implications.” The order defines policies that have tribal implications as regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on one or more Indian tribes, on the relationship between the federal government and Indian tribes, or on the distribution of power and responsibilities between the federal government and Indian tribes. On January 14, 2005, HHS adopted a tribal consultation policy that formalized HHS’s requirement to consult with Indian tribes in policy development. HHS’s policy defines consultation as: “An enhanced form of communication, which emphasizes trust, respect and shared responsibility.” In addition, the HHS policy explains that consultation is “integral to a deliberative process, which results in effective collaboration and informed decision making with the ultimate goal of reaching consensus on issues.” Under the HHS tribal consultation policy, every agency within HHS, including CMS, shares in the departmentwide responsibility to coordinate, communicate, and consult with Indian tribes. Among other things, the HHS tribal consultation policy specifies that each of the 10 HHS regions should have an annual consultation session to solicit information on Indian tribes’ priorities and needs related to health and human services. Within CMS, issues related to American Indians and Alaska Natives are coordinated by the agency’s Tribal Affairs Group and by designated Native American Contacts (NAC) in each of its 10 regional offices. While the Executive Order establishes clear requirements for federal agencies to consult with Indian tribes, in general, states determine how to interact, and whether to consult, with the tribes in their states. However, CMS has provided guidance to state Medicaid programs that encourages the programs to consult with tribes and be as responsive as possible to their issues and concerns when making changes to state Medicaid programs. While states have flexibility in making many changes to their Medicaid programs, some changes require states to obtain a waiver of certain Medicaid requirements. Specifically, the Social Security Act authorizes the Secretary of HHS to waive certain federal Medicaid program requirements under certain conditions. CMS guidance indicates that evidence of consultation with the tribes is one criterion that CMS will use during its review of proposed state Medicaid program changes that require a waiver of Medicaid requirements. CMS and IHS have interacted to provide support to IHS-funded facilities and Indian tribes in accessing Medicare and Medicaid as well as to address efforts associated with broader policy and regulatory concerns regarding the two programs. With regard to support, CMS and IHS have interacted to educate staff from IHS-funded facilities and American Indians and Alaska Natives about Medicare and Medicaid. Additionally, CMS has assisted IHS- funded facilities with Medicare and Medicaid billing procedures and other concerns. CMS and IHS also have worked to obtain input from tribal representatives through an advisory board and consultation sessions. At a broader policy level, CMS and IHS have worked together on policy initiatives aimed at ensuring that existing health care policies meet the needs of IHS-funded facilities and the populations they serve. CMS’s regulatory process—the process through which CMS issues regulations— can necessitate the review of approximately 140 major rule-making documents on a yearly basis. Thus, it has provided an important, but challenging, opportunity for CMS and IHS to identify regulatory changes that may affect American Indians’ and Alaska Natives’ eligibility for Medicare and Medicaid or these programs’ reimbursements to IHS-funded facilities. CMS and IHS have interacted to educate IHS-funded facility staff and American Indians and Alaska Natives about the Medicare and Medicaid programs. The following are examples of such activities: CMS and IHS have interacted to train staff from IHS-funded facilities on Medicare and Medicaid program topics. For example, in August 2007, the two agencies held a training session in the Aberdeen IHS area titled “Working Together – CMS, Tribes and the Aberdeen Area.” The session included presentations by both CMS and IHS officials on strategies to increase Medicare and Medicaid enrollment, changes to contract health service payments, and other topics. In 2007, CMS, IHS, and tribal officials coordinated tribal stops on the Medicare prevention tour, a nationwide CMS outreach effort that involved a bus traveling to different venues to encourage Medicare beneficiaries to utilize the preventive services covered by Medicare, such as cancer and diabetes screenings. Through CMS’s coordination with IHS and tribes, the CMS Medicare prevention bus visited approximately 15 tribal locations across five different CMS regions. CMS has also educated IHS staff about Medicare Part D. For example, CMS has held multiple training sessions in each of the 12 IHS areas to educate IHS-funded facility staff about the Medicare Part D program and encourage American Indians and Alaska Natives to enroll in the program. Additionally CMS and IHS interactions have included assistance intended to maximize IHS-funded facilities’ collection of Medicare and Medicaid reimbursement. Many of these activities have included helping facilities become providers for Medicare and Medicaid, as well as assisting with billing and other concerns. Examples include the following: CMS has assisted IHS-funded facilities in becoming Medicare and Medicaid providers, which is necessary to bill these programs. IHS officials from the Bemidji area told us that CMS officials provided instructions to IHS-funded facilities on how to sign up to participate in Medicare and Medicaid. Additionally, in 2007, CMS helped an IHS-operated health center and its satellite clinics to qualify as provider-based facilities, which would allow the facilities to bill Medicare Part A and potentially increase their Medicare reimbursement. CMS has provided technical assistance to IHS to resolve billing concerns. For example, CMS and IHS officials corrected a problem with the IHS electronic billing system that according to CMS officials, had resulted in some IHS-funded facilities being underpaid for certain Medicare services. A CMS official helped IHS-funded facilities navigate the CMS survey process, a process through which facilities are inspected for compliance with federal quality standards. Finally, CMS and IHS have interacted to ensure that they obtain input from tribal representatives. For example, CMS and IHS have interacted through CMS’s TTAG, an advisory board created to inform CMS about issues affecting the delivery of health care to American Indians and Alaska Natives served by CMS programs. Specifically, the IHS area offices helped identify and appoint tribal representatives to serve on the TTAG. Additionally, both CMS and IHS officials have attended TTAG meetings and participated in TTAG subcommittees, which focus on specific Medicare- or Medicaid-related issues. CMS and IHS officials also have interacted through annual HHS regional tribal consultation sessions, held in each region as part of HHS’s implementation of its tribal consultation policy. In addition to participating in the consultation sessions, CMS and IHS officials may work together to plan the sessions. For example, in the Chicago region, CMS regional and IHS Bemidji area officials served on the planning committee that organized the consultation session. With regard to specific policy issues, CMS and IHS have interacted on issues related to Medicare Parts B and D; they also jointly issued regulations to limit the amount that IHS-funded facilities must pay hospitals for contract health services, as shown in the following examples. Medicare Part B: CMS and IHS have been determining which American Indians and Alaska Natives are eligible for an exemption from financial penalties incurred for late enrollment into Medicare Part B. This exemption, referred to as equitable relief, is granted to individuals who did not initially enroll because of erroneous information provided by a government agency. In this case, IHS, while operating under specific interagency agreements with CMS, told some individuals not to enroll in Medicare Part B because, at the time, IHS was unable to bill Medicare Part B. Medicare Part D: During the implementation of Medicare Part D, CMS and IHS worked to ensure that IHS-funded facilities would be able to bill and receive reimbursement from prescription drug plans. This required special provisions to enable tribally operated facilities to enter into contracts with prescription drug plans, while retaining tribal sovereignty. Contract health services: In 2007, CMS and IHS jointly issued a regulation requiring hospitals that receive Medicare funds to accept rates based on Medicare as full payment for contract health services provided to eligible American Indians and Alaska Natives. Termed Medicare-like rates, this regulation prevents hospitals from accepting fees from IHS- funded facilities in excess of what Medicare would pay. With regard to regulations, CMS and IHS have had mixed success identifying CMS regulatory changes that have the potential to affect IHS- funded facilities and their populations and thus warrant IHS review. IHS officials reported reviewing and commenting on CMS regulations addressing Medicare payment issues, Medicaid managed care, and Medicare Part D, noting that CMS made changes to these regulations in response to their comments. For example, IHS informed CMS that regulations implementing a new payment methodology for reimbursing outpatient facilities under Medicare would adversely affect IHS-funded facilities because a number of facilities would have to hire new staff to implement the payment system. As a result of this interaction, CMS exempted IHS-funded facilities from the new payment methodology. In contrast, IHS officials also reported three examples where they did not have an opportunity to review CMS regulations prior to the public comment period. One regulation had the potential to affect Medicaid prescription drug reimbursement for IHS-funded facilities, while the other two regulations had the potential to affect Medicaid enrollment for American Indians and Alaska Natives by requiring documentation of U.S. citizenship and affected tribes’ access to federal funds that could be used for Medicaid outreach. Multiple opportunities exist for CMS and HHS to identify regulations that are important for IHS to review (see fig. 2). However, identifying such regulations can be challenging, as shown below. CMS: The Tribal Affairs Group has an opportunity to review all draft proposed regulations and notify IHS about regulations it determines are relevant to the agency. However, Tribal Affairs Group officials explained that the large number of regulations (approximately 140 regulatory documents a year), coupled with the size of their staff, means that they have difficulty doing more than a cursory review of the regulations. HHS: Responsible for sending proposed regulations to affected agencies, HHS staff use their judgment to determine which HHS agencies should be provided regulations for review. However, the HHS staff making the determination may not have expertise on IHS and thus might not foresee the potential effect a regulation could have on American Indians’ and Alaska Natives’ eligibility for Medicare and Medicaid or these programs’ reimbursements to IHS-funded facilities. HHS officials told us that they make these determinations by reviewing regulations and looking for key legislative terms, such as “Indian,” to determine which agencies should be involved in the review. However, it is not clear that the HHS staff consistently used certain key terms, as the three proposed regulations that IHS reported not having the opportunity to review each contained the word “Indian.” If regulations are not identified by CMS or HHS, then IHS may identify proposed CMS regulations that could affect its facilities or service population by reviewing quarterly CMS updates listing regulations and major policy changes under development. IHS may also review the Unified Agenda of Federal Regulatory and Deregulatory Actions, a semiannual listing of the regulatory actions that federal agencies—including CMS—are developing or have recently completed. Recognizing the difficulties associated with identifying a regulation that could affect IHS and the tribes, CMS has been working to develop and implement additional procedures aimed at improving these efforts. In particular, the CMS Tribal Affairs Group has been working to obtain information from IHS to compile a profile of the types of providers available in tribal locations, which would assist CMS in determining the regulations that could have tribal implications. Additionally, CMS staff with responsibility for overseeing the regulations process have begun asking the staff who draft a regulation whether it affects tribes. If a potential tribal effect is identified, then CMS will indicate, on a cover sheet transmitting the regulation to HHS, that IHS should be provided the regulation for review. CMS has used two key mechanisms—tribal liaisons and an advisory board—to interact with Indian tribes and has relied primarily on the annual HHS regional consultation sessions as its mechanism for consultation. CMS tribal liaisons have provided assistance and obtained input from tribes through activities such as participating in conferences and training sessions, visiting Indian reservations, and providing technical assistance and written guidance. The composition, meeting schedule, and organizational structure of CMS’s tribal advisory board—the TTAG—also has provided an opportunity for CMS to obtain input from tribal representatives. With regard to consultation activities, CMS has relied on annual HHS regional consultation sessions as the primary mechanism to ensure input from tribal officials in the development of regulatory policies, although CMS officials noted that they have also held consultation meetings with individual tribes. However, consulting with over 560 tribes is an inherently difficult process, primarily because of complexities such as considering the needs and priorities of individual tribes. Tribal representatives’ opinions on the effectiveness of CMS’s consultation with Indian tribes and the agency officials involved varied considerably. CMS has used two key mechanisms to interact with representatives from Indian tribes, namely (1) tribal liaisons, who generally serve as tribal representatives’ points of contact within CMS and provide assistance with Medicare and Medicaid, and (2) an advisory board, which provides input to CMS about issues affecting the delivery of health care to American Indians and Alaska Natives. CMS tribal liaisons are located in both CMS central and regional offices. In its central office, the CMS Tribal Affairs Group had four staff who served as the points of contact for tribal-related issues; these staff provided assistance to tribes and tribal representatives and coordinated issues within CMS. Formed in November 2006, the Tribal Affairs Group has served many functions, including (1) serving as an internal resource for CMS staff, educating staff about the needs and priorities of American Indians and Alaska Natives; (2) coordinating the creation of informational materials on CMS programs, such as Medicare and Medicaid, for tribal communities; and (3) representing CMS in communications with Indian tribes and tribal representatives. In addition, the Tribal Affairs Group has served as an advisor to the CMS Administrator, reporting directly to his office and briefing him or his deputy approximately eight times per year about issues raised by tribal representatives. In addition to the CMS Tribal Affairs Group, each CMS regional office has had a designated official, the NAC, who serves as a liaison between the agency and Indian tribes in the region. Key roles of the NAC have included providing training about CMS programs to Indian tribes in the region; helping address tribal concerns, including assisting tribes and IHS- funded facilities in solving problems and obtaining answers to questions that arose; and serving as a CMS information source on American Indians and Alaska Natives. Except for two regions, the NAC role was a part-time responsibility, with the percentage of time spent on NAC-related duties ranging from 20 to 50 percent. In the remaining regions—Denver and Seattle—the NAC positions are full-time because these staff have additional responsibilities as the lead NACs who coordinate activities across all CMS regions and because there are a significant number of tribes within these two regions. The NAC officials have coordinated their efforts with the CMS central office through monthly conference calls with the Tribal Affairs Group. The CMS Tribal Affairs Group and NACs have interacted, or coordinated other CMS staff’s interactions, with tribal representatives using several methods, including participating in conferences and training sessions, visiting Indian reservations, and providing technical assistance and written guidance to Indian tribes (see table 1). Tribal representatives with whom we spoke had varying opinions on the effectiveness of the CMS tribal liaisons. For example, a few tribal representatives we spoke with praised the efforts of the CMS Tribal Affairs Group staff; one representative noted that the Tribal Affairs Group is a critical link between Indian tribes and CMS, while other representatives noted the group’s responsiveness to tribal concerns. Additionally, some tribal representatives mentioned specific interactions with the NAC, such as the NAC’s working with the tribe to resolve issues with the state Medicaid program. However, some tribal representatives raised concerns about the liaisons’ lack of decision-making authority. In addition to liaisons, CMS has received input from tribal representatives through an advisory board. Specifically, in 2003, CMS created an advisory board, the TTAG, to provide it with expertise on policies, guidelines, and programmatic issues affecting the delivery of health care for American Indians and Alaska Natives served by Medicare, Medicaid, or other health care programs funded by CMS. Interactions between CMS officials and the TTAG are meant to complement, but not replace, consultation between CMS and Indian tribes. The TTAG was created to increase understanding between CMS and Indian tribes. The TTAG has been an important vehicle for CMS to obtain input from tribal representatives. (See table 2 for a description of the TTAG.) The agenda for TTAG meetings has been formulated jointly by tribal representatives and CMS officials, allowing for both CMS and tribal priorities to be discussed. The TTAG’s composition, schedule, and structure have provided an opportunity for CMS to obtain input from tribal members. For example: The TTAG has members from each IHS area and TTAG members gather information and views about CMS policies from tribes nationwide. Specifically, seven of the eight TTAG area representatives we spoke with indicated that they solicited information and obtained input from regular meetings with tribes in their area, often through the area health board or its equivalent. Similarly, the TTAG representatives from two of the three Washington, D.C.–based tribal associations indicated that they received input from regular meetings with the membership or from the board of their associations. The TTAG generally has met monthly, which provides an opportunity for tribal representatives and CMS to discuss issues as they arise. For example, in February 2007, TTAG members were able to have a timely discussion with CMS about tribal representatives’ concerns that a proposed regulation would prevent tribes and tribal organizations from collecting federal matching funds for Medicaid-related administrative activities, such as outreach. As a result of tribal representatives’ concerns, the regulation was revised prior to issuance. The TTAG’s subcommittee structure has allowed tribal representatives and CMS officials to conduct in-depth analysis, work, and dialogue on Medicare and Medicaid topics that are a priority for CMS, American Indians and Alaska Natives, or both. Subcommittees have focused on topics such as the availability of CMS data on Medicare and Medicaid enrollment and service use among American Indians and Alaska Natives, outreach and education, and long-term care. The TTAG and CMS have worked together on a number of issues. For example, the TTAG worked with CMS and IHS officials to develop a strategy to (1) educate Indian tribes and their members about the Medicare Part D benefit and (2) assist IHS-funded facilities in contracting with the program’s prescription drug plans. Additionally, the TTAG created a strategic plan to outline a path for CMS to take over a 5-year period to resolve high-priority issues related to health care for American Indians and Alaska Natives. CMS has used the annual HHS regional consultation sessions as its main mechanism to consult with the 562 federally recognized Indian tribes; CMS is required by Executive Order and HHS policy to consult with Indian tribes about policies that have tribal implications. HHS designed the regional consultation sessions to (1) solicit Indian tribes’ priorities and needs on health and human services programs and (2) provide an opportunity for tribes to articulate their comments and concerns on health and human services policy matters related to CMS and HHS. However, consulting with so many tribes is an inherently difficult task, in part because of the variation in the size, location, and economic status of the Indian tribes. Differences in the priorities of tribal participants may also make it difficult to have discussions that are meaningful for all participants. The HHS regional consultation sessions have offered limited time for consultation and discussion, as the sessions have generally occurred in the spring and lasted 1 to 2 days. Specifically, a review of a sample of eight consultation session agendas found that the time devoted to discussion of CMS-related issues ranged from less than 30 to 90 minutes. Additionally, since the consultation sessions only occurred once a year, they may not allow for meaningful discussions in a timely manner, as CMS makes policy changes throughout the year. While the consultation sessions have been open to all tribes, the number of tribes that have participated is relatively small. According to HHS, representatives from 100 tribes attended a 2006 HHS regional consultation session and representatives from 152 tribes attended a 2007 session; this equates to approximately 18 percent and 27 percent of federally recognized tribes, respectively. Several HHS officials noted that tribal attendance at the consultation sessions has varied, depending on the location of the session, which generally differed each year. Additionally, tribal participation in the sessions may be hindered by the amount of notice provided regarding the date of the sessions. The amount of notice tribes were given about the date of the regional consultation session ranged from 3 to 8 weeks across the four HHS regions we reviewed. In addition to the CMS-related discussions at the HHS consultation sessions, CMS officials have held consultation meetings with individual tribes or smaller groups of tribes. For example, CMS has consulted with the Navajo Nation about Medicaid issues the tribe has faced since its reservation is located across three states. Additionally, in January 2008, CMS officials traveled to Washington State to consult with the state’s Medicaid program and Indian tribes about a proposed amendment to Washington State’s Medicaid program that would stipulate how tribes in Washington state can receive federal reimbursement for Medicaid administrative activities. Tribal representatives had varying opinions on the effectiveness of the CMS and HHS consultations, including varying perspectives on the agency officials involved and the format of the consultation sessions. One tribal representative commented that leaders in CMS attend the meetings and are willing to share information, while another tribal representative commented that the officials who attend the sessions are not able to make decisions. Additionally, a third tribal representative explained that high- level officials who can make decisions attend the consultation sessions, but that these officials do not have the necessary information to answer questions. This variation may be due, at least in part, to regional differences in participation. Regarding the format of the consultation sessions, one tribal representative commented that the regional consultation sessions were fairly effective at identifying the issues that should be raised at the national level. However, a few tribal representatives commented that the HHS regional consultation sessions were too short and thus did not allow for meaningful tribal input or dialogue. The six state Medicaid programs we reviewed have used at least one of the following three mechanisms to interact and consult with Indian tribes: tribal liaisons, advisory boards, and regularly scheduled meetings. Most of the states also reported having policies in place that provided a mechanism to govern their interactions, including consultations, with the Indian tribes. Most of the state Medicaid programs reviewed reported consulting with Indian tribes about changes to their Medicaid program. Tribal representatives’ opinions on state Medicaid program’s consultation practices varied. The six state Medicaid programs we reviewed have used at least one of three mechanisms to interact and consult with Indian tribes: (1) tribal liaisons—who serve as the tribes’ primary contact with the states on issues related to Medicaid; (2) advisory boards—which, among other things, inform the state about Medicaid issues affecting American Indians and Alaska Natives; and (3) other regularly scheduled meetings—which states and tribes used to discuss Medicaid issues and identify opportunities for collaboration, technical assistance, and consultation. Additionally, five of the six states we reviewed had policies in place that provided a mechanism to govern interactions, including consultations, between the state Medicaid program and Indian tribes. All six state Medicaid programs have used at least one designated tribal liaison in their interactions, including consultations, with tribes about issues related to Medicaid. In addition to serving as a communication and coordination link between tribes and state Medicaid programs, some state tribal liaisons also have provided input on state Medicaid policies affecting American Indians and Alaska Natives and training and technical assistance to tribes on Medicaid (see table 3). Additionally, tribal liaisons have been involved in consultations with Indian tribes. For example, one of New Mexico tribal liaisons oversees the Medicaid program’s consultations with Indian tribes, while a Wisconsin tribal liaison helps to coordinate an annual tribal consultation session. Tribal representatives we spoke with had varying opinions on the effect tribal liaisons have had on interactions between the tribes and state Medicaid programs. For example, representatives from a Montana tribe reported that interactions with the state Medicaid program’s tribal liaison resulted in changes to the state’s Medicaid application. Specifically, after the tribe explained to the tribal liaison that the length of the application was a barrier to American Indians and Alaska Natives enrolling in Medicaid, the state simplified its Medicaid application. Additionally, individuals representing selected tribes in Arizona told us that the establishment of a tribal liaison position in that state’s Medicaid program has improved tribes’ ability to provide input on health policy issues and resulted in progress regarding those issues. In contrast, representatives from a Minnesota tribe noted that working with the state is difficult even though there is a tribal liaison. Similarly, while officials from a Southwest tribe noted the importance of tribal liaisons, they also expressed concern that tribal liaisons are sometimes kept out of decision making. Three of the six state Medicaid programs—Arizona, New Mexico, and Utah—reported using advisory boards to interact, and in some cases consult, with Indian tribes. For example, Utah has utilized an advisory board to determine if proposed state Medicaid policy or program changes have tribal implications and thus require additional consultation with the advisory board or other tribal representatives. The Medicaid programs described using two types of advisory boards to interact with the Indian tribes: (1) Indian advisory boards, which address a broad array of issues affecting the provision of health care to American Indians and Alaska Natives, and (2) Medicaid advisory boards, which address issues affecting all Medicaid beneficiaries, including American Indians and Alaska Natives. Specifically, one state Medicaid program (Arizona) reported using Indian advisory boards; one program (New Mexico) reported using its Medicaid advisory board, which includes tribal representation; and one program (Utah) reported using both. While both types of advisory boards are mechanisms for interactions between the state and tribal representatives, the composition of the advisory boards varied. Specifically, the Indian advisory boards included numerous tribal representatives, while there were fewer tribal representatives on the Medicaid advisory boards. For example, the Utah Indian advisory board, which meets monthly, includes appointed representatives from all of the Utah tribes as well as the state’s tribal liaison, other state and tribal officials, and IHS staff. In comparison, Utah’s Medicaid advisory board has one individual to represent the seven tribes in the state. New Mexico’s Medicaid advisory board has two tribal representatives who may also serve on a subcommittee on tribal issues. Four of the six state Medicaid programs (Arizona, Minnesota, New Mexico, and Wisconsin) reported holding regularly scheduled meetings to interact, and in some cases consult, with Indian tribes. The frequency of these meetings ranged from bimonthly to annually, and states reported discussing issues such as the Medicaid budget and reimbursement. For example, New Mexico officials reported holding an annual meeting to consult with tribal representatives about pertinent Medicaid policy and program changes and the Medicaid program’s budget prior to the state legislative session. A Wisconsin official reported that the state’s bimonthly meetings with tribal health directors focus on specific issues, such as increasing Medicaid reimbursements for tribally operated facilities and accessing federal matching funds for tribal Medicaid expenditures. Tribal representatives’ assessments of the value of the regularly scheduled meetings with the states varied. For example, representatives from one tribe, which participates in quarterly meetings with officials who oversee Minnesota’s Medicaid program, said that the meetings were successful in helping address tribal needs. However, representatives from two Wisconsin tribes noted that the number of tribes involved and the brevity of the annual meetings with the state made discussing specific issues difficult. Tribes also reported that location was a factor that contributed to the success of these meetings. Specifically, representatives from Wisconsin and Minnesota tribes indicated that holding meetings in convenient locations affects tribal participation and increased the meetings’ effectiveness, respectively. Five of the six states we reviewed—Arizona, Minnesota, New Mexico, Wisconsin, and Utah—reported having policies in place that govern the interactions, and in most cases consultations, between their states’ Medicaid programs and Indian tribes. The states had two types of policies governing interactions with Indian tribes: (1) governor’s orders, which specify that all state agencies should interact with Indian tribes on a government-to-government basis and provide for consultation between the state and Indian tribes, and (2) tribal consultation policies, which establish guidelines that state agencies, including Medicaid agencies, should use to consult with Indian tribes. Specifically, one state (Minnesota) reported having a governor’s order, two states (Utah and Wisconsin) reported having tribal consultation policies, and two states (Arizona and New Mexico) reported having both. The four states’ tribal consultation policies established guidelines with varying degrees of specificity for how consultation between the Medicaid agency and Indian tribes should be conducted. Table 4 provides an overview of the guidelines in the four states’ consultation policies. Most of the state Medicaid programs we reviewed reported consulting with Indian tribes in their state when making changes to their Medicaid programs. Specifically, four states (Minnesota, New Mexico, Utah, and Wisconsin) reported consulting with Indian tribes on any Medicaid program changes that they believed affected Indian tribes, and one state (Montana) reported consulting only on Medicaid program changes that required a waiver. The remaining state—Arizona—reported that it has not consulted with Indian tribes about Medicaid program changes. States used a variety of mechanisms to consult with Indian tribes, such as regularly scheduled quarterly meetings with tribal health directors and advisory boards. The states reported consulting with Indian tribes about a variety of topics. For example, New Mexico officials reported an extensive consultation process with tribes about a new Medicaid program for coordinated long- term services. These consultations resulted in changes to the program, including requiring the program’s managed care plans to have tribal liaisons. Additionally, Minnesota noted that it consulted with Indian tribes about changing the process by which Medicaid eligibility determinations are made for children in foster care and adoption assistance programs. Tribal representatives’ opinions on state Medicaid program’s consultation practices varied. For example, representatives from one Wisconsin tribe noted that consultation was not hurtful but was also not helpful. They explained that consultation provides opportunities to interact directly with agency officials and voice concerns but does not necessarily lead to changes in agency processes. In contrast, representatives from a Minnesota tribe provided examples of specific actions the Medicaid program took as a result of consultation. A representative from a Minnesota tribe noted that consultation was effective when there was a personal relationship with state officials. However, representatives from several tribes in Montana reported that consultation did not occur. For example, representatives from one Montana tribe noted that rather than consulting with tribes about changes to the Medicaid program, the state informed tribes after changes had already been made. American Indians and Alaska Natives have faced several barriers to Medicare and Medicaid enrollment despite efforts to provide assistance with the application process. While two of the barriers to Medicare and Medicaid enrollment are associated with the unique status of the tribal community, most of the enrollment barriers faced by American Indians and Alaska Natives are similar to those experienced by other populations—such as individuals with low incomes. Efforts to enroll American Indians and Alaska Natives have focused on providing assistance with the Medicaid and Medicare application processes. For example, almost all of the IHS-funded facilities we visited had staff who help patients complete and submit Medicare and Medicaid applications. Many organizations, including CMS and IHS, have conducted outreach to educate American Indians and Alaska Natives about the programs. American Indians and Alaska Natives have faced barriers to Medicare and Medicaid enrollment (see table 5). Two of the barriers are unique to the tribal community. First, some officials we spoke with reported that some American Indians and Alaska Natives believe they should not have to apply for Medicare or Medicaid because the federal government has a duty to provide them with health care as a result of treaties with Indian tribes. Second, American Indians and Alaska Natives may not see a personal benefit to enrolling in Medicare or Medicaid because they have access to free health care at IHS-funded facilities regardless of whether they enroll. Other barriers were similar to those faced by other populations. For example, similar to low-income populations, American Indians and Alaska Natives have experienced transportation and financial barriers, as well as barriers related to limits on access to communication devices, such as telephones and regular mail delivery. While similar to the barriers faced by other populations, some officials believed that there are some distinct aspects to the barriers faced by American Indians and Alaska Natives. For example, application processes, such as the Medicaid requirement to provide documentation of U.S. citizenship, may be especially difficult for American Indians and Alaska Natives as this population was traditionally not born in a hospital. As a result, some officials reported that some American Indians and Alaska Natives, particularly those who are elderly, do not have an official record of their birth. Efforts to enroll eligible American Indians and Alaska Natives in Medicare and Medicaid generally have focused on providing assistance with the application process. Specifically, almost all of the IHS-funded facilities we visited offered patients assistance with applying for Medicare and Medicaid. The assistance included helping complete and submit applications, collecting and possibly certifying required documentation, translating application information into tribal languages, and offering these services through home visits. Facility staff generally identified patients needing application assistance through their patient registration process, which is the process through which patients sign in for their medical appointments. For example, facility registration staff used information about a patient’s age, employment status, and existence of health insurance to determine whether the patient might qualify for Medicare or Medicaid and thus should be referred to a patient benefit coordinator for assistance (see fig. 3). In addition to the patient registration process, some facilities also generated reports listing individuals who were potentially eligible for, but not enrolled in, Medicare or Medicaid. For example, one facility indicated that it generated monthly reports of (1) individuals aged 65 and older who did not have Medicare and (2) individuals aged 19 or younger without health insurance and thus potentially eligible for Medicaid. This same facility also generated reports of individuals who were age 64 to alert patient benefit coordinators that these individuals may soon be eligible for Medicare. Facilities we visited used staff—referred to as patient benefit coordinators—to provide Medicare and Medicaid application assistance. Among the facilities offering assistance, the number of patient benefit coordinator positions ranged from one to eight; hospitals generally had a higher number of patient benefit coordinator positions. American Indians and Alaska Natives may also receive application assistance directly from Medicaid or Medicare eligibility staff. State or county Medicaid eligibility staff worked at or traveled to four of the IHS- funded facilities we visited to provide application assistance and conduct on-site eligibility determinations; these eligibility staff were located at two of the facilities full-time, that is, 5 days a week. State or county Medicaid eligibility staff were also located at, or traveled to, tribal offices on three of the reservations we visited. Specifically, one of the reservations had a satellite Medicaid eligibility office, which was open 5 days a week and housed several county Medicaid eligibility staff. The second reservation had a staff member on-site 5 days a week, while a staff member was available on the third reservation 2 days a week. Additionally, a few of the tribes we visited had the authority to determine Medicaid eligibility for at least some tribal members and therefore had additional Medicaid application assistance available at the tribal office where eligibility determinations occurred. Finally, staff from SSA, the federal agency responsible for Medicare enrollment, provided Medicare application assistance at some IHS-funded facilities. Specifically, staff from two of the IHS-funded facilities we visited indicated that SSA office staff visited their facilities at least monthly, while staff from a third IHS-funded facility indicated that SSA staff came to a building nearby at least monthly. Many organizations, including CMS and IHS, have conducted outreach to educate the tribal community about Medicare and Medicaid and encourage those in the community to apply. For example, beginning in May 2005, there was a concerted effort by CMS, IHS, and SSA to educate and enroll American Indians and Alaska Natives in the Medicare Part D prescription drug benefit, including training for patient benefit coordinators in each IHS area and informational materials, such as posters and fact sheets, targeted to the tribal community. In 2007, CMS and the TTAG released an outreach video, to be used at IHS-funded facilities, which emphasizes the community benefit to enrollment in Medicare and Medicaid. Additionally, in 2007, IHS published a poster and brochure to educate American Indians and Alaska Natives about existing federal and state health benefit programs, such as Medicare and Medicaid. Other outreach efforts targeted to the tribal community included radio advertisements, which a few of the state Medicaid programs we reviewed reported using, and newspaper or newsletter articles, which some IHS-funded facilities reported using. Finally, several of the IHS-funded facilities we visited provide information about Medicare and Medicaid at facility-based or community health fairs and events at schools, senior centers, or other community venues. We provided copies of a draft of this report to HHS and provided the six states we reviewed (Arizona, Minnesota, Montana, New Mexico, Utah, and Wisconsin) with copies of the portion of the report related to state Medicaid programs’ mechanisms for interacting and consulting with Indian tribes. HHS provided us with written comments from CMS (see app. III). We also received technical comments from CMS and three of the six states (Arizona, Montana, and New Mexico), which we incorporated as appropriate. In written comments, CMS noted that it was pleased that our findings highlight a number of activities that CMS engages in with IHS and commented that the report reinforces the benefit of the multiple processes CMS has put in place in working with IHS and the tribes. CMS acknowledged that it is working to improve its process for identifying whether proposed regulatory changes would affect IHS-funded facilities and the populations they serve. CMS noted that its regulations also affect programs directly operated by tribes, which have broader authority than IHS in operating programs and facilities such as nursing homes. We agree with CMS about the potential impact of its regulations on tribally operated programs and facilities, and we encourage the agency to consult with tribes when developing its regulations as required by Executive Order and HHS’s tribal consultation policy. As agreed with your offices, unless you publicly announce the contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Administrator of the Centers for Medicare & Medicaid Services and the Director of the Indian Health Service. We will also provide copies to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or kingk@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. We used a two-tiered approach to selecting facilities and tribes for site visits, which included selecting 3 of the 12 IHS areas and then selecting facilities and tribes within those 3 areas. Based on this approach, we interviewed officials from 25 IHS-funded facilities and leaders (or designated officials) from 14 tribes. In the first tier, we selected three IHS areas to represent a mix in geographic location, the entities operating the facilities (IHS or tribes), and the level of reliance on contract health services. Table 6 shows the characteristics of the areas selected. In the second tier, we selected facilities within the three IHS areas. When selecting facilities, we considered recommendations from CMS and IHS officials and tribal representatives, the type of facility (for example, hospital or health center), and whether it was IHS or tribally operated. We also used pragmatic considerations, such as distance between facilities, to guide our selections. See table 7 for the characteristics of the 25 facilities in which we interviewed officials. For each facility visited, we requested interviews with the leaders of the tribe primarily served by the facility. We were able to interview leaders or designated officials from 14 tribes—7 from the Bemidji area, 5 from the Billings area, and 2 from the Navajo area. Because of the judgmental nature of our sample, information obtained from the facilities and tribal leaders cannot be generalized. In addition to the contact named above, Carolyn Yocom, Assistant Director; Krister Friday; Elayne Heisler; Kevin Milne; Michelle Rosenberg; and Elijah Wood made key contributions to this report. | By law, facilities funded by the Indian Health Service (IHS) may retain reimbursement from Medicare and Medicaid without an offsetting reduction in funding. Ensuring that IHS-funded facilities enroll individuals in--and obtain reimbursement from--Medicare and Medicaid can provide an important means of expanding the funding for health care services for the population served by IHS. The Centers for Medicare & Medicaid Services (CMS), the agency within the Department of Health and Human Services (HHS) that administers Medicare and oversees states' Medicaid programs, is required by Executive Order and HHS policy to consult with Indian tribes on policies that have tribal implications. This requirement is in recognition of the unique government-to-government relationship between the 562 federally recognized Indian tribes and the federal government. GAO was asked to (1) describe interactions between CMS and IHS, (2) examine mechanisms CMS uses to interact and consult with Indian tribes, (3) examine mechanisms that selected states' Medicaid programs use to interact and consult with Indian tribes, and (4) identify barriers to Medicare and Medicaid enrollment and efforts to help eligible American Indians and Alaska Natives apply for and enroll in these programs. GAO reviewed documents, interviewed federal and state officials, and visited a judgmental sample of Indian tribes and IHS-funded facilities in six states. CMS and IHS have interacted to (1) provide support to IHS-funded facilities and tribes in their access to Medicare and Medicaid and (2) address broader policy and regulatory concerns regarding these programs. Their interactions to provide support have included education and technical assistance; the agencies also have interacted to obtain input from tribal representatives on program operations. On broader policy and regulatory concerns, CMS and IHS have worked on policy initiatives aimed at ensuring that existing health care policies meet the needs of IHS-funded facilities and the populations they serve. CMS and IHS have had mixed success identifying whether proposed CMS regulatory changes would affect IHS-funded facilities or their populations and thus warrant IHS review. CMS has been working to improve its identification of such regulations. CMS has used two key mechanisms--tribal liaisons and an advisory board--to interact with representatives from Indian tribes, and it has relied primarily on annual regional sessions sponsored by HHS as its mechanism to consult with Indian tribes. Tribal liaisons in CMS's central and regional offices generally served as the point of contact for tribal representatives. CMS's tribal advisory board, which is meant to complement but not replace consultation, has provided the agency with advice on policies affecting the delivery of health care for American Indians and Alaska Natives. CMS has used annual HHS regional consultation sessions as the primary basis for consulting with Indian tribes. However, consulting with tribes is an inherently difficult task, in part because of the variation in tribes' size, location, and economic status. Further, these HHS regional sessions--which generally lasted 1 to 2 days and covered all HHS programs--have offered limited time for consultation and discussion. The six state Medicaid programs we reviewed have used at least one of three mechanisms--tribal liaisons, advisory boards, and regular meetings--to interact and consult with Indian tribes. Five of the six states reported having policies in place that governed the interactions between the state's Medicaid program and Indian tribes, with most of these policies establishing guidelines for how consultation should be conducted. Five states reported consulting with tribes about changes to their Medicaid programs. American Indians and Alaska Natives have faced several barriers to Medicare and Medicaid enrollment despite efforts to assist them with the application process. Many of these barriers are similar to those experienced by other populations, such as transportation and financial barriers. To help eligible American Indians and Alaska Natives enroll in Medicare and Medicaid, almost all of the IHS-funded facilities we visited had staff who assisted patients with the application process, including helping them complete and submit applications, and collecting required documentation. In commenting on a draft of this report, CMS noted that it was appreciative of GAO's review of CMS activities related to interactions with IHS and tribes. |
Although the current focus of concern is largely on the potential for several years of declining physician fees, the historic and continuing challenge for Medicare is to find ways to moderate the rapid growth in spending for physician services. Before 1992, the fees that Medicare paid for those services were largely based on physicians’ historical charges. Spending for physician services grew rapidly in the 1980s, at a rate that the Secretary of Health and Human Services (HHS) characterized as out of control. Although Congress froze fees or limited fee increases in the 1980s, spending continued to rise because of increases in the volume and intensity of physician services. From 1980 through 1991, for example, Medicare spending per beneficiary for physician services grew at an average annual rate of 11.6 percent. The ineffectiveness of fee controls alone led Congress to reform the way that Medicare set physician fees. The Omnibus Budget Reconciliation Act of 1989 required the establishment of both a national fee schedule and a system of spending targets, which together first affected physician fees in 1992. From 1992 through 1997, annual spending growth for physician services was far lower than in the previous decade. The decline in spending growth was the result in large part of slower volume and intensity growth. (See fig. 1.) Over time, Medicare’s spending target system has been revised and renamed. The SGR system, Medicare’s current system for updating physician fees, was established in the Balanced Budget Act of 1997 (BBA) and was first used to adjust fees in 1999. Following the implementation of the fee schedule and spending targets in 1992 through 1999, average annual growth in volume and intensity of service use per beneficiary fell to 1.1 percent. More recently, volume and intensity growth has trended upward, rising at an average annual rate of more than 5 percent from 2000 through 2005. Although this average annual rate of growth remains below that experienced before spending targets were introduced, the recent increases in volume and intensity growth are a reminder that inflationary pressures continue to challenge efforts to moderate growth in physician expenditures. The SGR system establishes spending targets to moderate spending increases caused by excess growth in volume and intensity. Services covered by the SGR system’s spending targets include physician services and other items and services, such as clinical laboratory services, specified by the Secretary of HHS, that are commonly performed or furnished by physicians or in a physician’s office. The SGR system’s spending targets do not cap expenditures for SGR-covered services. Instead, spending in excess of the target triggers a reduced fee update or a fee cut. In this way, the SGR system applies financial brakes to spending for SGR-covered services and thus serves as an automatic budgetary control device. In addition, reduced fee updates signal physicians collectively and Congress that spending because of volume and intensity has increased more than allowed. To apply the SGR system, every year the Centers for Medicare & Medicaid Services (CMS) follows a statutory formula to estimate the allowed rate of increase for spending on SGR-covered services and uses that rate to construct the spending target for the following calendar year. The sustainable growth rate is the product of the estimated percentage change in (1) input prices for physician services and other SGR-covered services; (2) the average number of Medicare beneficiaries in the traditional fee-for- service program; (3) national economic output, as measured by real (inflation-adjusted) GDP per capita; and (4) expected expenditures for physician services and other SGR-covered services resulting from changes in laws or regulations. SGR spending targets are cumulative. That is, the sum of all spending for SGR-covered services since 1996 is compared to the sum of all annual targets since the same year to determine whether spending has fallen short of, equaled, or exceeded the SGR targets. The use of cumulative targets means, for example, that if actual spending has exceeded the SGR system targets, fee updates in future years must be lowered sufficiently both to offset the accumulated excess spending and to slow expected spending for the coming year. Under the SGR system, the volume and intensity of physician services and other SGR-covered services—that is, spending per beneficiary adjusted for the estimated underlying cost of providing those services—is allowed to grow at the same rate that the national economy grows over time on a per capita basis. When the SGR system was established, economic growth was seen as a benchmark that would allow for affordable increases in volume and intensity. Currently, the SGR system’s benchmark for volume and intensity growth is projected to be about 2.2 percent annually. Consequently, volume and intensity growth that exceeds 2.2 percent causes Medicare SGR-covered spending to exceed the SGR system’s target, while slower volume and intensity growth leads to spending that falls below the SGR target. If cumulative spending on SGR-covered services is in line with the SGR system’s target, the physician fee schedule update for the next calendar year is set equal to the estimated increase in the average cost of providing physician services as measured by the Medicare Economic Index (MEI). If cumulative spending exceeds the target, the annual physician fee update will be less than the change in MEI or may even be negative. Conversely, if cumulative spending falls short of the target, physicians benefit because the update will exceed the change in MEI. The SGR system places limits on the extent to which fee updates can deviate from MEI. In general, with an MEI of about 2 percent, the largest allowable fee decrease would be about 5 percent and the largest fee increase would be about 5 percent. Recent growth in spending due to volume and intensity increases has been larger than SGR targets allow, resulting in excess spending that must be recouped by reducing fees to lower future spending. From 2000 through 2005, based on an analysis of physician services claims from April of each year, average annual growth in the volume and intensity of Medicare physician services exceeded 5 percent—more than double the approximately 2.2 percent growth rate permitted under the SGR system. To offset the resulting excess spending, the SGR system calls for reductions in physician fees. Additional downward pressure on physician fees arises from the growth in spending for other Medicare services that are included in the SGR system, but that are not paid for under the physician fee schedule. Such services include laboratory tests and many Part B outpatient prescription drugs that physicians provide to patients. Because physicians influence the volume of services they provide directly—that is, fee schedule services— as well as other items and services commonly performed by physicians or furnished in a physician’s office, expenditures for both types of services were included when spending targets were introduced. To the extent that spending for these other services grows larger as a share of overall SGR spending, additional pressure is put on fee adjustments to offset excess spending and bring overall SGR spending in line with the system’s targets. This occurs because the SGR system attempts to moderate spending only through the fee schedule, even when the excess spending is caused by expenditures for SGR-covered services which are not paid for under the fee schedule. Legislated minimum updates for 2004 through 2006 have also contributed to future physician fee cuts. The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA) and the Deficit Reduction Act of 2005 (DRA) averted fee reductions projected for 2004 through 2006 by specifying minimum updates to physician fees for those years. The MMA-specified minimum annual increase of 1.5 percent replaced SGR system fee reductions of 4.5 percent in 2004 and 3.3 percent in 2005. DRA had the effect of replacing a fee reduction of 4.4 percent in 2006 with a 0.2 percent fee increase. These legislated minimum fee updates have resulted in additional aggregate spending. Because neither MMA nor DRA made corresponding revisions to the SGR system’s spending targets, the SGR system must offset the additional spending by reducing fees beginning in 2007. From 2000 through 2005, Medicare spending on physician services grew far faster than the growth in physician fees and the number of eligible beneficiaries. Our analysis of Medicare claims data for services provided during the first 28 days of April of each year indicates that from April 2000 to April 2005 a growing percentage of beneficiaries obtained services from physicians. Among those beneficiaries who obtained such services, there were increases in the average number of services provided. Overall, the volume of services provided increased as well as the intensity (and thus costliness) of the services provided. Our analysis also found that the number of physicians billing Medicare and allowed charges per physician increased over the period as did the proportion of claims for which physicians accepted Medicare payment as payment in full. From 2000 through 2005, while Medicare physician fees rose by 4.5 percent, program spending on physician services grew by nearly 60 percent. On a per beneficiary basis, spending for physician services grew by approximately 45 percent. Annual per beneficiary spending increases ranged from a low of 2 percent in 2002 to a high of about 11 percent in both 2001 and 2004. (See fig. 2.) It is important to note that even in 2002, a year in which fees were reduced by nearly 5 percent, Medicare spending per beneficiary for physician services went up. In general, the proportion of beneficiaries who received services from a physician rose during the period covered in our review. (See fig. 3.) Specifically, from 2000 through 2005, the proportion of beneficiaries receiving services during the month of April rose from about 41 percent to about 45 percent. Although this measure declined slightly in April 2003, the proportion of beneficiaries receiving services remained a percentage point higher than in April 2000 and the upward trend resumed in 2004. Nationwide, this measure increased in both urban and rural areas. The proportion of beneficiaries receiving services rose from about 42 percent in April 2000 to about 46 percent in April 2005 in urban areas and from about 39 percent in April 2000 to about 42 percent in April 2005 in rural areas. From April 2000 to April 2005, an increasing number of services were provided to beneficiaries who were treated by a physician. Specifically, in that period, the average number of services provided per 1,000 beneficiaries who were treated rose by 14 percent—from about 3,400 to about 3,900. (See fig. 4.) The number of services provided per 1,000 beneficiaries was higher in urban areas (3,516 services per 1,000 beneficiaries who received services in 2000) relative to rural areas (3,196 services per 1,000 beneficiaries who received services in 2000). However, in percentage terms, the urban and rural areas experienced similar increases in the number of services per treated beneficiary—15 percent in urban areas, compared with 12 percent in rural areas. Because there were increases in both the proportion of beneficiaries obtaining services from physicians and the number of services provided to each beneficiary who obtained care, the overall volume of services increased from 2000 through 2005. That is, the number of physician services per beneficiary, including beneficiaries who obtained care and those that did not, increased. Volume generally increased across broad categories of services—evaluation and management, procedures, imaging services, and tests. On average, volume for all physician services increased at an annual rate of 4.4 percent. (See table 1.) The volume of evaluation and management services, a category that includes office visits, increased at an average annual rate of 2.4 percent. There was a small average annual decline in the volume of major procedures (less than 1 percent), although minor procedures grew at an average annual rate of 6.3 percent. Volume grew most rapidly (9.1 percent average annual rate) for tests. From April 2000 to April 2005, the services that physicians provided to beneficiaries also increased in intensity. The fee schedule expresses this intensity through relative value units (RVU), which account for the amount of physician time, expertise, and resources required to deliver a service compared to other services. Because Medicare’s fee for a service is based on the number of RVUs associated with it, more intense services are also more costly. Overall, physician services per beneficiary rose in intensity, as measured in RVUs, at an average annual rate of about 5 percent. Intensity increases occurred among all categories of services, including major procedures. Intensity grew most rapidly among imaging services (10.5 percent average annual rate) and tests (13.9 percent average annual rate). Thus, taken as a whole, beneficiaries’ increased utilization of physician services has manifested itself in both increased volume and increased intensity of services for the 6 years reviewed. An increasing number of physicians billed Medicare from April 2000 to April 2005. (See fig. 5.) In April 2000, the number of physicians billing Medicare was about 419,000, and in April 2005, that number had increased to a little more than 467,000. While Medicare experienced an 11 percent increase in the number of physicians billing the program, the number of beneficiaries in Medicare—FFS and managed care combined—rose by 8 percent. On average, total allowed charges per physician billing Medicare increased by about 41 percent from April 2000 to April 2005. A portion of this increase can be attributed to the changes in Medicare’s fees, which increased by about 4.5 percent over the period. However, most of the increase was the result of physicians providing more services and more intense, and thus more costly, services. From April 2000 to April 2005, the vast majority of Medicare physician services were performed by participating physicians—that is, physicians who formally agreed to submit all claims on assignment. The percentage of services submitted by participating physicians increased from 95 percent to over 96 percent. (See fig. 6.) By submitting all Medicare claims on assignment, these physicians agreed to accept Medicare’s fee as payment in full for all of the services they provided. This includes the coinsurance amount (usually 20 percent) paid by the beneficiary. Nonparticipating physicians could choose for each service they provided to submit an assigned claim, thereby accepting Medicare’s fee as payment in full, or an unassigned claim. Nonparticipating physicians who submitted an unassigned claim could charge the beneficiary an additional amount, within set limits, for that service—a practice referred to as balance billing. The projected sustained period of declining physician fees and the potential for beneficiaries’ access to physician services to be disrupted have heightened interest in alternatives for the current SGR system. In 2005, we testified that potential alternatives cluster around two basic approaches. One approach would end the use of spending targets as a method for updating physician fees and encouraging fiscal discipline. The other would retain spending targets but modify the current SGR system to address its perceived shortcomings. The Medicare Payment Advisory Commission (MedPAC) has recommended replacing the SGR system with a system that bases the annual fee updates on changes in the cost of efficiently providing care as measured by MEI.24, 25 Under this approach, efforts to control aggregate spending would be separate from the mechanism used to update fees. The advantage of eliminating spending targets would be greater fee update stability. Although basing physician fee updates on changes in MEI would limit the annual increases in the price that Medicare pays for each service, this approach does not contain an explicit mechanism for constraining aggregate spending resulting from increases in the volume and intensity of services physicians provide. If no other actions were taken, Medicare spending for physician services would rise relative to projected spending under the SGR system. See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (Washington, D.C.: March 2001, 2002, 2003, and 2004). MedPAC suggested that other adjustments to the update might be necessary, for example, to ensure overall payment adequacy, correct for previous MEI forecast errors, and address other factors. not be automatic, but should be informed by changes in beneficiaries’ access to services, the quality of services provided, the appropriateness of cost increases, and other factors, similar to those that are considered for other provider payment updates. An alternative approach for modifying the current SGR system would retain spending targets but modify one or more elements of the system. The key distinction of this approach, in contrast to basing updates on MEI, is that fiscal controls designed to moderate spending would continue to be integral to the system used to update fees. Although spending for physician services would likely also rise under this approach, the advantage of retaining spending targets is that the fee update system would automatically work to moderate spending if volume and intensity growth began to increase above allowable rates. As presented in our 2004 report, the SGR system could be modified in a number of ways. For example, Congress could raise the allowance for increased spending due to volume and intensity growth by some factor above the percentage change in real GDP per capita. The Secretary of HHS could, under current authority, consider excluding Part B drugs from the definition of services furnished “incident to” physician services for the purposes of the SGR system. DRA mandated that MedPAC study a variety of SGR reforms, such as setting regional, instead of national, spending targets. The effects on overall Medicare spending for physician services, relative to projected spending under the current SGR system, would depend on whether the reforms simply allowed for higher fees or provided meaningful incentives for physicians to moderate volume and intensity growth. Mr. Chairman, this concludes my prepared statement. We look forward to working with the Subcommittee and others in Congress as policymakers seek to moderate program spending growth while ensuring appropriate physician payments. I will be happy to answer questions you or the other Members of the Subcommittee may have. For further information regarding this testimony, please contact A. Bruce Steinwald at (202) 512-7101 or steinwalda@gao.gov. James Cosgrove, Assistant Director; Todd Anderson; Jessica Farb; and Eric Wedum contributed to this statement. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In 2002, the system Medicare uses to determine annual changes to physician fees--the sustainable growth rate (SGR) system--reduced fees by almost 5 percent. Subsequent administrative and legislative actions averted fee declines in 2003 through 2006. Absent additional actions, fee reductions are projected for 2007 through 2015. Consequently, the appropriateness of the SGR system has been questioned. At the same time, there are concerns about the impact of increased physician services spending on the long-term fiscal sustainability of Medicare. GAO was asked to discuss the SGR system and Medicare physician payments. This statement addresses (1) how the SGR system is designed to moderate the growth in spending for physician services, (2) why physician fees are projected to decline under the SGR system, (3) trends in the use of services provided by physicians and spending for those services from 2000 through 2005, and (4) options for revising or replacing the SGR system. This statement is based on two GAO reports: Medicare Physician Services: Use of Services Increasing Nationwide and Relatively Few Beneficiaries Report Major Access Problems ( GAO-06-704 , July 21, 2006), and Medicare Physician Payments: Concerns about Spending Target System Prompt Interest in Considering Reforms ( GAO-05-85 , Oct. 8, 2004). To moderate Medicare spending for physician services, the SGR system sets spending targets and adjusts physician fees based on the extent to which actual spending aligns with specified targets. If growth in the number of services provided to each beneficiary--referred to as volume--and in the average complexity and costliness of services--referred to as intensity--is high enough, spending will exceed the SGR target. While the SGR system allows for some volume and intensity spending growth, this allowance is limited. If such growth exceeds the average growth in the national economy, as measured by the gross domestic product per capita, fee updates are set lower than the estimated increase in the average cost of providing physician services. A large gap between spending and the target may result in fee reductions. There are two principal reasons why physician fees are projected to decline under the SGR system. Recent growth in spending due to volume and intensity increases has been more than double that allowed under the SGR system, resulting in excess spending that must be recouped through reduced fee updates. Legislative actions that specified minimum updates for 2004 through 2006 have also contributed to future physician fee cuts. These actions, which averted fee reductions, did not revise the spending targets. Therefore, the SGR system must offset the additional spending resulting from the excess volume and intensity and the minimum fee updates by reducing fees beginning in 2007. From 2000 through 2005, Medicare spending for services provided by physicians grew rapidly. Our analysis of Medicare claims submitted during the first 28 days of April in these years shows that an increasing proportion of beneficiaries obtained services and the volume and intensity of the services provided increased. While Medicare physician fees rose by 4.5 percent over the period, program spending on physician services per beneficiary grew by approximately 45 percent. The number of physicians billing Medicare and total allowed charges per billing physician also increased, as did the proportion of claims for which physicians accepted Medicare payment as payment in full. Potential alternatives to the SGR system cluster around two basic approaches: (1) ending the use of spending targets as a method for updating physician fees and encouraging fiscal discipline and (2) retaining spending targets but modifying the current SGR system to address perceived shortcomings. Either approach could be complemented by focused efforts to moderate volume and intensity growth directly. Because multiple years of projected 5 percent fee cuts are incorporated in Medicare's budgeting baseline, almost any change to the SGR system is likely to increase program spending above the baseline. |
In 1935, title II of the Social Security Act created the Social Security retirement program to pay benefits to retired workers. Subsequent federal laws added benefits for workers’ dependents and survivors and, later, for disabled workers. Workers now earn entitlement to benefits on the basis of the number of Social Security credits they have earned while working in jobs covered by Social Security. Because the act required SSA to maintain records of wage amounts employers report having paid to individuals, in 1936, SSA created SSNs as a means of maintaining individual earnings records and issued cards to workers as records of their SSNs. The act now requires individuals to provide SSA their number when they apply for Social Security benefits. SSA uses the SSN to identify applicants’ personal earnings records, which contain information the agency uses to compute benefits payable to beneficiaries. Over the years, the SSN has come to be viewed by many as a national identifier because almost every American has an SSN, and each is unique.SSA estimates that about 277 million individuals currently have SSNs. Furthermore, the boom in computer technology over the past several decades has prompted private businesses and government agencies to rely on SSNs as a way to accumulate and identify information in their databases. Simply stated, the uniqueness and broad applicability of the SSN have made it the identifier of choice for government agencies and private businesses, both for compliance with federal requirements and for the agencies’ and businesses’ own purposes. No federal law regulates overall use of SSNs. However, a number of federal laws and regulations enacted since the 1960s require certain programs and federally funded activities to use the SSN for administrative purposes. These laws and regulations generally limit the use of the SSN to the required purpose by explicitly prohibiting other uses or disclosures. Federal law neither requires nor prohibits many of the public and private sectors’ other uses of SSNs. A number of federal laws and regulations require the use of the SSN as an individual’s identifier to facilitate automated exchanges that help administrators enforce compliance with federal laws, determine eligibility for benefits, or both. The Internal Revenue Code and regulations, which govern the administration of the federal personal income tax program, require that individuals’ SSNs serve as taxpayer identification numbers.This means that employers and others making payments to individuals must include the individuals’ SSNs in reporting to IRS many of these payments. Reportable payments include interest payments to customers, wages paid to employees, dividends provided to stockholders, and retirement benefits paid to individuals. Other reportable transactions include purchases involving more than $10,000 in cash, such as the purchase of an automobile or a boat, or mortgage interest payments totaling more than $600. In addition, the Code and regulations require individuals filing personal income tax returns to include their SSNs as their taxpayer identification number, the SSNs of people whom they claim as dependents, and the SSNs of spouses to whom they paid alimony. Using the SSNs, IRS matches the information supplied by entities reporting payments or other transactions with returns filed by taxpayers to monitor individuals’ compliance with federal income tax laws. A number of federal laws require program administrators to use SSNs in determining applicants’ eligibility for federally funded benefits. The Social Security Act requires individuals to provide their SSNs in order to receive benefits under the SSI, Food Stamp, Temporary Assistance for Needy Families (TANF), and Medicaid programs. These programs provide benefits to people with limited income and resources as well as medical care for the needy. Applicants give program administrators information on their income and resources, and program administrators use applicants’ SSNs to match records with those of other organizations to verify the information. For example, SSA uses SSNs to determine whether applicants for SSI benefits have accurately reported their income by matching records with the Department of Veterans Affairs, the Office of Personnel Management, and the Railroad Retirement Board to identify any retirement or disability payments to these applicants. In addition to using SSNs to match records with other federal benefit-paying agencies, administrators of these programs said they also match records with state unemployment agencies, IRS, and employers to verify earned and unearned income, such as unemployment benefits, wages, retirement benefits, and interest paid to applicants. In fact, we have recommended in numerous reports that administrators of programs paying federally funded benefits match data in their payment files with SSA records to identify deceased beneficiaries, and that SSA match its records with other state and federal program records to reduce SSI payments to individuals whom the agency finds residing in nursing homes and prisons as well as those receiving benefits under other programs. Using SSNs to identify such recipients enhances program payment controls and reduces fraud and abuse. Another federal law that requires the use of SSNs to identify individuals is the Commercial Motor Vehicle Safety Act of 1986. This law established the Commercial Driver’s License Information System (CDLIS), a nationwide database. States are required to use individuals’ SSNs to search this database for other state-issued licenses commercial drivers may hold. This checking is necessary because commercial drivers are limited to owning one state-issued driver’s license. If a state grants a license, the state is required to record the license information, including the driver’s SSN, in the CDLIS. States may also use SSNs to search another database, the National Driver’s Registry, to determine whether an applicant’s license has been cancelled, suspended, or revoked by another state. In these situations, the states use SSNs to limit the possibility of inappropriately licensing applicants. Federal law also requires the use of SSNs in state child support programs to help states locate noncustodial parents, establish and enforce support orders, and recoup state welfare payments from parents. The Personal Responsibility and Work Opportunity Act of 1996 expanded the Federal Parent Locator Service—an automated database searchable by SSN—to include information helpful for tracking delinquent parents across state lines. The law requires states to maintain records that include (1) SSNs for individuals who owe or are owed support for cases in which the state has ordered child support payments to be made, the state is providing support, or both, and (2) employers’ reports of new hires identified by SSN. States must transmit this information to the Federal Parent Locator Service. The law also requires states to record SSNs on many other state documents, such as professional, occupational, and marriage licenses; divorce decrees; paternity determinations; and death certificates, and to make SSNs associated with these documents available for state child support agencies to use in locating and obtaining child support payments from noncustodial parents. Federal laws that require the use of an SSN generally limit its use to the statutory purposes described in each of the laws. For example, the Internal Revenue Code, which requires the use of SSNs for certain purposes, declares tax return information, including SSNs, to be confidential and prescribes both civil and criminal penalties for unauthorized disclosure. Similarly, the Social Security Act, which requires the use of SSNs for a number of different purposes, declares that SSNs obtained or maintained by authorized individuals on or after October 1, 1990, are confidential and prohibits their disclosure. The Personal Responsibility and Work Opportunity Act of 1996 explicitly restricts the use of SSNs to purposes set out in the act, such as locating absentee parents to enforce child support payments. In addition to the restrictions contained in laws that require the use of SSNs, the Privacy Act of 1974 also restricts federal agencies in collecting and disclosing personal information, which includes SSNs. The act requires federal agencies that collect information from individuals to inform the individuals of the agencies’ authority for requesting the information, whether providing the information is optional or mandatory, and how the agencies plan to use the information. The act, which also prohibits federal agencies from disclosing information without the individuals’ consent, does not apply to other levels of government and private businesses. Except as discussed above, federal law does not regulate the use of SSNs. Thus, legitimate businesses and nonfederal agencies have devised uses of SSNs not covered by federal law, as discussed in the following section. The advent of computerized record keeping has led private businesses and government agencies to routinely use SSNs for activities other than those required by federal laws and regulations. Businesses and government agencies may ask for SSNs when individuals apply for benefits or services, such as worker’s compensation, driver’s licenses, credit, checking accounts, insurance, apartment rentals, and public utilities. Law enforcement agencies may also use SSNs for investigative purposes. Because there are so many users of the SSN, we focused on describing SSN use by organizations that routinely use these numbers for activities that affect a large number of people: organizations that sell personal information, provide financial services, and offer health care services and state government agencies that are responsible for collecting personal income tax and licensing drivers. In general, organizations may record SSNs in their databases for two purposes: to locate records for routine internal activities, such as maintaining and updating account information, and, more frequently, to facilitate information exchanges with other organizations. Continuing advances in computer technology and the ready availability of computerized data have spurred the growth of a new business activity: amassing vast amounts of personal information, including SSNs, about members of the public for resale. Businesses involved in this activity act as information brokers. One information broker official told us his organization has more than 12,000 discrete databases. The increasing proliferation of information brokers has aroused concerns about individuals’ personal identifying information, including SSNs, being made easily available to others. Federal law does not prohibit such disclosure of SSNs. Brokers buy information from public and private sources in various markets throughout the nation. The information may include public records of bankruptcy, tax liens, civil judgments, criminal histories, deaths, real estate ownership, driving histories, voter registration, and professional licenses. This information may also include privately owned information such as telephone directories and copyrighted publications, which are often made public, and certain information from consumer credit reports. Generally, each record provides details about the specific event for which it was created as well as some personal identifying data—for example, an individual’s name; date of birth; current and prior addresses; telephone number; and, sometimes, SSN. An information broker official told us that not every record his organization buys includes an SSN and that public records are more likely to contain SSNs than those from nonpublic sources. Brokers may provide their services (that is, information products) to a variety of customers either over private networks or over the Internet. Brokers that provide information over private networks generally limit their services to businesses that establish accounts with them. Brokers providing services over the Internet generally offer their services to the public at large. Law firms, businesses, law enforcement agencies, research organizations, and individuals are among those who use brokers’ services. For example, lawyers, debt collectors, and private investigators may request information on an individual’s bank accounts and real estate holdings for use in civil or divorce proceedings; automobile insurers may want information on whether insurance applicants have been involved in accidents or have been issued traffic citations; employers may want background checks on new hires; pension plan administrators may want information to locate pension beneficiaries; and individuals may ask for information to help locate birth parents. When requesting information, customers may ask for nationwide database searches or searches of only specific geographical areas. Information brokers’ databases can be searched by identifiers that may include SSNs; brokers may also include SSNs along with information they provide customers. When possible, information brokers retrieve data by SSN because it is more likely to produce records unique to the individual than other identifiers are. Three national credit bureaus serve as clearinghouses, receiving charge and payment transaction information from businesses that grant consumer credit and providing businesses consumer credit reports. Officials representing a bank and a credit card company—businesses that provide credit—told us that because it serves their interests for credit bureaus to have the most to up-to-date consumer payment histories, businesses in their industries voluntarily report customers’ charge and payment transactions, accompanied by SSNs, to credit bureaus. SSNs are one of the principal identifiers credit bureaus use to update individuals’ credit records with the monthly reports of credit and payment activity creditors send them. In addition, credit bureaus use SSNs provided by customers to retrieve credit reports on individuals. Credit bureau officials told us that customers are not required to provide SSNs when requesting reports, but requests without SSNs need to include enough information to sufficiently identify the individual. An official for a credit bureau trade association estimated that each national credit bureau has more than 180 million credit records. A publication by this official’s trade association estimated that, combined, all three bureaus sell 600 million credit reports annually. Businesses such as insurance companies, collection agencies, and credit granters use SSNs to request information about customers from credit bureaus. To determine a customer’s likelihood of repaying a loan, businesses—banks and credit card companies in particular—want information on customers’ histories of repaying debts and whether customers have filed for bankruptcy or have monetary judgments against them, such as tax liens. Officials representing credit granters said most banks and credit card companies ask applicants to provide their SSNs, and these credit granters may choose to deny services to individuals who refuse. These officials said their organizations generally do not use SSNs as internal identifiers but instead assign an account number as a customer’s primary identifier. Health care services are generally delivered through a coordinated system that includes health care providers and insurers. Officials representing hospitals, a health maintenance organization (HMO), and a health insurance trade association told us that their organizations always ask for an SSN, but they do not deny services if a patient refuses to provide the number. A hospital and an HMO official said that their organizations assign patients other identifying numbers, which they use internally as primary identifiers for patient medical records, and that they use SSNs as a backup to identify records when a patient either forgets or does not know the patient number he or she was assigned. The HMO official said SSNs are also used to integrate patients’ records when providers merge, a trend that is growing. In data exchanges, hospital and HMO officials said they use SSNs to track patients’ medical care across multiple providers, which helps establish the patients’ medical history and avoid duplicate tests. A trade association official told us that some health insurers use the SSN or a variation of the number as a primary identifier, which becomes the customer’s insurance number. We were told that the BlueCross BlueShield health insurance plans and the Medicare program frequently use this method. In addition, the trade association official said insurers and providers frequently match records among themselves, using SSNs to determine whether individuals have other insurance to coordinate payment of insurance benefits. Officials in the health care industry expect their use of SSNs to increase. For example, the hospital official said that to ensure it has a valid address to bill patients, her hospital plans to use SSNs during the admission process to obtain on-line verification of patients’ addresses from credit bureaus. The states use SSNs to support state government operations and offer services to residents. The Social Security Act authorizes states to use SSNs to administer any tax, general public assistance, driver’s license, or motor vehicle registration law in order to identify individuals affected by such laws. Officials of the Maryland and Virginia personal income tax and Ohio and Georgia driver licensing programs told us that they use SSNs in both administering these programs and enforcing compliance with regulations governing the programs. State income tax administrators routinely use the SSN as a primary identifier in their programs. An official from an organization representing state tax administrators said that all states levying personal income taxes use SSNs to administer their programs. Tax officials said that states use SSNs to make state tax systems compatible with the federal system and to reduce taxpayer reporting burden. Maryland and Virginia tax administrators told us their state tax returns require individuals to provide their SSNs, and individuals who omit SSNs risk being considered nonfilers if tax administrators cannot otherwise identify the submitter of the return. Tax administrators also use SSNs internally for auditing purposes. For example, tax administration officials said they use SSNs to cross-reference owners’ or officers’ business income tax returns with their personal income tax returns so that an audit of one triggers an audit of the other. Also, in the course of monitoring compliance with state income tax laws, states use SSNs to exchange data with other organizations. For example, in order to monitor taxpayer income reporting, states rely on SSNs for data matches with IRS and state tax agencies to identify residents who received income from out-of-state employers and businesses and to verify credits for income taxes that filers report paying to other states. Also, when tax administrators assess liens against taxpayers, states may use SSNs to request information from information brokers and credit bureaus to identify taxpayer assets, such as bank accounts and real estate. In addition, federal and state agencies, such as IRS and state child support agencies, use SSNs when asking state tax administrators to offset state refunds otherwise due to taxpayers. State driver licensing agencies are more likely to use SSNs to exchange data with other organizations than to support internal activities. A few states print SSNs on licenses and use the SSNs either as license numbers or along with the state-assigned license numbers. Most state driver licensing agencies that request SSNs, however, include SSNs in driver records as a secondary identifier and devise their own license numbers. Information from the AAMVA and other sources suggests that many states request, but may not require, applicants for noncommercial driver’s licenses to provide their SSNs. AAMVA officials estimate that there are about 175 million noncommercial drivers nationwide. To monitor driver compliance with state laws, state officials said they use SSNs during the licensing process to search national databases maintained by AAMVA to identify driver’s licenses the applicant may hold in other states and determine whether the applicant has had a license suspended or revoked in another state. These officials also told us that organizations such as the courts and law enforcement agencies may choose to request driver records by SSN when they do not know the driver’s license number. AAMVA officials expect states’ use of SSNs to increase as the result of a recent federal law. Effective October 1, 2000, the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 prohibits federal agencies from accepting state-issued driver’s licenses as proof of identification, unless licenses satisfy federal requirements set out in the act. Specifically, states must either verify a driver’s SSN with SSA and record the number in their database or display the number, visually or electronically, on the license. States’ practices for disclosing SSNs contained in driver records vary. In states in which driver records are public information, states may disclose SSNs to individuals and organizations such as credit card companies, direct marketers, and credit bureaus. For example, Massachusetts driver licensing officials told us that their driver records are public and that the state includes individuals’ license numbers (usually the SSN) when providing information to organizations or people requesting driver records. Officials of the programs and activities we reviewed believed their entities would be negatively affected if federal laws were enacted restricting use of SSNs. Businesses that sell personal information and state driver licensing officials, however, told us that their organizations have already voluntarily responded to concerns about their practices for disclosing SSNs. State tax administrators and credit bureau officials said that federal restrictions could hamper their ability to conduct routine internal activities. For example, representatives of these organizations said such restrictions could impede credit bureaus’ ability to accurately post consumer payment and credit transactions and state tax agencies’ ability to identify tax filers. Moreover, many of the officials we interviewed believed that federal restriction of their use of SSNs would hamper their ability to conduct data exchanges with other organizations. Without SSNs, state tax administrators said, it would be difficult to associate tax return information received from other tax agencies with tax information reported by residents. In addition, a health care provider said federal restrictions on SSN use could impede providers’ ability to track patients’ medical histories over time and among multiple providers. Also, AAMVA officials said federal restrictions could hinder states’ ability to screen for applicants who try to conceal traffic violations they have acquired under other state licenses. Many of the officials we interviewed said federal restrictions on their use of SSNs could make it difficult for their organizations to be assured of receiving credit reports for the specific individuals they requested. Officials of bank and credit card companies said they rely heavily on credit reports to make decisions about providing customers service on credit. Officials of businesses that sell personal information and driver licensing agencies also believed that federal restrictions on SSN use could make it difficult for others to obtain specific records from them. For example, driver licensing officials said that if “outsiders,” such as government and law enforcement agencies, do not know the driver’s license number and cannot request driver records by SSNs, these agencies can only use the driver’s name and are more likely, therefore, to receive the records of other people with the same name. Because of privacy concerns raised by disclosure of personal information, businesses and states have become more sensitive to this issue and are voluntarily restricting the disclosure of some personal information, including SSNs. In December 1997, 14 businesses that sell personal information—the self-identified industry leaders—responded to these concerns by, among other things, voluntarily executing a written agreement stating their intent to restrict disclosure of SSNs associated with data they obtain from nonpublic sources. These 14 businesses essentially agreed to make SSNs from such sources available to only a limited range of customers identified as having appropriate uses for the information, such as law enforcement. The 14 organizations also agreed to annual compliance reviews by independent contractors. When an organization fails to comply with the agreement, the Federal Trade Commission can cite the organization for unfair and deceptive business practices. Because the agreement was not scheduled to be fully implemented until December 31, 1998, its effectiveness could not be determined during our review. In addition, some states are discontinuing practices that result in routine disclosure of SSNs. For example, since July 1, 1997, Georgia no longer automatically prints SSNs on licenses but rather assigns its own numbers for driver licenses and uses SSNs as license numbers only if requested by the license holder to do so. Ohio, which before July 29, 1998, routinely printed SSNs along with state-assigned numbers on driver’s licenses, now allows drivers the option of not having SSNs printed on their licenses. Also, AAMVA officials believe most states in which driver records are public now exclude SSNs when responding to requests for driver records. SSA provided technical comments on a draft copy of this report, which we have incorporated as appropriate. We are providing copies of this report to the Commissioner of Social Security, officials of organizations and agencies we interviewed concerning their use of SSNs, and other interested congressional parties. Copies will also be made available to others upon request. Please contact me on (202) 512-7215 if you have any questions about this report. Other major contributors to this report are listed in appendix III. We identified federal requirements and restrictions governing Social Security numbers (SSN) by using a list prepared by the Social Security Administration (SSA) that identified federal laws addressing SSNs. We developed information on programs’ required uses of SSNs by interviewing officials at the following: SSA’s Retirement, Survivors, and Disability Insurance and Supplemental Security Income programs; the Internal Revenue Service’s federal personal income tax program; the Department of Health and Human Services’ Medicare, Medicaid, Temporary Assistance for Needy Families, and Child Support Enforcement programs; and the Department of Agriculture’s Food Stamp program. On the basis of literature searches and interviews with Federal Trade Commission, SSA, and other cognizant officials, we identified numerous types of businesses and government activities and programs that use SSNs extensively. We then selected two areas of commercial activity (the financial services and health care services industries) and two state government activities (personal income tax and driver licensing programs) for a detailed examination of their SSN use. In addition, we included in our review the industry that gathers and sells personal information. Although organizations in this industry do not obtain SSNs directly from the people they provide information about, these organizations do provide customers personal information about individuals that may include their SSNs. Because there are no readily available data on how extensively businesses and states use SSNs, we selected entities that are commonly known to use SSNs routinely and that affect a large number of the general public by this use. We developed information on SSN use for these entities through interviews with officials representing the selected businesses, trade organizations, and state programs. We obtained officials’ statements about the prevalence of the use of SSNs among other similar businesses and state agencies as well as officials’ opinions about the potential impact on their operations if they were restricted in how they could use SSNs. We performed our work at SSA headquarters in Baltimore, Maryland; Washington, D.C.; and some of their suburbs and at selected other locations including Annapolis, Maryland; Atlanta, Georgia; Harrisburg, Pennsylvania; and Richmond, Virginia. We conducted telephone interviews with officials in Columbus, Ohio; Boston, Massachusetts; and Kansas City, Missouri. We selected both large and small organizations to determine if size altered the organization’s use of SSNs or its views about the effect of limiting the use of SSNs. Information in this report was obtained primarily through interviews and is not generalizable to the universe of government and business communities of the officials we interviewed. We did not verify the accuracy of the information provided. This report does not address SSN use for illegal activities, such as credit card or program fraud, which are punishable under criminal statutes, because such an investigation was beyond the scope of the work we were asked to do. (In May 1998, we reported to the Congress on identity fraud, which can involve misuse of SSNs.) The following people also made important contributions to this report: Dennis Gehley and William Staab, Senior Evaluators, conducted work in the health care and financial communities, and Roger Thomas, Senior Attorney, provided legal counsel. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed how the social security number (SSN) is used, focusing on: (1) federal laws and regulations requiring or restricting SSN use; (2) how extensively the private and public sectors use SSNs for purposes not required by federal law; and (3) what businesses and governments believe the impact would be if federal laws limiting the use of SSNs were passed. GAO noted that: (1) no single law regulates the overall use of SSNs; (2) the Social Security Act, which created the social security programs for which the SSN was developed, did not require the Social Security Administration (SSA) to devise SSNs; (3) however, once SSA created and began using SSNs to help administer its programs, Congress recognized the universal nature of the SSN and subsequently enacted laws requiring SSN uses for some purposes not related to social security; (4) federal laws now require that SSNs be used in the administration of some programs, including the federal personal income tax program; the Supplemental Security Income, Medicaid, Food Stamp, and Child Support Enforcement programs; and state commercial driver licensing programs; (5) some of these laws impose restrictions on SSN use relating to the programs or activities involved; (6) no federal law, however, imposes broad restrictions on businesses' and state and local governments' use of SSNs when that use is unrelated to a specific federal requirement; (7) the report additionally addresses businesses' and governments' uses of SSNs for purposes not required by federal law; (8) officials of all of the organizations GAO reviewed--businesses that sell personal information, those that offer financial and health care services, and state personal income tax and driver licensing agencies--routinely choose to use SSNs as a management tool to conduct their business or program activities; (9) credit bureau and state personal income tax officials, for example, said they use the SSN as a primary record identifier for internal activities, such as maintaining individual consumer credit histories and identifying income tax filers; (10) all the organizations said they used SSNs to facilitate data exchanges necessary to their business; (11) they use SSNs to obtain information to assess credit risk, locate assets, or to ensure compliance with their program rules and regulations; (12) GAO reports officials of the organizations as saying their ability to conduct routine internal activities and data exchanges could be adversely affected if the federal government passed laws that limited their use of SSNs; and (13) however, given the public's concern about the disclosure of SSNs, officials of businesses that sell personal information and driver licensing agencies said that some members of their industry have taken steps to limit disclosure. |
Established in 1934, Ex-Im operates as an independent agency of the U.S. government and is the official export credit agency of the United States under the authority of the Export-Import Bank Act of 1945, as amended. Ex-Im's mission is to assist U.S. companies to create and maintain American jobs by financing exports of goods and services and filling gaps in the availability of commercial financing for creditworthy export transactions. It also helps American exporters meet government-supported financing competition from other countries so that American exporters can compete for overseas business on the basis of price, performance, and service. Its authorizing legislation requires Ex-Im not to compete with commercial lenders. To accomplish its mission, Ex-Im offers a variety of financing instruments, including loan guarantees and direct loans for buyer financing; export credit insurance; and working capital guarantees for pre-export financing. Under its loan guarantee program, Ex-Im agrees to guarantee loans made by other lenders to help buyers in other countries obtain financing to purchase U.S. exports. Ex-Im also provides export credit insurance to protect U.S. exporters against nonpayment by their customers. It provides this insurance either directly to exporters, or to banks which in turn finance U.S. exporters. In addition, Ex-Im provides working capital guarantees to U.S. companies that would like to export but need funds to produce or market their goods or services for export. After it receives an application for financing from a U.S. exporter, bank, or foreign buyer, Ex-Im determines whether the applicant meets certain eligibility requirements. After Ex-Im approves or “authorizes” the transaction, it issues the loan, loan guarantee, or insurance policy. The amount actually exported or shipped as a result of the transaction may differ from the authorized value of the transaction. For example, for bank- held insurance policies, the total value of the policies authorized during the year often exceeds the amount shipped under these policies. Figure 1 shows Ex-Im’s reported fiscal year 2004 financing, by type of transaction. Ex-Im reported authorizing more than $13 billion in loans, guarantees, and export insurance in fiscal year 2004. Of this amount, Ex-Im reported that more than $2.2 billion, about 17 percent, directly supported U.S. small businesses. Congress has demonstrated its interest in Ex-Im’s supporting small business by, among other things, requiring that Ex-Im make available a specified portion of its financing for small business. In 1983, Congress required Ex-Im to make available for fiscal year 1986 and thereafter not less than 10 percent of its aggregate loan, guarantee, and insurance authority for financing exports by small businesses. In 2002, Congress increased the percentage, requiring that Ex-Im “shall make available, from the aggregate loan, guarantee, and insurance authority available to it, an amount to finance exports directly by small business concerns. . .which shall be not less than 20 percent of such authority for each fiscal year.” Figure 2 shows the proportion of its total financing that Ex-Im has reported directly benefits small business. Ex-Im is also required to report annually (1) the number of its transactions that directly benefit small business and (2) an estimate of the number of small businesses Ex-Im indirectly supports as suppliers to companies receiving Ex-Im financing. Ex-Im uses the Small Business Administration (SBA) methodology to determine whether a company qualifies as a small business. SBA uses “size standards” to identify the largest a company can be and still qualify as a small business. SBA’s size standards vary by industry, as defined by the North American Industry Classification System (NAICS), which replaced the Standard Industrial Classification (SIC) system, and are typically expressed in either millions of dollars or number of employees, reflecting average annual receipts or average employment of a firm. To apply the size standards, Ex-Im obtains company information through its application process. Ex-Im also subscribes to Dun and Bradstreet (D&B), a commercial information vendor, which provides information about companies, including sales and employment data and SIC codes. Ex- Im uses the SIC codes provided by D&B to obtain the corresponding NAICS codes through the SBA Web site. The Federal Credit Reform Act of 1990 affects how Ex-Im budgets for and reports on its various credit programs. It requires that Ex-Im (and other government credit agencies) obtain budget authority to cover the cost to the government of new or modified loans and loan guarantees. Prior to credit reform, Congress annually provided budget authority for the face value of authorized loans and the value of defaulted guarantees. Credit reform requires agencies to estimate the cost to the government, over the life of the credit, of the financing they provide. Broadly speaking, this cost represents net losses to the government on a present value basis. By focusing on the cost to the government, credit reform allows policy makers to compare the costs of credit programs with each other and with noncredit programs in making budget decisions. Ex-Im’s financial statements are audited annually by an independent accounting firm, which does not examine Ex-Im’s reporting on the calculation of its small business financing share. The auditor reviews the financial information involved in the year’s transactions but does not review whether the figure reported for the small business financing share is accurate. Ex-Im has received unqualified or “clean” opinions on its financial statements for the past several years. While Ex-Im generally classifies companies’ small business status correctly, weaknesses in its data systems and data limit Ex-Im’s ability to accurately determine its small business financing amounts and share. Ex-Im bases its estimate of the small business share of its financing on authorized values for various types of transactions. Ex-Im’s methodology for calculating its small business financing is based on directly counting the value of small business financing for transactions where the exporter can be identified and estimating the small business value of transactions where the exporter cannot be identified at the time Ex-Im authorizes the transaction. While we found that Ex-Im generally classifies companies’ small business status correctly, we identified several weaknesses in Ex-Im’s process for calculating its small business support. For transactions where the exporter can be identified, internal control weaknesses in Ex-Im’s data systems affect the reliability of Ex-Im’s analysis of the value of its small business financing. For transactions where the exporter cannot be identified at the time Ex-Im authorizes the transaction, weaknesses in Ex-Im’s system for estimating small business financing also limit Ex-Im’s ability to accurately measure and report on the amount of small business financing. In addition, in its required reporting on the number—as opposed to the value—of transactions benefiting small business, Ex-Im includes transactions which do not directly benefit small business. Ex-Im calculates the small business share of its total financing during a year by dividing the value of authorized transactions directly benefiting small businesses by the total value of all transactions authorized. For some types of transactions, the amount of money authorized may be significantly different from the amount of financing that the exporters actually utilize. For most transactions, Ex-Im can identify the exporter at the time the transaction is authorized and, in those cases, it bases its calculation on whether the exporter qualifies as a small business under the SBA definition. About one-quarter of the time, such as in cases where Ex-Im provides an insurance policy to a bank, which in turn finances exports, Ex- Im cannot, when it approves the transaction, identify the company that will be the exporter. In these cases, Ex-Im estimates the share of the financing benefiting small business based on data regarding previous shipments under those types of transactions. To determine the value of the small business share of its financing authorized during a year, Ex-Im adds the value of small business financing for the types of transactions where the exporter can be identified at the time of authorization and the estimated small business value of the types of transactions where the exporter cannot be identified at that time. To determine the portion of financing directly supporting small business, Ex- Im divides this total by the total dollar value of all transactions authorized. According to Ex-Im officials, they have used this general methodology for calculating the small business portion since the late 1980s. (See fig. 3.) For transactions where the exporter can be identified, Ex-Im bases its calculation on actual data on the value of the transaction and the participants. For most of these transactions, Ex-Im generally counts 100 percent of the value of the transaction as benefiting small business if the exporter is a small business. For medium- and long-term loans and guarantees, only the amounts associated with small business suppliers to small business exporters are counted as directly supporting small business. Ex-Im officials noted that by not including the value of a transaction associated with a nonsmall business supplier, the small business share is reduced. They said this indicates Ex-Im’s desire to not overrepresent its direct support of small business. When the exporter is not a small business, none of the value of the transaction is counted as directly supporting small business. For transactions where the exporter is not known at the time Ex-Im authorizes the transaction, Ex-Im estimates the small business share based on data on the size of companies making shipments under these types of transactions for a previous period. To make these estimates, Ex-Im analyzes data on exports under each type of transaction and determines whether each exporter is small, nonsmall, or unknown. For each type of transaction, Ex-Im estimates the percentage of the value of shipments by small businesses. Ex-Im divides the value of shipments made by small business exporters by the sum of the shipments by small and nonsmall business exporters. (Shipments by companies of unknown size are excluded from the calculation.) Ex-Im applies this percentage to the value of the entire year’s authorized transactions of this type, resulting in its estimate of the value of direct support for small business from that transaction type. In some cases, these estimates of the small business share of authorized transactions can differ significantly from the small business amounts actually shipped under the authorizations. For example, in 2005 Ex-Im authorized a $10 million short-term insurance policy under which no shipments have been reported. In contrast, in 2005 Ex-Im also authorized a $50 million short-term insurance policy where shipments under the policy exceeded $87 million for a 6-month period (or $174 million on an annualized basis). A 2004 authorization for Iraq provides another example. In February 2004 Ex-Im issued a $250 million short-term bank-held insurance policy involving Iraq. Using the methodology described above, Ex-Im estimated that 21 percent of the value of bank-held insurance, overall, would directly benefit small business, and thus credited approximately $53 million of this authorization for Iraq to its accounting of small business financing. According to Ex-Im officials, companies have just begun making shipments under this policy. Figure 4 shows Ex-Im’s reported small business share of each type of transaction for fiscal year 2004. Ex-Im’s classification of companies’ small business status is generally correct, based on our review of independent data and Ex-Im’s paper transaction files. Based on our review of Ex-Im’s electronic databases and D&B data on companies’ sales and employment, we estimate that, 83 percent of the time, Ex-Im’s small business designation matches the designation based on D&B data. Based on a review of Ex-Im’s official paper transaction files in instances where Ex-Im’s small business designation differed from the designation indicated by D&B, we determined that Ex- Im’s designation was justified in most instances, although we observed a significant number of errors related to loans and guarantees. Based on our review of a statistical sample of 300 companies, we estimate that for those companies for which we were able to obtain credible matching data from D&B, 83 percent of the time Ex-Im’s small business designation in its electronic database matched the designation indicated by D&B company data. We estimate that there is credible D&B matching data for 90 percent of the companies in the Ex-Im database. Our analysis shows that, where Ex-Im’s small business designation differed from the designation indicated by D&B data, Ex-Im almost always identified a company that appears to qualify as a small business as a nonsmall business. Ex-Im officials stated that these results reflect their practice of being conservative in identifying companies as small businesses. Because the value of individual transactions can vary significantly, these results do not necessarily mean that Ex-Im undercounted the value of its small business financing. The frequency of differences in companies’ small business designation in Ex-Im’s data and our analysis of D&B data varied based on the type of transaction examined. For companies involved in nonbank-held insurance and working capital transactions, we estimate that 10 and 11 percent, respectively, of Ex-Im’s small business designations in its electronic data systems differ from the small business designation resulting from applying the SBA methodology to D&B data. For medium- and long-term loans and guarantees, which account for about half of the value of total transactions but only about 2 percent of the value of small business transactions, we estimate that 50 percent of Ex-Im’s small business designations differ from the small business designation resulting from applying the SBA methodology to D&B data. According to our review of Ex-Im’s official paper records, Ex-Im’s small business designations are generally justified when they differ from designations based on D&B data. We reviewed Ex-Im’s paper records for 90 percent of the companies where we observed differences between Ex-Im’s small business designation in its electronic database and the designation based on D&B data. We determined that Ex-Im’s designation was justified in the majority of instances. However, we found a large number of errors regarding companies involved in loans and guarantees. With respect to insurance or working capital transactions, we determined that, for 18 of the 19 companies involved in these transactions, documentation in Ex-Im’s paper files supported its small business designation in the paper and electronic files. In some of these instances, we determined that Ex-Im’s designation was correct because the company receiving Ex-Im financing was the subsidiary of a larger company that did not qualify as a small business, thus disqualifying the subsidiary from being considered a small business. In other instances, other information in the paper transaction files supported Ex-Im’s designation of the company’s small business status. For about half of the companies involved in loans and guarantees, however, Ex-Im’s small business designation in the paper file differed from the designation in the electronic database. In these cases, Ex-Im’s paper files and our analysis identified the companies as small businesses, but Ex-Im’s electronic files used to calculate its small business financing identified them as nonsmall businesses. Thus, none of these errors caused Ex-Im to inappropriately take “credit” for small business financing. We identified weaknesses in Ex-Im’s process for calculating its small business financing, ranging from internal control weaknesses that may affect only a few transactions a year to more significant weaknesses in Ex- Im’s system for estimating about one-third of its small business support. For transactions where the exporter is known, we found weaknesses related to internal controls in Ex-Im’s data systems. For transactions where the exporter is not known at the time Ex-Im authorizes the transaction, we identified weaknesses such as analyzing shipments equaling a small portion of the authorized value of transactions, excluding a large share of exports, and misclassifying companies’ small business status for the purpose of estimating small business shares based on shipments in previous periods. We did not determine the cumulative effect of these weaknesses on Ex-Im’s overall calculation of its small business support. Two internal control weaknesses exist in Ex-Im data systems used to calculate and report on Ex-Im’s small business financing. Three databases are relevant to Ex-Im’s small business financing calculation—two store information on companies involved in the transactions, and a third integrates information from these databases and performs the actual calculation. First, Ex-Im’s electronic data systems used to calculate its small business support do not contain complete or up-to-date information on companies’ small business status. As a result, to obtain the most current information for these companies, Ex-Im officials must identify and locate their paper transaction files. As discussed above, while Ex-Im’s paper files generally supported its small business designation, we found a significant number of discrepancies between Ex-Im’s paper and electronic files. We found that Ex-Im’s electronic data systems had no small business designation for 350 (or 66 percent) of the 531 companies we examined that had received medium- or long-term loans or guarantees. According to Ex-Im officials, if a company’s small business designation is left blank, they do not credit any part of the transaction as benefiting small business. Ex-Im also does not consistently maintain the latest information in the databases. Ex-Im officials told us they had not performed a general update of the company records since September 2004. Second, Ex-Im’s data systems sometimes contain conflicting information for the same company. Ex-Im maintains information about insurance transactions and participants in one data system and information about loans and guarantee transactions and participants in another data system. According to Ex-Im, updating information in a company’s record (including its small business designation) in one database does not update the company’s record in the other database. As a result, the two databases can, and in some cases do, have conflicting information about the same company. Our analysis identified 34 companies involved in about 180 transactions that were treated as small businesses in some transactions and as nonsmall businesses in other transactions. We found weaknesses in Ex-Im’s system for developing estimates of small business financing where the exporter is not known at the time Ex-Im authorizes the transaction, which applied to about one-third of Ex-Im’s total small business financing for fiscal year 2004. These weaknesses are a function of Ex-Im’s methodology, which focuses on the authorized value of transactions, and Ex-Im’s implementation of its methodology. First, Ex-Im’s estimates may not accurately reflect the amount of small business financing under bank-held insurance policies because of large differences between the amounts authorized and actually shipped under these policies. For both fiscal years 2004 and 2005, the value of shipments under bank-held insurance policies was a fraction of the total authorized value of the bank-held insurance policies. For example, according to Ex-Im records, they authorized $3.4 billion of bank-held insurance transactions for fiscal year 2004, but there were only $280 million in shipments under bank-held insurance policies in the first 6 months of the fiscal year. Ex-Im applied its estimate of the small business share of transactions, based on these shipments, to the $3.4 billion of bank-held insurance policies it authorized during the year, and determined that about $720 million of the authorized value of bank-held insurance policies during the year directly benefited small business. Thus, this method results in estimates of small business shares for the authorized value of these types of transactions that are based on a very small share (about 8 percent) of the total authorized value. Ex-Im officials stated that the difference between amounts authorized and amounts actually shipped can be very large because banks sometimes want as much flexibility as possible in the amount of insurance they can provide and request that Ex-Im authorize large policies. Ex-Im officials acknowledge that, as a result, the total authorized value of bank- held insurance transactions can be significantly greater than the value of shipments under these policies. Second, Ex-Im classifies the small business status of a significant portion of the companies making shipments as “unknown” and excludes them from its calculation of the estimate of its small business support. For the $280 million of shipments under bank-held insurance discussed above, an Ex-Im official reviewed the data and classified about $128 million (or nearly half) as shipments by companies whose small business status was “unknown.” It then excluded these shipments from its calculation of total shipments. For credit guarantee facilities, which account for about 1 percent of Ex- Im’s small business financing, Ex-Im’s system for calculating its small business share led to errors. Specifically, Ex-Im relies on an automated system, which classifies a company’s small business status as “unknown” unless it finds an exact match in Ex-Im’s company records, for identifying the small business status of companies shipping under these policies. Within the companies classified as “unknown” are some clearly large, easily recognized companies. No Ex-Im official reviews the results of these automated classifications, so these companies are not included in the calculation. Ex-Im officials stated that, since credit guarantee facilities account for such a small portion of Ex-Im’s overall small business financing, errors in its estimation of the small business share of these transactions would not materially affect Ex-Im’s reporting on its total small business financing. Third, as is the case with calculations when the exporter is known, Ex-Im, at times, inconsistently identifies the small business status of the same company in its estimates when the exporter is not known at the time Ex-Im authorizes the transaction. For example, in comparing Ex-Im’s classification of companies’ small business status in its separate analyses of shipments under bank-held insurance and credit guarantee facilities, we found that Ex-Im inconsistently coded the small business status of a company exporting solar turbines. In one analysis, Ex-Im designated the company as a nonsmall business, but in another analysis Ex-Im designated the company’s small business status as “unknown” and excluded it from its calculation. Excluding this company increased Ex-Im’s estimate of small business support for one type of transaction for the year. Ex-Im is also statutorily required to report on the number of its authorized transactions that directly benefit small business; we found that Ex-Im’s reported tally includes some transactions that do not benefit small business. In recent years, Ex-Im has frequently reported that about 85 percent of its authorized transactions directly benefit small business. For instance, in fiscal year 2004, it reported that 2,572 (or 83 percent) of its authorized transactions directly supported small businesses. This count was based on counting all six credit guarantee facilities and 698 bank-held insurance policies as directly benefiting small business. While many of these transactions may directly benefit small business, they do not all directly benefit small business, as evidenced by the fact that Ex-Im’s own estimate showed that about 20 percent of the value of bank-held insurance policies directly benefited small business. Prior to the enactment of credit reform legislation, Ex-Im interpreted the mandate as requiring it to make available for financing small business exports an amount equal to the legislatively established percent of the aggregate principal amount of loans, guarantees and insurance specified by Congress for that fiscal year. Given changes in law over time, Ex-Im currently interprets the small business financing mandate as requiring Ex- Im to attempt to ensure that 20 percent of the value of its transactions is provided directly to small business. As a result of credit reform legislation and related changes in law, Ex-Im cannot precisely determine at the beginning of the year its “aggregate loan, guarantee, and insurance authority available,” for the purpose of setting aside a certain percentage of that authority for small business, as originally intended under the requirement. Given the changes in law over time, Ex-Im’s current interpretation of the small business financing mandate is that it must attempt to ensure that 20 percent of the value of all the transactions Ex-Im authorizes during a year directly benefits small business. Ex-Im’s approach for implementing the requirement is to divide the dollar value of authorized transactions directly benefiting small business by the authorized dollar value of all transactions, as described above, and monitor this proportion throughout the year, aiming to reach 20 percent. According to Ex-Im’s officials, this approach is consistent with (1) congressional intent in establishing the small business requirement, (2) the demand-driven nature of Ex-Im’s operations, and (3) the broader mandate of Ex-Im’s authorizing legislation. First, Ex-Im’s General Counsel stated that, in establishing the requirement, Congress generally intended to ensure that a specified percentage of Ex-Im’s loan, guarantee, and insurance authority be available for small businesses. At the time the requirement was created, Congress exercised control over Ex-Im’s financing by establishing specific dollar limitations (in annual appropriations acts) on the value of transactions Ex-Im could approve during the year. Thus, according to Ex-Im, doing the calculation on the basis of the authorized value of transactions is reasonable based on the legislative history of the provision. Second, Ex-Im officials stated that Ex-Im interprets and implements the small business requirement in the broader context of Ex-Im’s operation as a demand-driven institution that provides financing to U.S. exporters who apply for Ex-Im financing. Because of the demand-driven nature of its business, Ex-Im has limited control over how much financing U.S. exporters apply for each year or, consequently, how much financing it provides during the year. Third, Ex-Im also implements the small business financing requirement in the broader context of Ex-Im’s other legislative mandates to support U.S. exports and increase domestic employment. Moreover, Ex-Im officials stated that, under Ex-Im’s approach to implementing the requirement, it has never had to turn down a small business transaction due to a lack of funds. Circumstances have changed since the small business financing requirement was enacted that have affected how Ex-Im implements it. Specifically, the removal of a direct congressional cap on annual Ex-Im financing and enactment of the Federal Credit Reform Act of 1990 changed how Congress exercised control over Ex-Im’s financing activities. Prior to credit reform, Ex-Im interpreted the mandate as requiring it to make available for financing small business exports an amount equal to 10 percent of the aggregate principal amount of loans, guarantees and insurance specified by Congress for that fiscal year. Following the implementation of credit reform, the authority available, or the amount of financing Ex-Im can provide during a year, is determined by the amount of subsidy appropriation Ex-Im receives from Congress and the estimated subsidy cost to the government of each transaction. Some transactions do not require a subsidy (or even make money), so the subsidy appropriation covers the expected total net losses of all transactions during the year. Thus, for the same amount of subsidy appropriation, Ex-Im could provide different amounts of total financing depending on the characteristics of the transactions it authorizes. It could authorize relatively few large, but risky transactions, or it could authorize many smaller, less risky transactions. At the time the small business financing requirement was enacted, Congress had historically specified in annual appropriations acts the total principal amount of loans and guarantees that Ex-Im could provide. Ex-Im could then make available for financing small business exports an amount equal to the required percentage, regardless of the actual budget authority utilized by Ex-Im by the end of the year. In these circumstances, Ex-Im could easily determine how much financing it needed to make available for small business to satisfy the requirement. However, in 1994 (and subsequent years), Congress did not specify any limitation on the total principal amount of loans, guarantees, and insurance that Ex-Im could provide during the year. As a result, Ex-Im no longer has a specific, pre- determined, amount from which it could calculate the required percentage to be made available for small business financing. While Ex-Im generally classifies companies’ small business status correctly, we identified several areas for improvement related to the processes and data it uses to determine and report on its support of small business. We observed a variety of weaknesses related to Ex-Im’s calculation of its small business support, ranging from data system weaknesses that may affect only a few transactions per year to shortcomings in Ex-Im’s system for estimating about one-third of its small business financing annually. While we did not determine whether these weaknesses result in Ex-Im overstating or understating the value of its small business financing, improvements are needed to address internal control weaknesses and improve the reliability of Ex-Im’s reporting on its small business financing. With more reliable data and data systems, Ex-Im could more effectively and accurately report to Congress regarding the number of its transactions that directly benefit small business and their progress toward meeting the 20 percent small business financing mandate. To improve the reliability of Ex-Im Bank reporting on its direct support for small business we recommend that the Chairman of the Export-Import Bank take the following four steps: improve the completeness, accuracy, and consistency of the data Ex-Im maintains on its customers, especially with regard to their small business status; improve the system for estimating the value and proportion of direct small business support for those transactions where the exporter is not known at the time Ex-Im authorizes the transaction; more accurately determine and clearly report the number of transactions that directly benefit small business; and have its external auditor audit Ex-Im’s annual legislatively-mandated reporting of its direct support for small business as a part of its review of Ex-Im’s compliance with laws and regulations. We provided a draft of this report to the Export-Import Bank of the United States. Ex-Im commented that the review helped reaffirm its methodology and identify areas where it can improve its efficiency. It generally concurred with our recommendations and identified several actions it is taking or will take that address them. Ex-Im stated that a new on-line application system that it is implementing will include updating electronic participant records and that it is strengthening its internal controls regarding small business status. Ex-Im also stated that its new on-line system will improve its information base regarding small business designations when the exporter is not known at the time of authorization. Ex-Im further stated that it is arranging for an independent audit of its direct small business reporting. With respect to its reporting on the number of its transactions directly supporting small business, Ex-Im stated its view that it has a sound methodology for counting transactions made available for the direct support of small business exporters. We believe greater clarity is needed in Ex-Im’s reporting of this measure. Ex-Im’s official comments are reprinted in appendix IV. We are sending copies of this report to the Chairman of the Export-Import Bank, appropriate congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4347 or YagerL@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The Chairman of the House Committee on Small Business requested that we review legal and policy issues related to the Export-Import Bank’s (Ex- Im) support for small business. This report (1) analyzes Ex-Im’s methodology for calculating its direct support of small business and the reliability of Ex-Im’s data used in the methodology and (2) describes Ex- Im’s legal interpretation of its requirement under the statutory 20 percent small business mandate. In addition, it includes information on Ex-Im’s efforts to monitor and track its small business financing (see app. II) and how Ex-Im estimates the share of its financing that indirectly supports small business (see app. III). To analyze Ex-Im’s methodology for calculating its direct support for small business and the reliability of the data used in the calculation, we interviewed knowledgeable Ex-Im staff, reviewed Ex-Im documentation regarding the calculation, and analyzed data on Ex-Im transactions and participants from fiscal years 2004 and 2005. To review the operation of Ex- Im data systems involved in the calculation of small business financing, we interviewed knowledgeable Ex-Im officials and staff from Ex-Im’s external auditor (Deloitte & Touche), reviewed annual audit reports of Ex-Im’s financial statements, viewed a demonstration of the data systems, and obtained detailed and summary data related to transactions from fiscal years 2004 and 2005. We performed basic electronic tests of the data’s reliability, including determining whether the data fell within the expected time periods, contained the types of transactions we expected, and were generally comparable to Ex-Im’s summary data from its Annual Reports. On this basis, we determined that the data were sufficiently reliable for our use in further analysis. We then identified the individual companies involved in Ex-Im transactions and analyzed data on companies’ industry classifications (Standard Industrial Classification ), number of employees, and annual revenues. We also reviewed Ex-Im’s electronic records for companies receiving financing in fiscal years 2004 and 2005 to identify whether there were any instances where Ex-Im’s small business designation for the same company differed in the insurance and loan and guarantee databases. We identified the Small Business Administration’s (SBA) “size standard” for each company based on the SIC code in Ex-Im’s electronic records and applied the SBA methodology to Ex-Im’s electronic company records to determine how frequently Ex-Im’s decision regarding companies’ small business status was supported by the data in Ex-Im’s databases. To test whether Ex-Im’s classification of companies’ small business status is accurate, we drew a stratified random probability sample of 300 companies from a population of 2,755 companies receiving Ex-Im financing in fiscal years 2004 or 2005, stratified by type of transaction. We developed our list of 2,755 companies from a transaction-level data set provided to us by Ex-Im by identifying all unique company identification numbers and then checking to ensure that there was no repetition of company names across the identification numbers. We stratified the population into three types of transactions: loans and guarantees, nonbank- held insurance, and working capital guarantees. We obtained data regarding the sampled companies’ industry classification, employment, and revenues from a commercial information vendor, Dun and Bradstreet (D&B), which Ex-Im also uses to update its company records. We obtained 269 credible matches based on searches either for each company’s DUNS number or name. We then applied the SBA “size standards” to the Dun and Bradstreet data for these companies to determine whether they qualify as small businesses. We then compared these results to Ex-Im’s small business designation for each company. Three potential limitations could affect this analysis: (1) the D&B data may be inaccurate or outdated, (2) companies’ small business status may have changed between the time Ex- Im authorized the transaction (2004 or 2005) and when we obtained the D&B data (December 2005), and (3) Ex-Im’s small business designation may have been based on data not available to D&B. With our probability sample, each member of the study population had a nonzero probability of being included and that probability could be computed for any member. Each sample company was subsequently weighted in the analysis to account statistically for all the companies in the population, including those who were not selected. Most estimates provided in this report apply only to the subset of companies for which we were able to obtain enough credible matching information in the D&B data to determine a classification into small or nonsmall. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as 95 percent confidence intervals (e.g., plus or minus 7 percentage points). These are intervals that would contain the actual population values for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. We also reviewed a selection of the 61 companies identified from our statistical sample for which Ex-Im’s small business designation did not match the designation based on applying the SBA methodology to the D&B data. This selection included companies involved in medium- and long-term loans and guarantees, working capital transactions, and nonbank-held insurance transactions. For these companies, we reviewed Ex-Im’s paper transaction files to (1) identify whether Ex-Im designated the company as a small business and (2) determine what supporting documentation existed regarding Ex-Im’s designation. To determine the reliability of Ex-Im’s estimates of small business financing when the exporter is not known at the time of the transaction, we interviewed Ex-Im staff and analyzed Ex-Im’s data for fiscal years 2004 and 2005. Our review of the data included verifying Ex-Im’s calculation, comparing Ex-Im’s classification of companies’ small business status in different Ex-Im data sets, and reviewing the names of companies to identify obvious classification errors. We also compared the value of the shipments in these analyses with the value of these types of transactions as reported in Ex-Im’s Annual Reports. To describe Ex-Im’s legal interpretation of its statutory small business financing mandate, we reviewed the statutory provision and its legislative history, reviewed other relevant legal documents, and interviewed Ex-Im legal staff, including the Acting General Counsel, regarding their interpretation. To review Ex-Im’s efforts to monitor and track its small business financing, we obtained Ex-Im reports and interviewed Ex-Im staff. To examine how Ex-Im estimates the share of its financing that indirectly supports small business, we obtained documents detailing Ex-Im’s estimates and interviewed Ex-Im staff regarding the methodology for developing the estimates. We conducted our work from June 2005 to January 2006 in accordance with generally accepted government auditing standards. The Export-Import Bank (Ex-Im) monitors and tracks the proportion of its financing that directly benefits small business, and thus its progress toward meeting the small business financing requirement, using reports produced by electronic databases maintained by Ex-Im staff. One tool is a standard report generated by an electronic Ex-Im database that details the number, amount, and proportion of Ex-Im transactions that directly benefit small business. In addition, Ex-Im’s Office of the Chief Financial Officer produces a monthly financial report that compiles a variety of data, including the amount and proportion of Ex-Im’s financing that directly benefits small business. Ex-Im uses a “canned” report produced by an Ex-Im database that pulls information from multiple other Ex-Im databases. This database integrates information, including data relating to specific transactions and information related to the companies participating in each transaction. Ex- Im officials told us this database is updated each night. The report breaks down Ex-Im’s financing for the year-to-date into five categories of transactions—medium- and long-term loans and guarantees, credit guarantee facilities, working capital, bank-held insurance, and nonblank- held insurance. For each category, the report includes summary data on the number, amount, and proportion of Ex-Im transactions that directly benefit small business for the year-to-date. Ex-Im also monitors and tracks its small business financing in a monthly financial report produced by the Office of the Chief Financial Officer. According to the Chief Financial Officer, this report is a key management tool and contains data on a variety of issues relevant to Ex-Im management, including small business financing. Specifically with regard to small business, it includes data on the dollar value of transactions authorized that directly benefit small business and the percentage this represents of total transactions. The report indicates that the “Small Business Target” is 20 percent and measures Ex-Im’s actual performance against this “target.” The Export-Import Bank’s (Ex-Im) authorizing legislation requires it to estimate its indirect support of small business. To meet this requirement, Ex-Im analyzes a subset of transactions and uses multiple sources of information to develop its estimate. Ex-Im’s authorizing legislation requires it to estimate its indirect support for small business. Specifically, it requires Ex-Im to “estimate on the basis of an annual survey or tabulation the number of entities that are suppliers of users of Ex-Im and that are small business concerns.” Ex-Im then reports this information in its Annual Report. Ex-Im officials emphasized that (in contrast to the legislative requirement related to Ex-Im’s direct support of small business) this requirement only necessitates Ex-Im report an estimate of its indirect support of small business rather than a precise calculation. They further noted that the requirement provides significant leeway regarding how to gather and report this information. For instance, they said that since the requirement refers to a “survey or tabulation” they infer that Congress intended for Ex-Im to rely on its customers to provide estimates to Ex-Im. Resource considerations were the key factor in Ex-Im’s rationale for developing a methodology to estimate its indirect support of small business. Ex-Im officials said they did not want to devote a significant amount of resources to developing the information because, regardless of the amount of resources expended, it would still only be an estimate. Similarly, Ex-Im recognized that it would rely on its customers to provide information to develop the estimate and wanted to minimize the burden on the customers. To establish a methodology, Ex-Im officials decided to examine a subset of Ex-Im transactions, based on the term (i.e., short-term, medium-term, or long-term) of the financing. Ex-Im considered analyzing the indirect support for small business from all the short-term transactions for the year. However, there are a large number (about 1,900 in fiscal year 2004) of these transactions, so analyzing them all would require a significant amount of resources. Additionally, a high percentage of short-term transactions directly benefit small business, so an analysis of these transactions would yield an unrealistically low amount of indirect support for small business. Ex-Im also considered analyzing medium-term transactions, but since there are a large number of such transactions (about 700 in fiscal year 2004), such an analysis would still take a significant amount of resources. Therefore, Ex-Im decided to analyze the indirect small business support resulting from its long-term transactions. Ex-Im officials told us that analyzing long-term transactions is appropriate because (1) there are a small number of such transactions each year (42 in fiscal year 2004), (2) the analysis would yield a “well-rounded” view of Ex-Im’s total support for small business when combined with its data on its direct support of small business, and (3) long-term transactions account for a significant share of the value of Ex-Im’s financing each year ($7.3 billion, or nearly half of the value of all transactions for fiscal year 2004). Ex-Im officials said they have been estimating Ex-Im’s indirect support of small business since the 1980s and use three sources of information to develop their estimate. These three sources of information are the following: Information directly from the primary exporter: Some of Ex-Im’s customers compile and provide data directly to Ex-Im regarding their small business suppliers. According to Ex-Im officials, this happens most frequently when the company is a large and well-established company and collects a significant amount of information from its suppliers. For instance, Boeing (a frequent Ex-Im customer) maintains a variety of data on its suppliers and subcontractors and reports this information to Ex-Im. According to Ex-Im, it based its estimate of indirect support of small business solely on information directly from the primary exporter for 19 of 42 long-term transactions for fiscal year 2004. Ex-Im analysis of the exporter’s list of subcontractors or sub- suppliers: For each long-term transaction, Ex-Im customers must submit a list of major contractors. The Ex-Im official assigned to the transaction reviews this list and, among other things, identifies which of the companies on the list is a small business by checking data on each company’s sales and employment in the Dun and Bradstreet database. According to Ex-Im, it based its estimate of indirect support of small business solely on its analysis of the exporter’s list of major contractors for 5 of 42 transactions for fiscal year 2004. Ex-Im officials’ judgment: Ex-Im officials sometimes must use their judgment to estimate the amount of indirect support for small business associated with a transaction. According to Ex-Im officials, the Ex-Im official assigned to the transaction can use his or her knowledge of the exporter (including any past history of its indirect support of small business), industry (including industry benchmarks regarding small business contracting), and the specific details of the transaction. According to Ex-Im, it based its estimate of indirect support of small business solely on an Ex-Im officials’ judgment for 10 of 42 transactions for fiscal year 2004. According to Ex-Im, for some transactions, it estimates the amount of indirect support for small business using a combination of sources of information. For example, for fiscal year 2004, Ex-Im estimated the indirect support of small business for four transactions based on a combination of information directly from the primary exporter and Ex-Im’s analysis of the exporter’s list of subcontractors or subsuppliers. For four other transactions in fiscal year 2004, Ex-Im estimated the indirect support for small business based on a combination of Ex-Im’s analysis of the exporter’s list of subcontractors or subsuppliers and an Ex-Im official’s judgment. In addition to the individual named above, Celia Thomas (Assistant Director), Jason Bair, Eugene Beye, David Dornisch, Ernie Jackson, and Bill Tuceling made key contributions to this report. Joe Carney, Carlos Diz, and Etana Finkler also provided editorial, technical, and graphics support. | The Export-Import Bank (Ex-Im) provides loans, loan guarantees, and insurance to support U.S. exports. Its level of support for small business has been a long-standing issue of congressional interest. Most recently in 2002, Congress increased the proportion of financing Ex-Im must make available for small business to 20 percent. GAO examined legal and policy issues related to Ex-Im's small business financing. Specifically, GAO (1) analyzes Ex-Im's methodology for calculating its direct support of small business and the reliability of Ex-Im's data used in the methodology and (2) describes Ex-Im's legal interpretation of its obligations under the statutory 20 percent small business mandate. While Ex-Im generally classifies companies' small business status correctly, weaknesses in its data systems and data limit its ability to accurately determine its small business financing. Ex-Im uses a combination of direct counts and estimates to calculate its small business financing, based on the authorized value of individual transactions. For most transactions, Ex-Im can identify the exporter and thus bases its determination of the small business financing share on whether the exporter qualifies as a small business. For other transactions, Ex-Im cannot identify the exporter at the time it authorizes the transaction and estimates the small business share based on shipment patterns in an earlier period. GAO determined that Ex-Im generally classifies companies' small business status correctly. However, GAO identified weaknesses in Ex-Im's process for calculating its small business support. For transactions where Ex-Im can identify the exporter, GAO found internal control weaknesses such as Ex-Im's data systems containing conflicting records for the same company. For transactions where Ex-Im cannot identify the exporter when it authorizes the transaction, a weakness is not including a large value of shipments in its calculations. GAO also determined that Ex-Im's reporting on the number of transactions--as opposed to the value of transactions--that directly benefit small business includes transactions that do not benefit small business. Prior to the enactment of credit reform legislation, Ex-Im interpreted the mandate as requiring it to make available for financing small business exports an amount equal to 10 percent of the aggregate principal amount of loans, guarantees and insurance specified by Congress for that fiscal year. Given changes in law including federal credit reform and the removal of specific financing authority limits, Ex-Im currently interprets its statutory small business financing mandate as requiring it to attempt to ensure that 20 percent of the authorized value of its transactions during a year directly benefits small business. |
Generally, an appellate court is a court of law that has the authority to review a lower court’s decision. Proceedings in appellate courts are different from those in trial courts. For example, unlike trial courts, which determine the factual issues in a case, in most situations, appellate courts determine only whether the lower courts correctly applied the law. There are no juries or witnesses in appellate courts. Rather, parties file written briefs and often present oral arguments to a panel of judges focusing on the questions of law in a case. Each appellate court has its own policies on video and audio coverage of oral arguments for public dissemination, and the development of such policies is determined by the relevant policy-making entity or each court. For instance, in March 1996, following a federal judiciary pilot program on cameras in the courtroom, the Judicial Conference—the policy-making body of the federal judiciary—authorized each circuit court of appeals to decide for itself whether to allow video and audio broadcasting of appellate proceedings. The U.S. Supreme Court is the highest appellate court in the country and has the power of judicial review, which is the ability to declare legislative and executive acts unconstitutional. The Court is part of the federal court system, which also includes U.S. courts of appeals and U.S. district courts, among others. The Court has original jurisdiction—the authority to hear a case for the first and only time—over certain cases, and appellate jurisdiction—the authority to review a lower court’s decision—on most other cases that involve a question of constitutional or federal law. Most of the cases the U.S. Supreme Court hears are appeals from lower courts. The U.S. Supreme Court has discretion over which appeals it hears and parties file petitions for writs of certiorari to ask the Court to hear cases. According to the Court’s website, the Court grants review and hears oral arguments in about 80 cases from the approximately 7,000 to 8,000 petitions it receives each Court term. The Court only grants a petition for a writ of certiorari for compelling reasons. U.S. Supreme Court rules state that such reasons may include, among other things, a U.S. court of appeals has entered a decision in conflict with the decision of another U.S. court of appeals on the same important matter; a state court of last resort has decided an important federal question in a way that conflicts with the decision of another state court of last resort or U.S. court of appeals; or a state court or U.S. court of appeals has decided an important question of federal law in a way that conflicts with relevant decisions of the U.S. Supreme Court. If a petition is granted, the case will be scheduled for oral argument. Oral arguments occur when the Court is in session on Mondays, Tuesdays, and Wednesdays, with up to two arguments scheduled per day, and generally last an hour for each case. The Court’s term begins the first Monday in October and continues until the first Monday in October the following year. Figure 2 provides additional information about how cases progress in the U.S. Supreme Court. The federal courts have jurisdiction in cases in which the United States is a party, cases involving the U.S. Constitution or federal laws, certain disputes between citizens of different states, or actions against foreign governments, among other matters. Sitting below the U.S. Supreme Court are 13 U.S. courts of appeals, which are lower appellate courts. These U.S. courts of appeals hear challenges to decisions by U.S. district courts located within their circuits, as well as appeals of certain federal administrative agencies’ decisions. Figure 3 shows the geographical boundaries of the circuits. Cases in the U.S. courts of appeals can be decided based on written briefs alone, but many cases are selected for oral argument. Appeals are generally decided by panels of three judges, but some cases can be heard before more than three judges, or en banc. Oral arguments before U.S. courts of appeals usually last about 30 minutes per case. Most decisions of the U.S. courts of appeals are final, but parties may petition the U.S. Supreme Court to review the case. Each state and the District of Columbia generally have one court of last resort and states may also have intermediate appellate courts. State courts of last resort are generally the final arbiters of state laws and constitutions, although their decisions can be appealed under certain circumstances. State court systems vary from state to state. State courts generally have broad jurisdiction and can hear cases not under the exclusive jurisdiction of federal courts. However, they may not hear cases against the United States and those involving certain specific federal laws. Cases in state courts of last resort that interpret federal law or the U.S. Constitution may be appealed to the U.S. Supreme Court. The courts of last resort in the selected countries included in our review— Australia, Canada, and the United Kingdom—are the final courts of appeals in their respective countries, and each court’s decisions are generally binding to all lower courts in that country. Table 1 has additional information on the courts of last resort in the selected countries, as well as the U.S. Supreme Court. The U.S. Supreme Court does not provide or allow video or live-audio coverage of oral arguments, but provides taped audio coverage of arguments. Specifically, beginning in the October 2010 term, the Court has posted audio recordings of all oral arguments on its website at the end of each argument week. Prior to the 2010 term, the recordings from one term of Court were not available until the beginning of the next term. The Court also provides transcripts of oral arguments on its website the same day arguments are heard and its decisions—the Court’s most important work, according to the Court’s Public Information Officer (PIO)—within minutes of their release. Further, starting with the presidential election cases in 2000, the Court began granting requests for access to audio recordings of oral arguments on the same day arguments are heard in selected cases. According to the PIO, media organizations submit written requests for such access to the Court’s Public Information Office, which forwards them to the Chief Justice for consideration. If a request is granted, the office issues a press release to inform the public in advance that the Court will provide expedited audio recordings for a given case. The Court’s Marshal, Public Information Office, and Office of Information Technology jointly make the arrangements for release of the recordings, which require advanced preparations for the significant increase in website traffic that may result. The PIO stated that the Court has made audio recordings of oral arguments available on the same day as the argument in rare cases, generally in response to extraordinarily high interest among the public and the media. From the 2000 through 2014 terms, the Court received media requests for access to same-day audio recordings of oral arguments in 58 cases. At its discretion, the Court granted these requests in 26 cases and declined them in 32 cases. Figure 4 shows U.S. Supreme Court decisions on media requests for access to same-day audio of oral arguments. As figure 4 illustrates, since October 2010, when the Court began its current practice of posting audio recordings of oral arguments at the end of each argument week, the Court has received media requests for same- day access to recordings in fewer cases—8 cases from the 2010 through 2014 terms, compared to 37 cases from the 2005 through 2009 terms. According to the General Counsel of C-SPAN, which has requested access to video or same-day audio of oral arguments in almost all of the 58 cases in which same-day audio access was requested, the network has made requests more sparingly since the Court began posting recordings of oral arguments at the end of each argument week and has limited requests to very prominent high-profile cases. See appendix III for a list of cases in which media organizations requested access to same- day audio of oral arguments and whether the Court granted or declined requests. Two of the 13 U.S. courts of appeals—the U.S. Courts of Appeals for the Second and the Ninth Circuits—allow media video coverage of oral arguments. In addition, 10 of the 13 U.S. courts of appeals regularly post audio recordings of oral arguments on their websites. Officials from 9 of these 10 courts stated that their court generally posts audio recordings on the same day arguments are heard. Table 2 summarizes the video and audio coverage and oral argument recording policies and practices in the U.S. courts of appeals for the 13 circuits. The policies and practices of these U.S. courts of appeals differ because, as discussed earlier in the report, each court has discretion to determine whether to allow video and audio coverage of appellate proceedings and how to do so. Among the courts we visited—the U.S. Courts of Appeals for the Second, Ninth, and D.C. Circuits—the policies and practices ranged from allowing media video and audio coverage of oral arguments conducted in open court upon request and streaming live video of arguments using the court’s own equipment (in the Ninth Circuit) to providing audio recordings of oral arguments on the court’s website (in the D.C. Circuit). The information below illustrates the range of policies and practices in these courts. U.S. Court of Appeals for the Second Circuit. The court’s guidelines allow media video and audio coverage of oral arguments conducted in open court, except for criminal matters. The guidelines state that the panel of judges assigned to hear oral argument has sole discretion to prohibit coverage of any proceeding, and will normally exercise this authority upon the request of any member of the panel. In practice, according to the court’s Clerk, the media is required to submit a request for video or audio coverage and the panel of judges must affirmatively grant permission to allow coverage. From its 2010 through 2014 terms, the court received requests for video coverage of oral arguments in 15 cases. Of these cases, 6 were granted and 9 were denied based on judicial discretion. The court does not post oral argument recordings on its website but provides CDs of audio recordings upon request for a $30 fee. According to the Clerk, the court’s video and audio policies require minimal resources to implement and there have been no implementation challenges. U.S. Court of Appeals for the Ninth Circuit. The court’s guidelines allow media video and audio coverage of oral arguments conducted in open court. According to court officials, such coverage is allowed for both criminal and civil cases. The guidelines require media organizations to submit a request for coverage and state that the panel of judges assigned to hear oral argument has sole discretion to grant or prohibit video or audio coverage of any proceeding. Court officials stated that the court requires a majority of the judges on the panel to grant or deny coverage. From January 1, 2010, through August 30, 2015, the court received requests for video coverage of oral arguments in 92 cases and granted them in 66 cases. The court also posts archived video recordings of arguments on its website and on YouTube.com, and in January 2015, began streaming live video of all oral arguments using its own equipment. According to the 2014 Ninth Circuit Annual Report and court officials, there were some initial technical challenges with providing live coverage, such as assembling and installing the video production systems and finding a reliable and cost-effective means to stream the arguments, but officials stated that implementation has generally been smooth. In addition, the officials said that live streaming oral arguments has decreased the number of media requests for video coverage. This has reduced the time and resources that the clerk’s office expends processing these requests, including reviewing the request forms and contacting the judges on the panel to decide upon requests. Figure 5 shows images of a courtroom camera in the U.S. Court of Appeals for the Ninth Circuit’s San Francisco courthouse, laptop controlling cameras, and oral argument video produced by the court. U.S. Court of Appeals for the D.C. Circuit. The court does not allow media video or audio coverage of oral arguments, but, beginning in September 2013, has provided audio recordings of arguments on its website using the court’s own equipment. Arguments are to be posted by 2 p.m. the same day they are heard by the court. Court officials stated that providing such audio coverage requires minimal resources and there have been no implementation challenges. See appendix IV for additional details on the video and audio policies and procedures, coverage requests and online views, and policy implementation for the U.S. Courts of Appeals for the Second, Ninth, and D.C. Circuits. Courts of last resort in 49 states have written policies that allow media video and audio coverage of oral arguments and almost all of these courts have video or audio of oral arguments available online. The D.C. Court of Appeals—the District of Columbia’s court of last resort—has no written policies on media video or audio coverage of oral arguments, and according to the court’s Clerk, does not allow such media coverage. However, the court itself streams live audio of all oral arguments on its website and, according to the Clerk, streams live video of some arguments. Although the written policies of the courts in 49 states allow media video and audio coverage, the features of these policies vary. For instance, some state policies prohibit coverage of oral arguments in certain types of cases, such as juvenile proceedings, or unless parties affirmatively consent to it, which may limit coverage, while policies in other states require that judges make an on-the-record finding in order to prohibit coverage, which indicates that there is a strong presumption that coverage is allowed. Table 3 summarizes media video and audio policy features and availability of oral arguments online of state and D.C. courts of last resort. See appendix V for information on the courts of last resort in each of the 50 states and the District of Columbia. While courts of last resort in 49 states have written policies that allow media video and audio coverage of oral arguments, the procedures they follow to do so vary. For instance, the Supreme Court of California, which we visited, both allows media organizations to use their own cameras in the court and provides a live video feed that media organizations can access upon request, while the Florida Supreme Court, which we also visited, partners with a local public broadcasting station to provide video coverage. The information that follows further illustrates variations in the policies and procedures of these two courts. Supreme Court of California. The court’s rules allow video and audio coverage of oral arguments by the media upon request and list 18 factors for judges to consider when deciding whether to grant or prohibit coverage, such as the importance of promoting public access to the judicial system and the privacy rights of all participants in the proceeding. The court permanently began allowing coverage in 1984. From 2010 through 2014, the court received requests for media video coverage in 17 cases and granted all of them. According to court officials, if the media has missed the deadline to request coverage, or based on other extenuating circumstances, the court also has the discretion to provide access to its live closed-circuit video feed of oral arguments, which the court records using its own equipment. Media organizations must obtain permission from the court’s Public Information Office to access this feed through a mult box—a box that allows multiple individuals to directly connect to a video and audio source—in the press rooms of each of the court’s locations. The officials noted that they prefer that media organizations use the court’s feed, rather than bring in their own cameras, to reduce the likelihood of any distractions or other effects on proceedings, but may still receive requests for media coverage of high-profile cases. In addition, the court periodically posts archived audio recordings and a small number of video recordings of oral arguments for selected high-profile cases on its website. According to court officials, the court also conducts annual special oral argument sessions for students, usually in October, where live video of arguments are broadcast on The California Channel, a public broadcasting station, and streamed on the channel’s website. Archived recordings of some of these arguments are also available on The California Channel’s website and other hosting sites, such as the CaliforniaCourts channel on Youtube.com. Court officials stated that there have been no challenges with implementing the court’s policies. In March 2016, the court announced that it plans to begin live streaming video of oral arguments on its website in May. Figure 6 shows pictures of the Supreme Court of California’s cameras in its San Francisco courtroom and mult box in the press room. Florida Supreme Court. The court’s rules allow media video and audio coverage of oral arguments, and Florida case law establishes a presumption that coverage is allowed and requires judges to make an on-the-record finding to prohibit coverage. Coverage was permanently allowed in 1979 and, according to the court’s Public Information Officer, the court has never prohibited coverage of oral argument in a case. The court does not allow freestanding video cameras in the courtroom during oral arguments, but partners with WFSU-Television (WFSU- TV)—a public broadcasting station—to record, broadcast, live stream online, and archive video of arguments. The court and WFSU-TV have an annual interagency agreement that details the services WFSU-TV is to provide, the court’s responsibilities, and the monthly payment the court is to make to WFSU-TV for its services. WFSU-TV staff operate the courtroom cameras and produce the videos of oral arguments. The agreement states that WFSU-TV is to be responsible for the purchase and maintenance of all equipment necessary, including the courtroom cameras, to fulfill the terms of the agreement. In addition, The Florida Channel, which is produced and operated by WFSU-TV, televises live and tape-delayed video of oral arguments. Per the agreement, The Florida Channel is required to show all broadcasts of oral arguments in their entirety and is not permitted to show only partial segments of arguments. Arguments that are broadcast on The Florida Channel are also transmitted to all interested parties via a satellite feed, which media and other organizations can access without going to the court. Further, live and archived video of all oral arguments are also available on the Florida Supreme Court Gavel to Gavel website, which is maintained by WFSU-TV. WFSU-TV officials stated that archived video is generally posted within 48 hours of arguments. According to the Public Information Officer, the close partnership between the court and WFSU-TV is key to providing access to video coverage of oral arguments. He stated that the partnership allows the court to leverage WFSU-TV staff, technical expertise, and production capabilities. For example, the court would not be able to devote the same number of staff to broadcasting oral arguments as WFSU does. In addition, WFSU has more advanced technology than the court would have been able to purchase. Figure 7 shows pictures of the Florida Supreme Court’s cameras, the court’s video and audio control room, and WFSU-TV’s production room. See appendix VI for additional details about the Supreme Court of California’s and Florida Supreme Court’s video and audio policies and procedures, coverage requests and online views, and policy implementation. The courts of last resort in the three countries included in our review— Australia, Canada, and the United Kingdom—have policies that provide video coverage of oral arguments by the court itself and do not allow media organizations to record oral arguments using their own equipment. These courts have varying procedures for providing coverage and mechanisms to help control who can use the footage and how the footage can be used. For example: High Court of Australia. Beginning in October 2013, the court has posted on its website video recordings of oral arguments heard before the full court—at least five of the court’s seven justices—in its Canberra courthouse. The court’s 2014-2015 Annual Report states that recordings are generally available at the end of each sitting day. According to the court’s Senior Executive Deputy Registrar, recordings may be posted on the next business day following arguments for some cases because they require editing to remove sensitive information, such as the names of victims in sexual assault cases. He said that this is one benefit of providing recordings of oral arguments instead of live coverage. He also stated that the court already had the technical capacity in place to record and post video of oral arguments and the costs are minimal for the court to provide such coverage. In addition, he noted that having the court use its own equipment and maintain control of the video recording process helped justices acclimate to the court’s providing video coverage and alleviate concerns about cameras being a distraction. The terms of use for the video recordings state that viewers may not modify, reproduce, publish, broadcast, or use the video of proceedings in any other way without prior written approval of the court. However, schools and universities may use video of proceedings in a classroom setting for educational purposes without prior approval. The Senior Executive Deputy Registrar stated that the court receives about 10 to 15 requests to use video recordings in a given calendar year and has approved all of them. Supreme Court of Canada. The court records video of oral arguments using its own equipment and, since February 2009, has streamed live video of arguments on its website. According to court officials, the court has never prohibited video coverage of a public proceeding. The court also has an agreement with the Canadian Public Affairs Channel (CPAC) which allows CPAC to televise and live stream arguments. The agreement states that CPAC will broadcast arguments in their entirety, but may use clips, sound bites, or excerpts for its programming, provided that they are balanced and fair to the parties and all concerned in the appeal. In addition, CPAC is authorized and has agreed to make broadcast feeds of oral arguments available to other broadcast members of the Canadian Parliamentary Press Gallery at a central node for news and public affairs broadcasts only. The court and CPAC also provide archived video recordings of oral arguments on their websites. Parties and individuals who are not members of the news media must submit a request to the court to obtain permission to use oral argument recordings. Requests are made using an electronic form on the court’s website, which requires information such as a description of the video or webcast requested, how it will be used, and the medium in which it will be used (e.g., Internet, video, film, DVD). If approval is granted, the requester is required to sign an agreement detailing the terms of use. Agreements may include provisions to, for example, use footage in a context that presents the case and the positions of the litigants in a fair and balanced way and does not harm the reputation of the court or of the counsel or justices appearing in the footage. The U.K. Supreme Court. The court records video of oral arguments using its own equipment and, in October 2014, began streaming live video of oral arguments on its website. In addition, Sky News, a U.K. broadcasting organization, has streamed the court’s live video of oral arguments on its website since May 2011. According to the court’s Head of Communications, media organizations can access the court’s video feed in a nearby broadcast studio. He stated that the court’s recording of its own video allows it to control what is filmed and interrupt or terminate coverage if necessary. The court also began making archived video recordings of oral arguments available on its website in May 2015. According to the court’s press release, footage is uploaded the next working day after an argument is heard and is available until about a year after the date of the argument. The court has established rules for how videos of oral arguments can be used by broadcasters. For example, the rules only allow use in news, current affairs, and educational programs and prohibit use in light entertainment, satirical, and other types of programs. In addition, the rules state that any stills produced from the video must be used in a way that has regard to the dignity of the court and its functions as a working body. According to the Head of Communications, all of the U.K.’s main media broadcasting organizations have agreed to these rules. He stated that the court enforces its policy to the best of its ability with limited resources and that, to his knowledge, there have not been any violations of the rules. See appendix VII for additional details about the video policies and procedures, online video views, and policy implementation of these foreign courts of last resort. The judges and attorneys we interviewed in selected appellate courts who have experience with video and audio coverage of oral arguments cited several benefits of such coverage, including greater public access to the courts and educating the public on the judicial system, among others. Administrative officials in selected courts also provided additional examples of these benefits. Public access. Fifteen of the 16 judges and all nine attorneys stated that they believed that coverage has enhanced or could potentially enhance the public’s access to the courts, particularly as the public relies more heavily on television as a principal source of information. For instance, one attorney and one judge said that, in high-profile cases or those of interest to the public, the public could be more informed about both the process and the issues in the case through video coverage. Further, the one attorney noted that providing greater access to the court through video or audio coverage is valuable because, as more information about court proceedings is available to the public, more people will understand the courts and the judicial system. In addition, two judges with whom we spoke said that a benefit of same-day audio coverage is that attorneys or other interested persons do not have to physically go to the court to hear an oral argument, but instead could access same-day audio recordings of the argument on the court’s website. Two attorneys who practice in the same court voiced some of the same benefits, stating that they believed that same-day audio coverage has provided more access to the court, information about what happens in the court, and is useful for persons who are not able to attend the oral argument. Moreover, another attorney with whom we spoke stated that he believed video or audio coverage of oral arguments increases the information available to the public and the media, which could also result in a more complete and neutral representation of oral arguments by the media. Administrative officials in selected courts also described instances in which they believed that video or audio coverage of arguments in their courts had enhanced public access. For example, according to a U.K. Supreme Court official, one of the main reasons the court provides video coverage of its proceedings is to ensure that the country’s citizens are able to watch the proceedings in their highest court and hear important points related to principles in the development of common law. In addition, an official in the High Court of Australia said that providing video recordings of proceedings allows more of the public to view proceedings because Australia is a large country and most of its population does not reside in Canberra, where the court is located. Moreover, according to officials from the U.S. Court of Appeals for the Ninth Circuit, live streaming oral arguments has increased public access to the court, particularly in cases of high public interest. For example, in November 2014, the court heard arguments in a case regarding an incident in which a high school student aimed a laser pointer at an incoming passenger jet as it approached an airport near his home. Officials stated that the courtroom was not able to accommodate the large number of students from his high school who were interested in viewing oral arguments, but students were able to watch the live-streamed video of arguments at the school. Education. Fourteen of the 16 judges and seven of the nine attorneys with whom we spoke cited public education on the judiciary as a benefit or potential benefit of video or audio coverage of oral arguments. For instance, one judge said that because the work of the courts can easily be misunderstood and is not in the headlines as much as the work of other branches of the government, video coverage is useful for providing the public a window into how the courts think about the issues in a case. Moreover, one attorney with whom we spoke stated that video coverage of oral arguments is a useful learning tool because she can review her arguments to identify areas for improvement. Additionally, this same attorney said that video coverage is useful for junior attorneys to watch so they can learn about how to conduct oral arguments and the legal issues of the case. However, another attorney stated that coverage of oral arguments may be more misleading than illuminating because, for those watching to have an accurate view of the arguments, they would need to understand the entire case and the judicial process. Additionally, ten of the 16 judges stated that they believed that coverage of oral arguments, which is only part of the decision making process, may not be helpful for understanding the case in its entirety. For instance, one judge stated that the public might attain a general understanding of the issues in a case and what was of concern to the court, but may not have all the information needed to fully understand a case after viewing arguments. Another judge noted that the written briefs that parties submit to the court are critical to understanding the case, and that oral arguments frequently address narrow aspects of the case that the judges are concerned about. Court administrative officials with whom we spoke also provided examples of instances in which video or audio coverage of oral arguments in their courts has provided educational benefits. For example, an official from the Florida Supreme Court stated that high-profile, controversial cases can be misunderstood by the public and broadcasting oral arguments in their entirety can help dispel misconceptions about the case and how the court operates. For instance, this official stated that broadcasting oral arguments in the 2000 presidential election cases that were before the Florida Supreme Court helped educate the public about the judicial system and noted that it was beneficial for the public to be able to see the arguments and draw their own conclusions. In addition, officials from the U.S. Court of Appeals for the Ninth Circuit stated that law schools have used live-streamed and archived oral arguments as a learning tool for their students. A U.K. Supreme Court official also stated that video coverage helps educate attorneys, law students, and others in the legal profession who can watch the justices in action and see how attorneys conduct arguments. Public confidence in the courts. Seven of the 16 judges and seven of the nine attorneys with whom we spoke believed that coverage has enhanced or could potentially enhance confidence in the courts. For instance, 1 judge stated that if a good judicial system is in place, video or audio coverage of arguments, which demonstrates how the system works, would increase the public’s understanding of and confidence in the courts. Further, one attorney said that providing coverage of oral arguments would show the public the work the courts conduct, as well as the quality and quantity of the work the court puts into each case. However, 7 judges with whom we spoke believed that coverage may not enhance confidence. For instance, 4 judges noted that it would be hard to identify the effect of coverage on the public’s confidence in the courts. In particular, 1 judge stated that it would depend greatly on what a person already thinks of the court before seeing any video or audio coverage of oral arguments, while 2 judges said that it would be hard to determine the specific impact of coverage on public confidence. Judicial accountability. Eight of the 16 judges and five of the nine attorneys with whom we spoke stated that coverage has increased or could potentially increase judicial accountability, although 7 judges felt that it did not affect accountability. For example, 1 judge stated that video coverage is a form of accountability in that it demonstrates how judges reason and think through cases, and helps explain the judicial process and justify the court’s results. Moreover, 1 judge said that he believed that video or audio coverage would increase the accountability of any public official whose work was covered, including judges, although he noted that the public does not and should not have access to the judges’ deliberative process. However, 4 U.S. courts of appeals judges explained that judicial accountability is already very high, and if judges make mistakes, they are documented in publicly issued opinions; therefore, they did not believe that coverage would increase judicial accountability. The judges and attorneys we interviewed in the selected appellate courts raised some concerns with video or audio coverage of oral arguments, including how the media might use such coverage, among others. Effect on court participants. Almost all judges and attorneys we interviewed stated that they did not believe video or audio coverage had affected court participants’ behavior or did not believe that such coverage would affect the behavior of court participants. For example, at least 12 of the 16 judges and eight of the nine attorneys we interviewed said that they personally were not affected by video or audio coverage and had not observed judges or attorneys appearing to grandstand, talking in sound bites, or being more attentive or courteous to others; judges altering their methods of questioning; effects on court decorum; or other changes in behavior. Three attorneys we interviewed explained that coverage did not affect their behavior because, during oral arguments, they are so focused on the arguments themselves that it is not possible to think about anything else, including video coverage. Two judges stated that judges or attorneys could grandstand and be more courteous, potentially because their questioning might be misinterpreted as badgering attorneys. However, one judge noted that he was not sure if this behavior would be caused by audio coverage. Privacy and security. Fifteen of the 16 judges and all nine attorneys with whom we spoke did not have concerns with the effect of coverage on their own privacy and security, while 1 judge we interviewed expressed concerns. Specifically, this judge recounted having personally experienced security concerns in a particular case in which a video clip during questioning by the judge was posted and disseminated on social media. The judge received threats as a result of the video coverage. In addition, 6 judges and four attorneys said that there was the potential for coverage to affect the privacy and security of court participants even though they had not experienced issues themselves. Media use of coverage. Some judges and most of the attorneys with whom we spoke also raised some concerns with how the media might use coverage of oral arguments. For instance, 5 of the 16 judges and eight of the nine attorneys we interviewed stated that they believed that video or audio coverage might potentially result in portions of the proceeding being distorted by the media. However, 11 of the 16 judges we interviewed stated that they did not believe that coverage might result in such distortions. In addition, three attorneys noted that distortions happen even without audio or video coverage. For instance, one attorney stated that the media regularly distort proceedings, including some of her own oral arguments, regardless of video or audio coverage. Another attorney stated that, in her experience, proceedings have been inaccurately covered by the media. For instance, the reporters listening to an argument are often not lawyers and may not understand the oral argument; as a result, members of the media may focus on a segment of the case that they think is interesting and use that segment in their reporting of the argument even if they have taken that segment out of context. She noted that same-day audio coverage may help prevent distortion because it allows reporters to review and confirm what actually occurred before reporting on the case and allows the public to independently listen to the entire oral argument. Four judges and four attorneys with whom we spoke stated that they believe that coverage by the court itself—such as the court recording oral arguments using its own equipment—versus coverage by the media, might help or could potentially help mitigate these concerns, including potential distortion of proceedings by the media. For example, one attorney stated that if the court produces the coverage, then the court can control it and release it as the court sees fit. He also noted that while the media generally have an incentive to promote coverage to gain viewers, the court does not have such an incentive. Further, 1 judge stated that when the court shows coverage of the entire oral argument, people have the opportunity to make their own judgements about what they see, while the media may insert their own views. Moreover, 12 of the 16 judges and five of seven attorneys with whom we spoke stated that the media showing edited segments of oral arguments is not sufficient to provide a complete or accurate understanding of court proceedings. For example, one attorney stated that the public may misunderstand the proceeding if the media show edited segments and do not provide proper context for the case. In addition, 1 judge stated that a local channel broadcasts the court’s oral arguments in their entirety, which is preferable to the media showing edited snippets. He noted that television networks rarely have the air time to broadcast an entire oral argument and will not do so unless it is for a landmark case. A representative from one media organization explained that some media outlets selectively cover oral arguments, which may appear to some as distortions, because they must report on the case in a short news segment during their broadcast. He stated that, while his organization generally broadcasts oral arguments in their entirety, other media outlets have such time constraints and cannot do so. A small number of studies have also addressed the effects of video coverage on appellate courts. See appendix II for information about these studies. In our interviews with selected appellate judges and attorneys who have had experience with video or audio coverage, we asked for their perspectives on the extent to which the benefits, concerns, or potential effects of coverage discussed previously might also apply to video or live- audio coverage of the U.S. Supreme Court’s oral arguments, if such coverage were to be allowed. Twelve of the 16 judges and eight of the nine attorneys we interviewed in selected appellate courts said that they believed that the potential benefits, concerns, and effects might apply to the U.S. Supreme Court. For example, 3 of the 16 judges and two of the nine attorneys we interviewed identified benefits to the public of video or same-day audio coverage, such as providing the public with access to the Court’s proceedings, or enhancing the public’s perception or understanding of the Court’s proceedings. One judge noted, however, that video coverage of oral arguments could distort the public’s perception of what the Court does, as the coverage would likely focus on a small number of high-profile cases and little attention would be given to the other cases the Court hears. In addition, 7 of the judges and two of the attorneys noted that, given the greater media or public interest in the U.S. Supreme Court and the higher profile or sensitivity of the cases it hears, the potential concerns and effects may be magnified. For instance, 3 judges and three attorneys felt that coverage could affect the behavior of court participants, such as justices adjusting their lines of questioning or attorneys grandstanding. Further, 5 judges and one attorney said that privacy and security concerns associated with coverage of oral arguments at the U.S. Supreme Court would be greater than at the appellate level because of the increased interest and profile of the Court and its cases. One judge explained that, because U.S. Supreme Court cases are so often high- profile, the Justices could face threats against them after every argument, compared to a small number of such instances at the appellate court level. We also requested perspectives on the potential benefits of and concerns with video coverage of oral arguments from the U.S. Supreme Court’s Public Information Officer, as well as four attorneys who have argued before the Court. Three of these four attorneys believed that the Court should allow additional access to coverage of its oral arguments. Of these three attorneys, two stated that the Court should allow video coverage and one stated that allowing more same-day audio access to oral arguments would be a good starting point. The fourth attorney stated that he would support additional access to coverage if the Court allowed it but that the Justices are in the best position to determine whether such access should be allowed. All four attorneys stated that there would be potential benefits to allowing video coverage of U.S. Supreme Court proceedings. Specifically, all of them stated that they believed allowing video coverage of U.S. Supreme Court oral arguments would enhance access to the Court. For example, one attorney said that the courtroom has a limited number of seats available and it can be costly to travel to the Court. He noted that allowing video coverage would be more equitable because all members of the public could view coverage on the television or the Internet. Another attorney stated that there is a substantial difference between access to transcripts of oral arguments, which the Court provides, and viewing oral arguments. He noted that individuals are more likely to be interested in viewing arguments. In addition, all four attorneys stated that they believed allowing video coverage would help educate either the public about the judicial system or law students and professionals on how to conduct arguments. For instance, one attorney stated that video coverage would allow individuals to see the judicial branch operating at the highest level and help increase understanding of the U.S. Supreme Court’s work. Further, three of the four attorneys believed that allowing video coverage would increase the public’s confidence in the Court. For example, one attorney stated that such coverage would allow the public to see the rigor and seriousness with which the Court conducts its business. Another attorney noted that it could help alleviate the potential public perception that the Court is a partisan institution. The U.S. Supreme Court’s Public Information Officer (PIO) and the attorneys with whom we spoke also raised potential concerns with video coverage of oral arguments. According to the PIO, individual Justices have commented on the need to ensure the fairness and efficiency of its decision-making process. They have noted that televising U.S. Supreme Court proceedings could adversely affect the dynamics of the oral arguments, diminishing the frankness and extemporaneity of the exchanges, and reducing their usefulness for both the counsel and Justices. Three of the four attorneys also shared concerns related to potential changes in the behavior of court participants, such as changes to how attorneys prepare for oral arguments and the manner in which oral arguments are conducted. For example, one attorney stated that allowing video or live-audio coverage of the Court’s oral arguments might change the tenor of the argument, which currently focuses on the genuine search for truth and is a very effective process. He noted that attorneys may feel the need to choose their words more carefully during arguments because of the potential for negative public reactions. In addition, three attorneys stated that allowing video coverage might potentially result in inexperienced attorneys playing to the public or grandstanding, but noted that such behavior would be detrimental to their case. The U.S. Supreme Court’s PIO and the attorneys we interviewed further noted concerns related to the information and perceptions the public could potentially get from viewing oral arguments. Specifically, the PIO stated that Justices have observed that oral argument is a small part of the advocacy process. According to the PIO, because oral argument merely supplements the extensive and often technical written submissions, it is generally indispensable to read the written briefs in order to understand the oral arguments. She also noted that the Justices have emphasized that the Court’s written decisions stand as the Court’s most important and enduring work—work that should not be overshadowed by one piece of the decision-making process. All four attorneys with whom we spoke stated that they believed viewing oral arguments would not provide a complete understanding of a case, but could still provide useful information. These four attorneys also stated that there is the potential for the media to distort video coverage of oral arguments to varying degrees. For example, one attorney stated that there is the potential for statements to be taken out of context or misrepresented but the benefits of coverage outweigh the risks, and another attorney stated that such distortion could be a significant problem. This attorney noted that the Court providing coverage of arguments in their entirety, as opposed to edited coverage by the media, could help alleviate this concern. Finally, the PIO stated that, above all, the Justices are trustees of an institution that has functioned well and earned the public’s confidence. The Justices have expressed caution about introducing changes that could diminish the public’s respect for and create misconceptions about the Court. The PIO stated that the Court is proceeding carefully in evaluating whether it should make changes to its current practice of not providing video camera coverage of its proceedings. We provided a draft of this report to the U.S. Supreme Court, the Administrative Office of the U.S. Courts, the Federal Judicial Center, and the Department of Defense for review and comment. They had no written comments on the draft report. The Administrative Office of the U.S. Courts provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the U.S. Supreme Court; Administrative Office of the U.S. Courts; the Federal Judicial Center; the state and foreign courts of last resort in which we conducted interviews— the Supreme Court of California, the Florida Supreme Court, the High Court of Australia, the Supreme Court of Canada, and the U.K. Supreme Court; the Department of Defense; appropriate congressional committees and members, and other interested parties. In addition, this report is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions, please contact Diana Maurer at (202) 512-9627 or maurerd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this report are listed in appendix VIII. We addressed the following questions as part of this review: 1. What is the U.S. Supreme Court’s policy regarding access to video and audio of oral arguments and what are the policies of other selected appellate courts? 2. What do selected stakeholders report are the benefits of and concerns with allowing video and audio coverage of oral arguments in appellate courts, including the U.S. Supreme Court? To address the first question, we analyzed information on the U.S. Supreme Court’s policy regarding access to video and audio of oral arguments that we obtained from Court documents, the Court’s website, and its Public Information Officer, including the process by which the Court decides whether to grant media requests to release audio recordings of oral arguments on the same day of the arguments. We also analyzed data from the Public Information Officer on the cases for which the Court received requests for same-day audio recordings of oral arguments and whether the requests were granted or declined from the Court’s 2000 term—the term in which same-day audio was first made available—through the Court’s 2014 term. We assessed the reliability of these data and determined them to be reliable for the purposes of this report. This assessment included comparing these data with other available sources and obtaining information from the Court about the accuracy and completeness of these data. We also analyzed information about policies regarding access to video and audio of oral arguments from selected appellate courts. We focused on appellate courts because these courts conduct oral arguments and, as such, their proceedings and participants are most similar to those of the U.S. Supreme Court. The selected appellate courts included the U.S. courts of appeals for the 13 federal circuits and courts of last resort—the highest appellate courts in a given jurisdiction—in the 50 states and the District of Columbia. These courts were chosen because their decisions may be directly appealed to the U.S. Supreme Court under certain circumstances and/or because they are generally the highest court in their respective jurisdictions. We also included foreign courts of last resort because they are the highest appellate courts in their respective countries. We selected the High Court of Australia, Supreme Court of Canada, and United Kingdom Supreme Court because their countries have common law legal systems in which judicial decisions establish legal precedents of law that are unwritten in statutes or codes, as does the United States; populations of over 20 million; and English as an official language and the language predominantly spoken. We identified and compiled rules, court and administrative orders, guidelines, and other documentation of video and audio policies of the courts we selected by searching court websites and lexis.com and reviewing literature that discussed the video and audio policies of the courts. We also contacted administrative officials in these courts to confirm that the written policies we identified were complete and current and to obtain information on and documentation of policies not available online. We compiled the information on state courts of last resort from January through May 2015, and confirmed that our analysis of the policies was accurate, complete, and current as of January 2016 for 42 states and the District of Columbia and June through August 2015 for the 9 remaining states. In addition, we conducted interviews in person and on the phone or had written correspondence with court administrative officials in 8 selected U.S. courts of appeals, state courts of last resort, and foreign courts of last resort to obtain information on the implementation of video and audio policies in the courts, such as resource requirements or challenges. We selected U.S. courts of appeals to reflect a range of video and audio policies. As such, we visited the U.S. Courts of Appeals for the Second and the Ninth Circuits because they are the two U.S. courts of appeals that currently allow media video coverage of oral arguments, and the U.S. Court of Appeals for the D.C. Circuit because it is one of the U.S. courts of appeals that does not allow video coverage of oral arguments. We selected state courts of last resort based on their (1) range of video and audio policies, including limitations on coverage such as whether certain types of cases are excluded from coverage and whether consent of parties is required; (2) having relatively high caseloads to increase the likelihood of cases with media interest and coverage; (3) extent of experience in allowing video or audio coverage; and (4) proximity to selected U.S. courts of appeals. Using these criteria, we visited state courts of last resort in Florida and California. We also contacted courts of last resort in 3 other states that require the consent of parties before coverage is allowed or do not allow video coverage of oral arguments to arrange interviews, but officials in these states either did not respond to our requests or declined to meet with us. In addition, we conducted interviews with or received written responses from court administrative officials in our three selected foreign courts of last resort—the High Court of Australia, Supreme Court of Canada, and United Kingdom Supreme Court. The information collected from the interviews with officials in these selected appellate courts cannot be generalized to all administrative officials or appellate courts. However, the site visits and interviews provided us with valuable information about court officials’ experiences with and perspectives on a variety of policies regarding access to video and audio of oral arguments. In addition, where available, we obtained data from these courts on the number of cases for which media video or audio coverage has been requested or granted and the number of views video or audio recordings of oral arguments that are posted online have received. We assessed the reliability of these data and determined them to be reliable for the purposes of this report. This assessment included obtaining and reviewing information from court administrative officials on how the data are collected and maintained. To address the second question, we conducted semi-structured interviews with 16 judges and nine attorneys who have had experience with video or audio coverage. Specifically, we interviewed 14 judges and nine attorneys who practice in the selected federal circuit courts of appeals and state courts of last resort described above—the U.S. Courts of Appeals for the Second, Ninth, and D.C. Circuits, and courts of last resort in Florida and California—to discuss their experiences with video and/or audio coverage of oral arguments, and their perspectives on the benefits of and concerns with allowing such coverage in appellate courts, including the U.S. Supreme Court. We also interviewed 2 justices of the United Kingdom Supreme Court. We selected the judges and attorneys based on recommendations from the courts. The information obtained from these interviews cannot be generalized to all appellate courts, judges, or attorneys; however, they provided us with insights regarding the benefits of and concerns with video and audio coverage of oral arguments in these courts. In addition, we obtained written responses from the U.S. Supreme Court regarding the Justices’ perspectives on video coverage of the Court’s oral arguments. We also conducted semi- structured interviews with four attorneys who have argued before the U.S. Supreme Court to obtain their perspectives on allowing video and audio coverage of oral arguments at the Court. We selected these attorneys because they had argued nine or more cases before the Court from the 2012 through 2014 terms and based on their availability. Their perspectives cannot be generalized to all attorneys who have argued before the U.S. Supreme Court, but provide insights regarding allowing video and audio coverage of the Court’s oral arguments. Finally, we contacted or interviewed representatives from selected legal associations and media organizations to obtain their perspectives on the potential benefits of and concerns with allowing video and audio coverage of oral arguments in appellate courts, including the U.S. Supreme Court. We selected these organizations based on our review of relevant literature, their work in this area, and recommendations from others. The organizations included the American Bar Association, Federal Bar Association, C-SPAN, and the Coalition for Court Transparency, and Radio Television Digital News Association. Their perspectives cannot be generalized, but provided insights into potential benefits of and concerns with such coverage. We conducted this performance audit from January 2015 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Through searches of databases, Internet websites, and other sources available as of April 2015, we identified almost 400 documents that addressed video and audio coverage of court proceedings. We reviewed these documents and identified 53 studies. Of these 53 studies, 2 were studies that included findings on the effects of video coverage in appellate courts, while most of the remaining studies focused on trial courts. According to one of two researchers we interviewed who have conducted work in this area, more studies have been conducted in trial courts, rather than appellate courts, because of a greater interest in the potential effects on victims, witnesses, and jurors—stakeholders who are not involved in appellate court proceedings. Both of these researchers also stated that, in general, there is insufficient empirical or experimental research on the effects of coverage in courts. They said that conducting a rigorous study on the effects of coverage in court proceedings requires funding and time from both researchers and stakeholders involved, such as judges, attorneys, and court personnel. Neither of the two studies we identified used an experimental or quasi- experimental methodology. Instead, they reported findings on the perceived effects of video coverage in appellate courts and relied on data from surveys and interviews with stakeholders, which provided useful information on stakeholder experiences with video coverage. Table 4 describes these studies. Case Bush v. Palm Beach County Canvassing Board McConnell v. Federal Election Commission Rasul v. Bush; and Al Odah v. U.S. (Consolidated) Cheney v. USDC District Of Columbia McCreary County v. ACLU of Ky. Ayotte v. Planned Parenthood of Northern New England Rumsfeld v. Forum for Academic and Institutional Rights League of United Latin American Citizens v. Perry; Travis County, Tex. v. Perry; Jackson v. Perry; and GI Forum of Texas v. Perry (Consolidated) Philip Morris USA v. Williams Gonzales v. Planned Parenthood Federation of America Parents Involved in Community Schools v. Seattle School District No. 1 Meredith v. Jefferson County Board Of Education Davenport v. Washington Education Association; and Washington v. Washington Education Association (Consolidated) FEC v. Wisconsin Right to Life; and McCain v. Wisconsin Right to Life (Consolidated) Declined Boumediene v. Bush; and Al Odah v. United States (Consolidated) Crawford v. Marion County Election Board; and Indiana Democratic Party v. Rokita (Consolidated) Case United States v. Ressam Altria Group, Inc. v. Good Winter v. Natural Resources Defense Council, Inc. FCC v. Fox Television Stations, Inc. Pleasant Grove City, Utah v. Summum Philip Morris USA, Inc. v. Williams Caperton v. A.T. Massey Coal Co., Inc. Northwest Austin Municipal Utility District No. 1 v. Holder Holder v. Humanitarian Law Project; and Humanitarian Law Project v. Holder (Consolidated) National Federation Of Independent Business v. Florida; and Florida v. Department of Health and Human Services (Consolidated) Burwell v. Hobby Lobby Stores, Inc.; and Conestoga Wood Specialties Corp. v. Burwell (Consolidated) Obergefell v. Hodges; Tanco v. Haslam; DeBoer v. Snyder; and Bourke v. Beshear (Consolidated) The three U.S. courts of appeals that we visited—the U.S. Courts of Appeals for the Second, Ninth, and D.C. Circuits—have varying policies and procedures for video and audio coverage of oral arguments, with different levels of usage and resource requirements. Tables 5, 6, and 7 summarize the policies and procedures, coverage requests and online views, and policy implementation for these courts. Written policies require parties to affirmatively that judges must make an on-the- record finding to juvenile) Written policies require parties to affirmatively that judges must make an on-the- record finding to juvenile) ● through August 2015, but did not review policy implementation. Courts of last resort in 42 states and the District of Columbia confirmed their policies as of January 2016 and those in the 9 remaining states were confirmed as of June through August 2015. The states with asterisks were confirmed as of January 2016. This category does not include policies that prohibit media video or audio coverage of oral arguments that are not conducted in open court, such as arguments for cases that are closed to the public, sealed, or confidential under law. The D.C. Court of Appeals has no written policies on media video or audio coverage of oral arguments, and according to the court’s Clerk, does not allow such media coverage. The Florida Supreme Court partners with WFSU-Television, a public broadcasting station, to provide video coverage of oral arguments. Freestanding video cameras are not permitted in the courtroom during arguments. Although oral arguments in the Supreme Court of Illinois are not generally streamed live, video of arguments for four cases in the court were streamed live on another website in November 2015. Louisiana Canon 3 states that a judge should prohibit broadcasting, televising, recording, or taking photographs in the courtroom and areas immediately adjacent thereto at least during sessions of court or recesses between sessions except as provided by guidelines on media coverage. The guidelines for extended media coverage in appellate courts require media organizations to notify the court clerk of their intention to provide such coverage at least 20 days in advance of the proceedings and allow the chief justice to prohibit or limit coverage of Louisiana Supreme Court proceedings, among other provisions. According to the Deputy Judicial Administrator of the Louisiana Supreme Court, there is a presumption that coverage is not allowed, although exceptions may be made for cases with high public interest. Mississippi Rules for Electronic and Photographic Coverage of Judicial Proceedings prohibit media coverage of certain matters, such as those involving divorce, neglect of minors, domestic abuse, and trade secrets, but the presiding justice can allow coverage by order. Missouri Court Operating Rules prohibit media video and audio coverage of juvenile, adoption, domestic relations, and child custody hearings. The Communications Counsel of the Supreme Court of Missouri stated that this limitation does not apply to the supreme court, although the court reserves the right to make a case-by-case determination about whether such coverage would be allowed. Supreme Court Guidelines for Still and Television Camera and Audio Coverage of Proceedings in the Courts of New Jersey state that coverage is prohibited in certain proceedings, such as juvenile proceedings and those involving trade secrets, child abuse or neglect, and charges of sexual contact when the victim is alive. The Director of Communications and Community Relations for the New Jersey Courts stated that this limitation does not apply to the Supreme Court of New Jersey. North Carolina court rules state that media video and audio coverage is prohibited in certain judicial proceedings, such as juvenile and child custody proceedings and proceedings involving trade secrets. The Clerk of the Supreme Court of North Carolina stated that this limitation does not apply to the supreme court. Oklahoma’s two courts of last resort—the Supreme Court, which determines all issues of a civil nature, and the Court of Criminal Appeals, which decides all criminal matters—do not have written policies on media video and audio coverage. The office of the Chief Justice of the Oklahoma Supreme Court noted that the supreme court has left it up to each presiding judge to determine whether to allow coverage. According to the Chief Justice, the supreme court has allowed video coverage of oral arguments on a few occasions and is in the process of developing a written policy for such coverage. According to the Supreme Court of Pennsylvania’s Court Crier, the Pennsylvania Cable Network is the only media organization that can record proceedings. The courts of last resort in the two states we visited—California and Florida—have varying policies and procedures on video and audio coverage of oral arguments, with different levels of usage and resource requirements. Tables 8 and 9 summarize the policies and procedures, coverage requests and online views, and policy implementation for these courts. The courts of last resort in Australia, Canada, and the United Kingdom (U.K.) have policies that provide video coverage of oral arguments by the court itself, with varying procedures for doing so and mechanisms to help control who can use the footage and how the footage can be used. Tables 10, 11, and 12 summarize the policies and procedures, online views and usage requests, and policy implementation for these courts. In addition to the contact named above, Jill Verret (Assistant Director), Tom Jessor (Assistant Director), David Alexander (Assistant Director), Claudine Brenner, Colleen Candrl, Dominick Dale, Farrah Graham, Nina Gurak, Yvette Gutierrez, Eric Hauswirth, Tracey King, Jan Montgomery, Alice Paszel, Janet Temko-Blinder, and Johanna Wong made significant contributions to this report. | The U.S. Supreme Court—the highest appellate court in the country—hears high-interest cases potentially affecting millions. The Court generally hears oral arguments for these cases, which are open to the public. Seating in the Court is limited and media organizations, as well as members of Congress, have requested video coverage of oral arguments. GAO was asked to review video and audio coverage of proceedings in the U.S. Supreme Court and other appellate courts. This report addresses (1) the U.S. Supreme Court's policy regarding video and audio coverage of oral arguments and the policies of other selected appellate courts and (2) perspectives of selected stakeholders on the benefits of and concerns with allowing such coverage. GAO analyzed policies on video and audio coverage of oral arguments in the U.S. Supreme Court and other selected appellate courts—13 U.S. courts of appeals and the highest appellate courts in the 50 states and the District of Columbia and three foreign countries—chosen because of comparability to the U.S. Supreme Court. GAO obtained information from administrative officials in 8 courts, selected based on video and audio policies, and perspectives on the benefits of and concerns with coverage from (1) 16 judges in 6 of these courts and 9 attorneys in 5 of these courts and (2) the PIO of the U.S. Supreme Court and 4 attorneys who have argued before the Court. Results are not generalizable but provided insights on video and audio coverage of oral arguments. GAO also reviewed studies on this issue. The U.S. Supreme Court (the Court) posts audio recordings of oral arguments on its website at the end of each argument week, but does not provide video coverage of these arguments. In addition, starting in 2000, the Court began granting requests for access to audio recordings of oral arguments on the same day arguments are heard in selected cases. As of October 4, 2015, the Court had received media requests for access to same-day audio recordings in 58 cases and had granted them in 26 cases. Other selected appellate courts have varying policies on video and audio coverage of oral arguments. For example, Two of the 13 U.S. courts of appeals allow media video coverage of oral arguments. Also, 9 of these 13 courts generally post audio recordings of arguments on their websites the same day arguments are heard. The highest appellate courts in 49 states have written policies that allow media video and audio coverage of oral arguments and almost all of these courts have video or audio of oral arguments available online. The highest appellate courts in Australia, Canada, and the United Kingdom have policies that provide video coverage of oral arguments by the court itself. Stakeholders in selected courts stated that the benefits of video or audio coverage of oral arguments in their courts include educating the public on the judicial system, among others, but also expressed concerns with regard to how the media might use such coverage. For example, Fourteen of the 16 judges and seven of the nine attorneys GAO interviewed in the selected appellate courts cited public education on the judiciary as a benefit or potential benefit of video or audio coverage of arguments. One judge noted that video coverage is useful for providing a window into how the courts think about the issues in a case. Five judges and eight attorneys stated that coverage might potentially result in portions of the arguments being distorted by the media. However, four judges and four attorneys said that the court providing coverage itself might help mitigate these concerns. For example, one attorney stated that this allows the court to control and release the coverage as it sees fit. With regard to the U.S. Supreme Court allowing video coverage of oral arguments, the four attorneys GAO interviewed who have argued before the Court also cited similar educational benefits and concerns regarding the media potentially distorting coverage. Further, three of the four attorneys and the Court's Public Information Officer (PIO) raised concerns that coverage may potentially affect court participants' behavior. The PIO stated that individual Justices have commented that televising proceedings could adversely affect the dynamics of the oral arguments, among other concerns, and have expressed caution about introducing changes that could create misconceptions about the Court. |
DIV’s goal is to support USAID’s mission and improve the lives of millions of people around the world within 10 years, especially those living in poverty or extreme poverty. To achieve this global development goal, DIV awards grants and cooperative agreements (in this report, collectively referred to as grants) to academic institutions, nongovernmental organizations, and businesses, among other types of organizations, to advance development-related innovations. DIV defines such innovations as novel business or organizational models, operational or production processes, or products or services that could lead to substantial improvements in addressing development challenges. According to DIV officials, the program does not outline specific problems to be solved or propose specific solutions but is intentionally open-ended, funding grants on the basis of three core principles: Evidence: rigorous evaluation of what works and what does not, scaling up only those solutions proven to produce demonstrable impact Cost-effectiveness: potential to deliver greater development impacts per dollar than traditional development assistance Potential to scale up: a plan to deliver and maintain widespread impact by increasing the geographic scope of operations and reaching financial sustainability beyond DIV’s support through private or public funding Managed at USAID headquarters, DIV takes a venture capital approach to investing in innovations, by awarding grants through a three-stage funding model. The model is intended to identify, evaluate, and scale up development innovations that demonstrate widespread impact and cost- effectiveness. According to DIV officials, the program developed this three-stage model as a risk mitigation approach. Stage 1—Proof of Concept. In stage 1, DIV provides small grants for testing the viability of an innovation in a real-world setting. Grantees must assess whether the innovation will yield results through evaluation or performance monitoring. Innovations that have demonstrated results and satisfied stage 1 criteria are eligible for stage 2 funding to support evaluations that will test for impact. Stage 2—Testing and Positioning for Scale. In stage 2, grantees determine, through rigorous assessments including impact evaluations, whether the solution can achieve larger-scale impact and can also be implemented successfully at a larger scale. Innovations that have credible evidence of development impact at stage 2 standards are eligible for stage 3 funding. Stage 3—Transitioning Proven Solutions to Scale. In stage 3, DIV funding supports innovations that seek to transition a solution from large-scale implementation to widespread adoption in one country or to replication in an additional country. DIV has established maximum funding amounts and project durations for each funding stage of this model, as shown in table 1. According to DIV officials, the staged funding model was not envisioned as an inevitable progression of projects from stage 1 to stage 3. For example, only 7 of 56 projects received stage 2 funding after having previously received a stage 1 grant. Grantees can receive funding at any stage without necessarily implementing a DIV project at an earlier stage, provided they meet the established requirements for that stage. For example, in many cases, stage 2 grantees have demonstrated a proof of concept prior to receiving a DIV grant. In addition, DIV places a particular emphasis on using rigorous evaluation methods, such as randomized controlled trials (RCTs), to determine impact. DIV officials noted that because DIV has set a maximum funding level of $150,000 for stage 1 grants, grantees conducting evaluation studies often require additional funding from a source other than USAID. DIV officials also noted that other funding sources may be required because the time frame for completing a study may extend beyond the duration of the DIV grant. In the case of projects at stage 2 or stage 3, the grantee has already tested its idea and requires funding to bring the project to scale. In fiscal years 2010 through 2015, DIV obligated approximately $72.5 million for innovation projects across nine sectors, including energy, economic growth, health, and education. DIV directed approximately 52 percent of project funding to two countries where it funded projects and 40 percent of funding to four grantees, which supported projects in India and Kenya, as well as other countries. In fiscal years 2010 through 2015, USAID obligated approximately $72.5 million for DIV grants, with annual funding rising from nearly $1 million in fiscal year 2010 to approximately $19 million in fiscal year 2015 (see fig. 1). The number of DIV grants increased from 8 in fiscal year 2010 to 41 in fiscal year 2013 and declined to 33 in fiscal year 2015. Overall, DIV has awarded 142 grants from over 7,500 applications submitted since July 2010. These awards consisted of 83 grants for stage 1 (Proof of Concept), 56 grants for stage 2 (Testing and Positioning for Scale), and three grants for stage 3 (Transitioning Proven Solutions to Scale). The three stage 3 grants represented 21 percent of overall DIV funding, as shown in figure 2. Overall, DIV has funded a range of projects across nine sectors, with the largest share of funding supporting projects in the energy sector ($16.6 million) and the economic growth sector ($15.8 million), as shown in figure 3. Two DIV projects in India, in the education and training sector and the energy sector, respectively, provide illustrative examples of the types of grantee organizations and innovations that DIV has funded. Education and training sector. In 2013, DIV awarded a $927,000 stage 2 grant to the Pratham Education Foundation to expand its evaluation of intensive learning camps in selected villages using a randomized evaluation, and determine if this model is a good candidate for implementation at scale (see fig. 4). The intensive learning camps were intended to improve learning outcomes for children in grades 3 through 5. The project organized and grouped students by ability, rather than grade level, to provide more focused instruction tailored to students’ learning needs. For example, for reading instruction, Pratham grouped students by their ability to recognize Hindi characters, words, and sentences, while for math instruction, it grouped students by their ability to recognize numbers. The project’s evaluation showed that the reading and math scores of students who participated in the learning camps increased by as much as 22 percent over the scores of students who did not participate in the learning camps. Energy sector. In 2011, DIV provided a $300,000 stage 2 grant to Mera Gao Power (MGP) to test whether its solar micro-grid system providing low-cost electricity to off-grid villages in India was commercially viable. After micro grids were installed, MGP’s customers paid a weekly subscription fee of approximately $0.27 for the use of two LED lights and one phone charger. An MGP staff member came to subscribing villages each week at prearranged times to collect customer payments in cash (see fig. 5). By the conclusion of the grant in March 2013, MGP had installed the service in approximately 180 villages, reaching 4,480 households—exceeding its targets of 40 villages and 4,000 customers. MGP officials told us in March 2015 that they had further expanded the service to approximately 17,000 customers and had secured external financing from an impact investment firm. While DIV has funded projects in 43 countries since 2010, over half of its project funding—roughly $37.8 million—is concentrated in India and Kenya where it has awarded 64 of its 142 grants (45 percent). Figure 6 provides information on the number of DIV projects by country, including those that were part of multicountry projects. In India, DIV funded 18 stage 1 projects and 21 stage 2 projects. In Kenya, DIV funded 14 stage 1 projects, 9 stage 2 projects, and 2 stage 3 projects. According to DIV officials, to support its global development goal, DIV awards grants through an open-ended process to applicants that best meet its criteria, regardless of geographic location. DIV officials stated that the program did not target or prioritize India and Kenya for the implementation of its projects, and that the concentration of funding in these two countries reflects the relative strength of their applications. These officials indicated that in recent years DIV had expanded its geographic distribution of projects and made efforts to work with USAID missions to promote the program in other countries. In 2015, for example, DIV funded 33 projects in 22 countries. However, our analysis of DIV data showed that the distribution of DIV projects remained concentrated—at over 40 percent of all DIV projects—in India and Kenya in fiscal years 2013 through 2015. DIV funding is also concentrated among its grantees, awarding roughly $29 million (40 percent of program funding) to four grantees—the Abdul Latif Jameel Poverty Action Lab at the Institute for Financial Management and Research (J-PAL/IFMR), Innovations for Poverty Action (IPA), Off Grid Electric Limited, and Georgetown University (see fig. 7). J- PAL/IFMR and IPA—research organizations that focus on evaluating development interventions using RCTs—have received a total of 31 (22 percent) of DIV’s 142 grants. J-PAL/IFMR received 13 grants, totaling $4.13 million, and IPA received 18 grants, totaling $14.1 million—the largest total amount awarded to a DIV grantee. In 2015, Off Grid Electric received a stage 3 grant totaling $5 million and is the only grantee to have received a grant for each of the three stages. These three grants supported the testing and expansion of an innovation to provide electricity to households in Tanzania with limited access to the electric grid. Georgetown University has received three DIV grants totaling $4.28 million, the third largest total dollar amount awarded to a DIV grantee. One of the grants to Georgetown University, a $3 million stage 3 grant, supports the expansion of an innovation to reduce traffic accidents in Kenya and other countries in East Africa. In a previous evaluation, researchers tested the effects of placing behavior change messages on stickers in buses that urged passengers to speak up against dangerous driving and encourage their bus drivers to slow down. They found that accident insurance claims for buses with stickers fell by half compared with claims for buses without stickers. As with the concentration by country, DIV officials stated that the concentration of funding among four grantees reflects the relative strength of their applications and that DIV did not target these organizations for awards. DIV has developed and is collecting data for several program-level performance measures, which show some positive outcomes, but has not established specific targets for these measures, making it difficult to assess DIV’s progress. DIV is in the process of developing a new results framework; however, our review of a draft version of the framework shows that it does not include performance targets. DIV has used various program-level measures to track performance since the beginning of the program, and DIV officials provided data that they have collected for these performance measures through October 2015 (see table 2). These range from process-oriented measures related to overall DIV program management to measures that capture results from specific grantees. Examples of process-oriented measures include tracking the length of time between receiving an application and the final decision on whether or not to make an award, and the length of time between approving an application and issuing the award. Examples of outcome-oriented performance measures include the percentage of projects conducting RCTs and the number of grantees that connect to outside sources of funding after the award of the DIV grant. DIV’s outcome-oriented measures, including those focused on bringing awards to scale, are similar to measures used by some venture capital firms. For example, DIV reported that as of October 2015, 11 of its grantees had obtained outside sources of funding after the award of the DIV grant, and 5 of its awards had scaled up through the public sector. Although DIV established performance measures and is collecting data that correspond to these measures, DIV officials stated in November 2015 that they have not established targets for these measures as a means for assessing DIV’s performance. Therefore, it is difficult to determine the level of performance that DIV is intending to achieve and to determine DIV’s actual progress against targets. Our past work has shown that, although agencies collect a significant amount of performance information, they have not consistently used that information to improve management and results. The GPRA Modernization Act of 2010 (GPRAMA) requires agencies to establish performance measures to assess progress toward goals. Moreover, we have previously identified practices for enhancing agency use of performance information, including communicating performance against targets. Without related targets, DIV may be unable to demonstrate to key stakeholders, including Congress and the public, that it is making progress in achieving agency goals. During the course of our review, DIV officials were in the process of developing a results framework for the program and provided us with a draft version of the framework. Although the draft framework provided an expanded list of indicators for measuring results, it did not include targets for these indicators. DIV officials did not provide a specific time frame for completing this results framework but stated that they expect to finalize the results framework in 2015. These officials stated that they are developing the results framework as part of an effort to better articulate and measure the program’s goals and to link to other related USAID programs. DIV officials also stated that, as part of this effort, they are outlining a monitoring and evaluation plan to inform learning objectives for the program. DIV has established and applied evidence-based requirements when awarding grants and assessing results, emphasizing the use of rigorous evaluation. For example, applications that DIV funded in India generally met the program’s evidence requirements, such as including evaluation plans. In addition, most completed DIV projects in India provided final reports and evaluations that corresponded with DIV’s evidence requirements. DIV also has recently taken action to ensure that the final reports and evaluations of its projects are publicly disseminated, as generally required by USAID policy. DIV emphasizes the testing of potential development solutions and rigorously evaluating impact, to scale up only those solutions with proven results. DIV outlines specific evidence requirements for each funding stage, with greater evidence of impact required, the higher the stage applied for. For example, while applicants for stage 1 grants are not required to provide evidence of prior testing of the proposed solution, they are required to present a plan for assessing results or impact, including specific metrics for success. Applicants for higher-stage grants are required to discuss prior experiences implementing or testing their solutions and evidence of successful development impact. Additionally, stage 3 applicants are required to discuss specific evaluation methodologies and findings. DIV encourages grantees to utilize rigorous evaluation methods, including RCTs, in their projects, while recognizing that RCTs are not appropriate in all cases. Our review of DIV project data showed that approximately 43 percent of its global portfolio, and 54 percent of projects in India, included an RCT to assess development impact (see table 3). Of the 103 DIV projects in countries other than India, 39 percent of these projects conducted RCTs. We found that DIV projects across all three stages conducted RCTs. DIV officials also stated that, although many awards use an RCT, this type of evaluation design is not applicable for every question being examined. However, these officials added that each grant does include a test of some sort and analysis of the data. Our review of DIV documents and meetings with India-based grantees found a number of examples of DIV projects in India that are employing RCTs as part of the DIV award. For example, two DIV grantees that we met with were evaluating the use of biometric fingerprinting technologies as a tool for making improvements in different aspects of India’s health care system. J-PAL/IFMR stage 2 DIV grant to evaluate the problem of absenteeism among medical staff in India through an RCT. Awarded in 2010, this study evaluated the impact of an intervention using a digital attendance and medical information system to monitor attendance of medical staff in government health centers in the state of Karnataka. J-PAL/IFMR randomly assigned primary health centers to treatment and control groups, and the treatment health centers were equipped with fingerprint reader devices and a mobile device for uploading attendance and patients’ data. The preliminary results of the program showed a modest effect on the attendance of nurses, pharmacists, and lab technicians, but no effect on the attendance of medical officers. Operation ASHA stage 2 DIV grant to evaluate the effectiveness of a fingerprint identification system in preventing the occurrence and lapses in the treatment of Multidrug-resistant tuberculosis (MDR-TB) through an RCT. Awarded in 2012, this project evaluated the effectiveness of fingerprint reader devices in preventing lapses in treatment of MDR-TB patients. These devices register the presence of patients and staff at treatment centers in receiving MDR-TB treatments, and Operation ASHA’s system informs TB counselors when a patient misses a treatment. Operation ASHA is carrying out the RCT involving about 12,000 patients across approximately 200 health centers to establish the effectiveness of the fingerprint identification system as a tool for ensuring patients’ compliance with their MDR-TB treatments. Our review of the applications for grants DIV awarded in India found that the applications generally met evidence and other requirements. We examined 33 of the applications to determine the nature and types of evidence and other information that they contained, as well as the extent to which they met DIV’s evidence requirements (see table 4). For example, we found that 31 of the 33 applications fully or partially provided information on how the innovation would be evaluated for impact. In addition, we determined that 16 of 19 applications that were awarded stage 2 grants provided evidence that the innovation had previously been tested for impact. We also found that 29 of the 33 applicants included an analysis or information on the innovation’s cost-effectiveness, although the level of information on cost-effectiveness varied among the applications. In some applications, for example, we found that the applicants discussed cost-effectiveness, but did not provide supporting data or analysis to compare the costs of their solution to competing solutions or traditional methods of delivering development assistance. Based on our review of DIV documents, we found that most DIV grantees in India provided final reports and evaluations that met DIV’s requirements. We reviewed grant agreements for 33 of the DIV projects in India, and these agreements contained specific requirements linked to estimated completion dates and funding amounts that would be disbursed upon completion of each milestone. The DIV grants we reviewed contained requirements for delivering final reports and evaluations, although these requirements varied across projects. For example, some grant agreements required specific elements to be included in the final report, such as an analysis of the cost-effectiveness of the project, while other grants generally required that a final report be delivered without requiring that the report include specified elements. We analyzed 18 DIV final reports and found that almost all of the reports provided information that met DIV’s milestone requirements for a final report or final evaluation (see table 5). Specifically, we found that 16 of the 18 projects met DIV’s requirements for completing a final report to close the grant agreement. In addition, we found that 10 of 13 projects completed the evaluation requirement. We also found that 13 of the 18 final reports we reviewed provided data on results and outcomes consistently with the methodologies discussed in the respective applications. In some cases, we found inconsistencies between the evaluation methodology discussed in the application and the corresponding information in the final report. When asked for clarification, DIV officials explained that, in some cases, during the award process they negotiated changes to grantees’ methodologies or implementation plans from what was initially discussed in the application, based on updates or contextual changes. In addition, we found that the 18 final reports for India generally addressed DIV’s three core principles: (1) evidence, (2) cost- effectiveness, and (3) potential to scale up (see table 6). For example, 17 of 18 final reports fully or partially provided evidence of the project’s development outcomes. We also found that 13 of the 18 final reports fully or partially provided information on DIV’s core principle of cost- effectiveness, although they varied in the levels and types of information provided. For example, the final report for a project testing a metered pricing system for off-grid power provided a detailed cost breakdown of the solar micro-grid system in comparison to the costs of competing energy sources, such as diesel generators and household solar panels. In another example, a grantee reported that undertaking a cost-benefit analysis was difficult because of the challenge of quantifying the intervention’s economic benefits, but it did report the cost of conducting the intervention. Finally, in five other cases, final reports did not include any discussion of cost-effectiveness. DIV has recently taken action to ensure that its final reports and evaluations are publicly disseminated, as is generally required by USAID policy. USAID’s policy states that evaluation findings should be shared as widely as possible with a commitment to full and active disclosure. A standard requirement for USAID grants, including DIV’s grants, is that grantees post final reports and evaluations from completed projects on USAID’s Development Experience Clearinghouse (DEC), the agency’s online repository of research information. This requirement was specified in DIV grant agreements we reviewed that were awarded after the requirement came into effect. However, when we initially reviewed the DEC in July 2015, it did not contain any DIV final reports or evaluations. After raising the issue with DIV officials, we searched the DEC again in November 2015 and found that it contained 87 total documents from DIV projects, including 46 final reports. These included 22 total documents and 13 final reports from projects based in India, and 64 total documents and 33 final reports from DIV projects in other countries. Appendix II provides a list of published studies by DIV grantees in India. DIV and other U.S.-funded innovation programs in India support similar objectives and beneficiaries, and in several cases these programs have funded the same types of innovations. Collaboration among these overlapping programs in India has been limited, which has contributed to missed opportunities to share information and leverage resources. During the course of our review, DIV began implementing an action plan intended to improve its collaboration with the USAID mission in India (“USAID India”) and other missions. However, the plan does not establish a joint approach to development among these programs. Without such an approach, USAID may not be capitalizing on opportunities to gain efficiencies and maximize the impact of its innovation programs. We identified several U.S.-funded innovation programs in India with similar objectives and beneficiaries, as shown in table 7. These overlapping programs award grants to promote proven innovations that will benefit poor, underserved populations in India. USAID India’s 2012- 2016 country development strategy has two objectives focused on innovation, including supporting innovations that impact those living in extreme poverty, and supporting innovations proven in India and disseminating them to other countries. To support these objectives, USAID India created several innovation programs similar to DIV. For example, in 2012 USAID India established the Millennium Alliance, an innovation grant program modeled on DIV. This program provides funding to Indian grantees that demonstrate cost-effective solutions that address the needs of the extreme poor in India. Like DIV, the program uses a staged funding model to make relatively small initial investments, test more developed solutions, and scale up those that have proven development impact through rigorous evaluations. USAID India also created the U.S.-India Partnerships program to overcome critical development challenges through new technologies and other innovations that can be rigorously tested, shared, and scaled up in India and abroad. State also funds innovations to support economic growth and clean energy for underserved populations in India through the U.S.-India Science and Technology Endowment Fund and the PACESetter fund, respectively. While these programs have similar objectives and beneficiaries, they also have some differences in the way they are implemented. For example, the Millennium Alliance and the U.S.-India Science and Technology Endowment Fund are managed in cooperation with the Indian government, while DIV is funded and managed solely by USAID. In addition, the USAID India Partnerships Program requires partners to share the costs and contribute at least $500,000 in cash and in-kind resources for a one-to-one match totaling at least $1 million, while DIV has no requirements for cost-sharing. Our review of project data for innovation programs in India identified examples in which these programs have funded innovations similar to those funded by DIV, as shown in figure 8. For example, both DIV and another program supported projects to test the viability of “clean” cook stoves in rural markets—that is, stoves designed to reduce air pollution and firewood consumption compared with traditional cook stoves. DIV and two other programs supported projects to provide inexpensive eye care and eyewear for poor and underserved populations. DIV and two other programs funded projects to support the development, testing, or implementation of micro grids for people living in rural areas who are unconnected to the power grid. USAID and State officials we interviewed in India stated that they generally supported the implementation of similar innovation programs in India by different organizations if the programs resulted in additional resources being made available to poor and underserved populations. According to these officials, there is a vast need for innovations, such as clean energy and off-grid electricity, which improve the lives of the poor in that country. In addition, State officials commented that in a country of 1.25 billion people, with significant diversity in cultural, linguistic, and religious norms, as well as considerable geographic diversity, different solutions to the same problem may produce varying levels of success in different contexts. These officials said that, as a result, it may be in some cases necessary to fund several similar or competing solutions in an effort to identify the few that demonstrate widespread impact and cost- effectiveness. USAID India officials added that because of the variety of difficult and intractable problems in India, the mission does not see it as problematic that there would be more than one activity aimed at addressing the same problem. We have previously found that several key practices that enhance collaboration, including articulating a joint strategy and common outcomes, agreeing on roles and responsibilities, and identifying and addressing needs by leveraging resources, can help manage programs with similar objectives and beneficiaries. Collaboration among U.S.- funded innovation programs in India has not routinely or systematically included these practices and, with some exceptions, has been limited to USAID India’s providing initial input to DIV regarding grant award decisions. During USAID India’s technical reviews of DIV applications, DIV routinely communicated with USAID India officials, requesting that the mission review applications for projects that DIV subsequently funded in India. USAID India officials rated the proposals, provided narrative information on the strengths and weaknesses of the projects, and in some cases raised concerns. However, according to DIV officials and a wide range of USAID India and State officials we spoke with in India, collaboration among programs beyond these examples has been limited and has not routinely included the key practices we identified. For example, these officials indicated that after award decisions were made, DIV and the other programs did not systematically share information about project results, or reach agreements on their respective roles and responsibilities, such as roles in coordinating planning for the use of grant funds or in monitoring the implementation of grants. State officials we interviewed in India who manage other innovation programs—such as the U.S.-India Science and Technology Endowment Fund and the PACESetter fund—stated that, while they were aware of some of the activities that DIV has supported in India, DIV had not communicated with these other agency programs to collaborate on ongoing or upcoming efforts. USAID India and State officials we interviewed in India who manage innovation programs under the India Partnerships program and the PACESetter Fund, among others, told us that limited collaboration among these programs and DIV had resulted in missed opportunities to share information and leverage USAID India resources by providing outreach and monitoring of project implementation and marketing DIV innovations. We have previously found that, without engaging in collaboration practices such as agreeing on roles and responsibilities or identifying common outcomes, overlap can have a negative effect in that limited resources may not be used in the most efficient and effective manner and opportunities may be missed to leverage resources. The following provide some examples of missed opportunities to share information and leverage the mission’s resources. Missed opportunities to provide outreach to DIV grantees and monitor project implementation. USAID India officials stated that in many cases, they did not know DIV grants had been awarded and thus missed opportunities to provide outreach and establish productive working relationships with DIV grantees in India because roles and responsibilities were not clarified. For example, USAID India officials from the India Partnerships program, and the health sector, cited examples in which DIV grantees had contacted USAID India seeking assistance but found that the mission was unaware that DIV had awarded grants to these organizations, limiting the effectiveness of USAID India’s outreach to them. In addition, USAID India officials stated that the mission’s and DIV’s respective roles and responsibilities were not always clear to USAID India officials or to DIV grantees, which negatively affected some grantees’ perceptions of USAID. USAID India officials also discussed missed opportunities to conduct project monitoring on DIV’s behalf, and DIV officials stated that they had not sought assistance from USAID India in monitoring DIV projects. Missed opportunities to market DIV innovations. USAID India and State officials responsible for promoting U.S.-funded clean energy projects in India, including those of the PACEsetter Fund, indicated that they had missed opportunities to share those results with the government of India or other stakeholders with the means to scale them up, if appropriate. For example, during a recent high-level U.S. government delegation’s visit to India, USAID India officials stated that they had missed an opportunity to highlight promising DIV projects focused on clean energy activities, because they were unaware of the projects’ results. Although collaboration among innovation programs in India has been limited, DIV officials provided some additional examples of communication and consultation with USAID India beyond the initial consultation on DIV applications. For example, USAID India and DIV jointly funded a project to rigorously test an innovation to increase full immunization rates in rural areas. This project is testing the viability of implementing the innovation in cooperation with the government system in the Indian state of Haryana. USAID India and DIV officials also discussed DIV’s consultations with the USAID India energy team and corresponding interactions between DIV grantees and the USAID India energy program, which was in contrast to more limited consultations between DIV and USAID India officials from other programs. During the course of our review, DIV officials, acknowledging that collaboration could be improved, began implementing an action plan to improve collaboration with missions and bureaus within USAID. The plan outlines steps to share information on DIV’s activities across the agency, including establishing DIV points of contact for outreach with missions and bureaus and developing tools for providing more frequent updates on DIV projects with the missions. The plan also discusses time frames for collaboration activities, including identifying opportunities for joint management and co-investment with missions on DIV projects. During our visit to India, a DIV official briefed staff at the mission about the DIV program and about its broader plans to increase outreach to USAID missions. DIV officials also provided us with additional examples of briefings and outreach that it conducted with other bureaus and missions. In addition, in 2015, DIV collaborated with the USAID mission in Jordan to hold a regional competition for innovators to pitch their ideas for development solutions to be considered for grants in the Middle East and North Africa region, where DIV has made the fewest awards thus far. We previously found that developing a joint approach among related programs, including reaching agreement on a joint strategy, common outcomes, roles and responsibilities, and leveraging resources, can improve collaboration and generate greater results than the programs could achieve independently. However, DIV’s action plan, while a promising step toward improving collaboration, does not yet represent a joint approach among the overlapping innovation programs that we identified in India. Thus, DIV cannot ensure that the benefits of its initial outreach efforts will be realized. DIV has not extended its action plan to include the similar innovation programs we identified outside USAID India, for example. Also, DIV has not harmonized its award selection processes with those of the other innovation programs to help ensure that funding similar projects is appropriate and not unnecessarily duplicative. Furthermore, DIV has not reached agreement with the other U.S.-funded innovation programs on a common approach to monitoring and evaluation of the projects they select to fund to help ensure that results from similar projects are being assessed consistently. Consequently, it may be difficult to determine which version of a technology or innovation has the greatest potential to scale up and where further U.S. support would have the most impact. USAID created DIV to demonstrate a new model of U.S. development assistance, and DIV’s approach has shown promise, especially through the rigorous evaluation of an innovation’s results and outcomes before determining whether to increase the agency’s investment to bring these innovations to scale. After 5 years of experience in implementing projects and testing its model in real-world situations, DIV has an opportunity to assess what results have been achieved and what lessons have been learned from these initial experiences. However, because DIV lacks clearly identified performance targets for its program, and its draft results framework does not contain targets, it is difficult to assess DIV’s overall progress toward achieving its goal of promoting global development for the poor through its portfolio of innovations. Since DIV was established in 2010, several other U.S. grant programs have emerged that overlap with DIV and in some cases have funded the same types of innovations. Although USAID’s mission in India prioritized innovation and modeled one of its programs after DIV, DIV and the mission collaborated to a limited extent during the implementation of DIV’s projects. As a result, DIV and the USAID mission in India have missed opportunities to share information and leverage resources. While DIV has begun implementing an action plan to improve collaboration with other USAID missions and bureaus, the action plan does not establish a joint approach, including reaching agreement on a joint strategy, common outcomes, or roles and responsibilities among all relevant programs and agencies. Thus, USAID may not be capitalizing on potential synergies among these innovation programs or maximizing their efficiency and impact. To help ensure that DIV is making progress toward achieving its global development goal, we recommend that the Administrator of USAID take the following two actions: 1. Establish performance targets that will allow periodic assessment of DIV’s progress toward achieving its goal. 2. Establish a joint approach to collaboration reflecting agreement with the USAID mission in India and with other related U.S. agency programs in India, and consider where such a joint approach would be beneficial in other countries. We provided a draft of this report to USAID and State for comment. USAID and State provided technical comments, which we incorporated into the report as appropriate. USAID also provided written comments, which are reprinted in appendix III. USAID agreed with our recommendations, stating that our review had helped identify areas for improvement. USAID also discussed steps it is taking to respond to the recommendations. With regard to the recommendation to establish performance targets that will allow periodic assessment of DIV’s progress toward its goal, USAID noted that it had recently established a results framework that includes targets and performance milestones to be assessed on a semiannual basis. With regard to the recommendation to establish a joint approach to collaboration with the USAID mission in India and with other agency programs in India, USAID discussed collaboration and coordination between DIV and the USAID mission in India that had occurred during the course of our review. USAID also stated that it would build on these collaboration efforts, discuss where improvements could be made, and take action to formalize them. We are sending copies of this report to the appropriate congressional committees, the Administrator of USAID, the Secretary of State, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3149 or gootnickd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. We were asked to review the U.S. Agency for International Development’s (USAID) Development Innovation Ventures (DIV) program. In this report, we examine the DIV program’s (1) distribution of funding and (2) efforts to measure progress toward achieving its goals, and for DIV’s activities in India, we examine (3) the extent to which DIV uses evidence to make funding decisions and assess results and (4) DIV’s collaboration with other similar U.S. development assistance innovation programs. To examine the distribution of DIV funding, we obtained and analyzed funding data for projects from fiscal years 2010 to 2015. These data included information on the stage of the project, the fiscal year, and the award start and end dates of the projects, among other things. Projects implemented in more than one country were counted as one project per each country. For example, by 2015 DIV had funded 33 individual projects in India and 6 projects that were implemented in multiple countries—of which India was one—for a total of 39 projects for India. To assess the reliability of these data, where possible, we cross-checked the data with other sources, evaluated the data for internal consistency, and interviewed agency officials knowledgeable about the data sources. We determined the data presented in this report to be sufficiently reliable for our purposes. To examine DIV’s efforts to measure progress toward achieving the program’s goals, we reviewed and analyzed DIV’s performance data and interviewed USAID officials in Washington, D.C. Specifically, we analyzed performance data publicly available on the USAID website, reviewed data and documentation on the DIV program provided by USAID, and interviewed officials in the DIV program office at USAID. To assess the reliability of these data, where possible, we cross-checked the data with other sources, evaluated the data for internal consistency, and interviewed agency officials knowledgeable about the data sources. We determined the data presented in this report to be sufficiently reliable for our purposes. Based on our analysis of USAID project data, we selected India as a nongeneralizable case study for two objectives. Of the 33 countries DIV had supported through 2014, India had received the largest amount of funding and had the largest number of projects. To examine the extent to which DIV uses evidence to make funding decisions and assess the results of projects it funded in India, we reviewed and analyzed DIV documents, including applications, final reports, and final evaluations. We focused our analysis on projects implemented in India, including multicountry projects where India was one of the countries where the project was being implemented, for a total of 33 projects. For the applications analysis, we reviewed USAID applications for funding through the DIV program, for multiple rounds, and developed a data collection instrument based on criteria in the application. We independently reviewed the applications and rated the extent to which the applicant responded to the question, supplying data and citations when necessary. We then reconciled any instances where the ratings of the initial and secondary reviewer did not concur. We aggregated and reported the outcomes of several questions we developed in the data collection instrument. For the final reports and evaluations, we reviewed the award letters for all 18 projects in India that had completed the grant agreement and submitted a final report or final evaluation. The award letters contain the terms and conditions of the grant agreement, including required tasks to be completed with the supporting documentation, to be submitted periodically to DIV by the grant recipient. We developed a data collection instrument based on DIV’s principles of testing and scaling innovations that demonstrate widespread impact and cost-effectiveness. In addition, we analyzed the award letters, the applications, and the final reports and evaluations submitted to DIV to determine the extent to which the methodologies in final reports and evaluations corresponded to the proposed methodologies in the application. Finally, we examined DIV’s collaboration with other similar U.S. development assistance innovation programs, using India as a nongeneralizable case study. We interviewed officials at USAID, the Department of State (State), the Department of Agriculture’s Foreign Agricultural Service (FAS), and the Department of Energy, in Washington, D.C. We traveled to the USAID mission in New Delhi, India, to interview officials from USAID, State, FAS, the U.S. Trade and Development Agency (USTDA), and the Department of Commerce, and to obtain information on any development and assistance innovation programs managed by the USAID India mission or the U.S. embassy. During our fieldwork, we observed DIV projects and interviewed grant recipients. We also identified programs at the USAID mission and embassy in New Delhi that had innovation and development components. We interviewed program officials from these agencies, including the Chief of Mission and the Deputy Chief of Mission, to obtain information on the programs and their experiences in collaborating with the DIV office in Washington, D.C. In addition, we analyzed program data that we obtained from DIV, and from USAID India and other agency officials in New Delhi, to determine the extent to which the DIV program overlaps with programs from USAID and other U.S. agencies in India, and has funded projects that could overlap or duplicate projects funded by U.S. agencies in India. DIV officials provided us with the following list of published studies relating to DIV projects implemented in India. Ashraf, Nava, Oriana Bandiera, and Scott S. Lee. “Do-gooders and Go-getters: Career Incentives, Selection, and Performance in Public Service Delivery.” Harvard Business School Working Paper, March 2015. Banerjee, Abhijit, Donald Green, Jennifer Green, and Rohini Pande. “Can Voters be Primed to Choose Better Legislators? Experimental Evidence from Rural India.” Working Paper, 2010. Borkum, Evan, Anitha Sivasankaran, Swetha Sridharan, Dana Rotz, Sukhmani Sethi, Mercy Manoranjini, Lakshmi Ramakrishnan, and Anu Rangarajan. “Evaluation of the Information and Communication Technology (ICT) Continuum of Care Services (CCS) Intervention in Bihar.” Mathematica Policy Research Report, May 8, 2015. Callen, Michael, and James Long. “Institutional Corruption and Election Fraud: Evidence from a Field Experiment in Afghanistan.” American Economic Review, vol. 105, no. 1 (2015): 354-381. Dhaliwal, Iqbal, and Rema Hanna. “Deal with the Devil: The Successes and Limitations of Bureaucratic Reform in India.” NBER Working Paper No. 20482, September 2014. Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. “The Value of Regulatory Discretion: Estimates from Environmental Inspections in India.” NBER Working Paper No. 20590, October 2014. Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. “Truth-Telling by Third-Party Auditors and the Response of Polluting Firms: Experimental Evidence from India.” The Quarterly Journal of Economics, vol. 128, no. 4 (2013): 1499-1545. Duflo, Esther, Michael Greenstone, Rohini Pande, and Nicholas Ryan. “What Does Reputation Buy? Differentiation in a Market for Third- party Auditors.” American Economic Review: Papers & Proceedings, vol. 103, no. 3 (2013): 314–319. Habyarimana, James, and William Jack. Results of a Large-scale Randomized Behavior Change Intervention on Road Safety in Kenya. Proceedings of the National Academy of Sciences, 2015. Karlan, Dean, and Leigh L. Linden. Loose Knots: Strong versus Weak Commitments to Save for Education in Uganda. No. w19863. National Bureau of Economic Research, 2014. Maitra, Pushkar, Sandip Mitra, Dilip Mookherjee, Alberto Motta, and Sujata Visaria. “Financing Smallholder Agriculture: An Experiment with Agent-Intermediated Microloans in India.” Hong Kong University of Science & Technology Institute for Emerging Market Studies Working Paper No. 2015-23, April 2015. David B. Gootnick, (202) 512-3149 or gootnickd@gao.gov. In addition to the contact named above, James Michels (Assistant Director), Jeremy Latimer (Analyst-in-Charge), Debbie Chung, Daniel Kuhn, Jill Lacey, Christopher J. Mulkins, Kyerion Printup, and Ozzy Trevino made key contributions to this report. | USAID established the DIV program in 2010 with a goal of creating a portfolio of innovations that contribute to reducing global poverty. Borrowing from the venture capital model, DIV seeks to identify and test innovative development solutions based on three core principles: rigorous evidence, cost-effectiveness, and potential to scale up. As of 2014, India was the largest recipient of DIV funding, representing approximately one-third of the program's portfolio. In this report, GAO examines the DIV program's (1) distribution of funding and (2) efforts to measure progress toward achieving its goals, and for DIV's activities in India, GAO examines (3) the extent to which DIV uses evidence to make funding decisions and assess results and (4) DIV's collaboration with similar U.S. development assistance innovation programs. GAO reviewed and analyzed DIV documents and data for fiscal year 2010 to 2015, and interviewed agency officials and grant recipients. GAO selected India as a nongeneralizable case study and conducted fieldwork in that country. From fiscal years 2010 to 2015, the U.S. Agency for International Development's (USAID) Development Innovation Ventures (DIV) program obligated approximately $72.5 million for innovation projects to reduce poverty across a range of sectors, including energy, health, and education. In India, for example, DIV funded intensive learning camps that group children by reading and math abilities rather than by grade level, and a solar micro-grid service providing lighting to off-grid customers for approximately $0.27 per week. While DIV has a global focus and is open to applications regardless of source, approximately 52 percent of its funding is concentrated in two countries, India and Kenya, and 40 percent of its funding is concentrated with four grantees. DIV is collecting data for several program-level performance measures, which show some positive outcomes, but has not established targets for these measures, making it difficult to assess DIV's progress. GAO's review of DIV's draft framework indicates that it does not include performance targets. DIV has applied evidence-based requirements for awarding grants and assessing results, emphasizing rigorous evaluations. Specifically, applications that DIV funded in India have generally met the program's evidence requirements, such as including evaluation plans. DIV grantees in India have also provided final reports and evaluations that generally met DIV's requirements. In addition, DIV recently has taken action to ensure that the final reports and evaluations of its projects are publicly disseminated, as generally required by USAID policy. DIV's limited collaboration with similar U.S.-funded innovation programs in India has contributed to missed opportunities to share information and leverage resources. DIV and several other U.S.-funded programs in India support similar objectives and beneficiaries. For example, the strategy of the USAID mission in India focuses, in part, on innovation and modeled its Millennium Alliance program after DIV. Such programs have funded some similar innovations, such as “clean” cook stoves and low-cost eyewear. Although DIV has begun implementing a plan to improve collaboration, it does not yet reflect a joint approach among similar programs, including those of other agencies. Without such an approach, DIV may not be capitalizing on opportunities to gain efficiencies and maximize the impact of its innovation programs. GAO recommends that USAID establish (1) performance targets to assess DIV's progress toward its goal and (2) a joint approach to collaboration for similar programs in India, while considering such an approach in other countries, as appropriate. USAID agreed with these recommendations and noted steps it is taking to implement them. |
According to the Centers for Disease Control and Prevention, contaminated foods cause an estimated 76 million illnesses in the United States each year, including 325,000 hospitalizations and 5,000 deaths. Illnesses stemming from contaminated meat and poultry are responsible for an unknown portion of these illnesses and deaths. The Federal Meat Inspection Act and the Poultry Products Inspection Act give USDA responsibility for ensuring the safety and wholesomeness of meat and poultry products that enter interstate commerce. There are about 5,000 meat and poultry slaughter and processing plants nationwide. According to the American Meat Institute, total meat and poultry production in 2000 exceeded 80 billion pounds and sales were estimated at more than $100 billion. In January 1998, FSIS began phasing in HACCP regulatory requirements for meat and poultry slaughter and processing plants. Large plants—those with 500 or more employees—were required to have HACCP systems in place by January 1998; small plants—those with 10 to 499 employees—by January 1999; and very small plants—those with fewer than 10 employees or annual sales of less than $2.5 million—by January 2000. As part of its oversight efforts to verify that plants effectively control food safety hazards, FSIS established standards for Salmonella in raw meat and poultry products and for visible feces on carcasses in slaughter plants.For Salmonella, FSIS established separate standards for the carcasses of cows/bulls, steers/heifers, market hogs, and broiler chickens, as well as for ground beef, ground chicken, and ground turkey. When a Salmonella test is scheduled, the FSIS inspector should take one sample each day the plant produces the product until a set is complete, according to FSIS guidance. The number of samples in the set depends on the product and ranges from a low of 51 samples for broiler chickens to a high of 82 samples for steers and heifers. On July 25, 2002, FSIS issued new, more- detailed guidance on actions the agency and plants will take after Salmonella set failures. When a plant fails a first set of Salmonella tests, FSIS will, among other things, notify the plant in writing of the failure and assess the plant’s HACCP procedures. After a second consecutive Salmonella set failure, FSIS will notify the plant that it must reassess its HACCP plan to determine if changes are needed. After the plant completes its reassessment, FSIS will conduct an in-depth verification review, among other things. With regard to the zero tolerance standard for visible feces, the FSIS inspector checks a prescribed number of carcasses on each production shift to verify that the plant has successfully eliminated visible fecal contamination. FSIS also requires plants to test meat and poultry carcasses for generic E. coli—bacteria that occur naturally in animals’ intestinal tracts—to help ensure that the plants are minimizing the risk that harmful bacteria may be on the carcasses. In December 1999, we reported that FSIS inspectors were confused about their authority to request changes to HACCP plans and recommended that FSIS clarify and provide FSIS inspectors with additional training on their roles, responsibilities, and authorities for reviewing and verifying HACCP plans. We also recommended that FSIS review all plants’ HACCP plans to verify that plants identify and control, through their HACCP plans, all food safety hazards that are reasonably likely to occur. In June 2000 USDA’s Office of Inspector General reviewed 57 HACCP plans from 15 plants nationwide and reported that 14 of the plants had at least one incomplete HACCP plan. The report made recommendations to ensure that hazard analyses were complete and all critical control points identified. In response to these reports, FSIS implemented the following additional oversight mechanisms: Food safety systems correlation reviews to improve the effectiveness of FSIS inspection activities. The reviews examine a range of FSIS plant inspection practices using a randomly selected sample of 10 percent or a minimum of 40 plants (whichever is greater) in an FSIS district. From April 2001 to May 30, 2002, FSIS had completed reviews in 7 of its 15 districts. Subsequent to each review, FSIS provides targeted training to inspectors on the basis of the review’s findings. In-depth verification reviews to examine plants’ compliance with HACCP plan design and implementation requirements. The reviews examine elements of plants’ HACCP plans, such as hazard analysis, critical control points, and critical limits, and their implementation of these plans. From February 2000 to June 30, 2002, FSIS had completed reviews in 57 plants. Consumer safety officers have been trained by FSIS in microbiological hazards, HACCP plan design, epidemiology, and statistics to, among other things, review the scientific basis of HACCP plans. FSIS had 32 consumer safety officers in its district offices as of May 30, 2002. FSIS plant inspectors have front-line responsibility for reviewing HACCP plans to ensure that they meet basic regulatory requirements. They use a “noncompliance record” to document violations of HACCP requirements and actions taken by plants to correct the violations. These records include the following information: A unique record number. The date of the violation. The oversight procedure that the inspector was performing (e.g., assessing the process for grinding meat) when the violation was discovered. The element of the HACCP system—monitoring, corrective action, record keeping, or plant verification—where the violation occurred. A written description of the violation. The plant management’s written response stating both the immediate action to correct the violation and any subsequent action to prevent its recurrence. If actions taken by a plant to correct a problem fail to prevent the violation from recurring, the plant is said to have a “repetitive violation”—a recurring inability to maintain compliance with HACCP requirements. According to HACCP regulations, repetitive violations indicate that a plant’s HACCP system is inadequate and that an enforcement action may be warranted. An enforcement action can also be taken for a single serious violation. FSIS may take the following types of enforcement actions: A regulatory control action, which includes the retention of product, rejection of equipment or facilities, slowing or stopping of production lines, or refusal to allow the processing of specifically identified product. This action is considered the least burdensome type of enforcement action and can be initiated by an FSIS inspector to quickly respond to violations that can be easily remedied. A withholding action is the inspector’s or district officials’ refusal to allow the USDA marks of inspection to be applied to the product. This action is used for more serious HACCP violations, such as repeated failure to maintain HACCP records adequate for inspectors to determine whether or not a product was adulterated. This action may affect all products in the plant or only those products produced by a particular process. When only a particular process is involved, the plant may continue with its other operations, but it may not distribute the affected product. A suspension is an interruption in the assignment of FSIS inspectors and, hence, production, in all or part of a plant. An FSIS district manager may suspend inspections when the violation cannot be resolved through a withholding action or there is an immediate threat to public health. The district manager may put a suspension on hold—“in abeyance”—to give the plant time to execute a plan to correct the violation and prevent its future recurrence. FSIS guidance recommends that suspension not be held in abeyance for more than 90 days. A withdrawal of the grant of inspection is the removal of FSIS from the plant. Under this rarely used action, taken only by the FSIS Administrator, a plant’s products cannot enter interstate or foreign commerce. According to the June 2000 Inspector General’s report, while some plants had received numerous noncompliance records for the same deficiency, FSIS’s inspectors had no understanding of what number, frequency, or nature of deficiencies would constitute a breakdown in the system requiring an enforcement action. The report further found that FSIS inspectors were unsure when to declare a plant’s corrective actions unworkable—a critical step in taking further enforcement action. According to FSIS’s food safety systems correlation reviews, inspectors are not consistently identifying and documenting failures of plants’ HACCP plans to meet regulatory requirements. Furthermore, FSIS does not expect its inspectors to determine whether HACCP plans are based on sound science—the cornerstone of an effective plan. While in-depth verification reviews examine the scientific aspects of HACCP plans, they have been conducted in very few plants, and consumer safety officers hired to review the scientific soundness of HACCP plans may take several years to assess the plans at all plants. Moreover, inspectors in 55 percent of the 5,000 plants nationwide did not document any HACCP violations during fiscal year 2001. When we brought this information to the attention of FSIS officials, they were surprised that so many plants had no HACCP violations for an entire year. FSIS’s food safety systems correlation reviews show that plants have deficiencies in their HACCP plans that FSIS’s in-plant inspectors did not identify and document in noncompliance records. Through May 2002, FSIS conducted food safety systems correlation reviews for seven districts and completed reports for six of those districts; it plans to complete reviews in the remaining districts by the end of fiscal year 2003. These reviews, which examine a random sample of plants in a district, compare inspection practices within a district to, among other things, better target inspector training. While examining the findings of the six completed district review reports, we found that a significant number of plants had deficiencies in their HACCP plans that FSIS inspectors had not identified and documented. For example, in about 91 percent of the plants sampled in three districts, inspectors had failed to issue noncompliance records for deficiencies in basic requirements such as the requirement that plants have adequate documentation to support the analysis of hazards in their HACCP plans. In 26 of 27 plants in one of the three districts, inspectors had not issued noncompliance records for HACCP plans that failed to include supporting documentation on the food safety hazards that were likely to occur. Inspectors also had not issued noncompliance records for 15 plants with plans that failed to address the three categories of hazards (biological, chemical, and physical) at each step of their production processes. In 10 of 14 plants in another district, inspectors had not issued noncompliance records for HACCP plans that had either not sufficiently documented decisions, not included all likely hazards, or not addressed specific pathogens. In the third district, inspectors had not issued noncompliance records for any of the 15 plants with HACCP plans that did not sufficiently document their hazard analyses. The food safety system correlation reports did not elaborate on the reasons for the lack of documented violations in noncompliance records. However, all the reports included the general observation that “a number of inspection personnel” were unclear about some of the basic requirements of the HACCP program. FSIS conducted in-depth verification reviews during calendar years 2000 and 2001 at 47 plants that it considered as having potentially serious food safety risks. The 47 plants included 31 that had failed to meet the Salmonella performance standard in two consecutive sets of tests; 8 that tested positive for Listeria monocytogenes on ready-to-eat meat or poultry products; 4 that tested positive for E. coli 0157:H7 on ground beef; and 4 for other concerns. We found that at 44 of these 47 plants, FSIS identified significant violations of regulatory requirements in HACCP plans. In 42 of these 44 plants, the HACCP plans did not include a complete hazard analysis to identify the biological, chemical, or physical food safety hazards that were reasonably likely to occur. One plant did not have the required documentation to substantiate the hazards that were identified in the hazard analysis. Instead, according to the FSIS review team, the hazard analysis was based on the personal experience and general knowledge of plant personnel. Another plant’s hazard analysis addressed some but not all parts of its production process where hazards could be introduced. Areas not addressed included returned products, packaging materials, and nonmeat ingredients. A third plant’s hazard analysis failed to identify a biological hazard as reasonably likely to occur for one product even though plant personnel were checking the product for pathogenic bacteria. Because the hazard was not identified in the plan and a critical control point was not designated for the hazard, no HACCP documentation was generated and no control measures were implemented to control the biological hazard throughout the process. In 35 of the 44 plants, the HACCP plans did not adequately identify critical control points in their processes where controls could be applied to prevent, eliminate, or reduce a food safety hazard to an acceptable level. One plant’s hazard analysis identified several biological and chemical hazards as reasonably likely to occur at various steps in the production process but did not establish critical control points to address those hazards. Another plant’s HACCP plan for its slaughter activities identified a biological hazard at the animal-receiving step. The plant did not establish a critical control point to address that risk. Instead, it identified USDA inspection activities as the control measure. FSIS regulations require the plant itself to have control measures for all hazards that it identifies as reasonably likely to occur. The in-depth verification reviews also showed that some plants may have a fundamental misunderstanding of what constitutes a hazard that is reasonably likely to occur. For example, when a plant fails a second set of Salmonella tests or a single test for Listeria monocytogenes or E. coli 0157:H7, it must reassess its HACCP plan to determine whether any changes are needed to prevent the problem from reoccurring. However, 15 of the 47 plants had not identified the pathogen that prompted the in-depth verification review as a hazard that was reasonably likely to occur. For example, the hazard analysis at one plant that had failed two consecutive Salmonella sets did not identify Salmonella as a hazard that was reasonably likely to occur—an “egregious” omission, according to FSIS’s report on the review for that plant. The in-depth verification reviews are useful in identifying deficiencies in the scientific aspects of plants’ HACCP plans. However, according to FSIS officials, they are too time- and resource-intensive to be implemented on a broader scale. As of June 30, 2002, FSIS had conducted reviews at 57 plants—or about 1 percent of the more than 5,000 plants nationwide. FSIS has recognized since HACCP’s inception that its inspection workforce did not collectively possess the skills needed to evaluate the scientific validity of HACCP plans. As a result, FSIS does not expect its inspectors to evaluate the scientific soundness of HACCP plans. In October 2001, FSIS introduced consumer safety officers with the scientific and technical skills to, among other things, assess the scientific soundness of plants’ HACCP plans. Initially, according to district office officials, the consumer safety officers were reviewing HACCP plans at plants where there was an indication of problems and were finding significant violations of HACCP regulatory requirements. In response to those findings, FSIS is taking enforcement actions to address potential food safety risks. For example, in one district, as of June 2002, consumer safety officers reviewed HACCP plans at 59 plants. As a result of these reviews, FSIS suspended 3 plants, sent letters to 17 plants indicating its intention to take enforcement action if changes were not made, and sent letters to 24 plants advising them to reassess their HACCP plans within 30 days to correct deficiencies. FSIS plans to have 352 consumer safety officers by September 2005: 32 consumer safety officers on-board as of May 30, 2002; 50 more in 2002, plus 25 veterinary medical officers who will perform consumer safety officer duties on a part-time basis; 105 new consumer safety officers in fiscal year 2003; and 140 in fiscal year 2004. An FSIS official estimated, however, that FSIS might need a total of 500 consumer safety officers, including cross-trained veterinary medical officers, to carry out HACCP oversight responsibilities. Initially, FSIS had planned to bring consumer safety officers on board more quickly and in greater numbers. According to FSIS officials, Congress did not approve FSIS’s fiscal year 2000 budget request to hire consumer safety officers and FSIS’s efforts to retrain existing staff to fill these positions have taken longer than FSIS anticipated. Officials in the two largest district offices (Alameda, Calif. and Albany, N.Y.) told us that it could take several years to ensure that all HACCP plans at all of the nation’s meat and poultry plants have a sound scientific basis if FSIS cannot bring consumer safety officers on board as quickly as expected. If this were to occur, an Alameda District official told us it would take at least 4 years for the two consumer safety officers it has now to review the more than 500 plants in the district. Similarly, an Albany District official estimated that its five consumer safety officers will need from 2 to 5 more years to review HACCP plans at the district’s more than 800 plants. FSIS’s headquarters and district officials told us that finding plants with zero HACCP-related noncompliance records for an entire year would be unusual. HACCP requirements are numerous, and FSIS inspects plants on a daily basis, which creates many opportunities to identify and document HACCP violations. And as one district official told us, there are no perfect plants. That notwithstanding, our analysis of information in FSIS’s inspection database showed that 55 percent of all plants had no documented HACCP-related violations during fiscal year 2001. (See table 1.) FSIS officials were surprised at the large percentage without violations. FSIS had not analyzed these data for an entire year. An FSIS field official told us that if inspectors are finding no HACCP violations for an entire year at so many plants, they may not understand their HACCP oversight responsibilities. As table 1 shows, the percentage of plants, by district, where no HACCP violations were documented on noncompliance records ranged from 38 to 66 percent. Officials in several districts acknowledged that they had reviewed reports that showed that some plants in their districts had no documented HACCP violations. According to FSIS officials, they had not analyzed the data for an entire year and were not aware of the extent to which no violations had been documented. Two officials told us that they had asked their circuit supervisors—who oversee FSIS’s in-plant inspectors—to investigate plants with no documented violations but that they had not asked the supervisors to report back to them with the results. In fact, at 10 of the 43 plants in which FSIS’s in-depth verification reviews found serious HACCP implementation problems, FSIS inspectors had not documented any HACCP violations on noncompliance records during the 12 months preceding the review. For example, at one of those plants, the in-depth verification review found that (1) corrective actions taken by the plant were not documented, (2) monitoring records did not show the time that product temperatures were checked, and (3) the required annual reassessment of the HACCP plan had not been done. Inspectors had not documented any of these violations. Although FSIS has implemented a variety of inspector training activities in response to our earlier report recommendations, it is clear that some FSIS inspectors remain uncertain about their roles, responsibilities, and authorities for reviewing and verifying plants’ compliance with HACCP requirements. Following a meeting we had with FSIS officials in June 2002 to alert them of our preliminary findings, FSIS informed us, in a letter dated August 2, 2002, that it was taking a number of actions aimed at addressing the problems we identified. With regard to inspector activities, FSIS stated that it is developing a directive explaining the responsibilities of inspectors under HACCP and has introduced an interactive computer tool for inspectors and others to use to strengthen HACCP problem solving using fictional scenarios. In its August 2, 2002 letter, FSIS also told us that the agency had developed supervisory guidelines that will be a reference for managers to use to verify that FSIS inspectors are carrying out their responsibilities, including “applying appropriate inspection methods; using effective regulatory decision-making; documenting findings appropriately; and when warranted, implementing enforcement actions properly.” The agency expects to train all field supervisors and implement the new guidelines by October 1, 2002, and believes it will then be better able to hold supervisors accountable for overseeing inspectors’ performance. The letter also stated that FSIS field offices are evaluating the results of the food safety system correlation reviews to determine how FSIS can improve the reviews and how it can use the reviews to strengthen inspectors’ effectiveness. According to our review of 1,180 noncompliance records from 16 plants for fiscal year 2001, plant inspectors have not consistently identified and documented repetitive violations of HACCP requirements. The lack of consistency occurs, in part, because FSIS has not established specific, uniform criteria for identifying repetitive violations. Moreover, even at the district level, officials’ understanding of the factors that should be considered in determining repetitive violations varied. Furthermore, we found that FSIS’s recently revised inspection data system lacks important summary information that managers need to oversee inspectors’ identification of repetitive violations and enforcement decisions. If FSIS does not consistently identify and document repetitive violations, it cannot properly and equitably enforce HACCP requirements. FSIS has not established specific criteria for its inspectors to use for determining when violations are repetitive. According to the noncompliance records we analyzed, inspectors did not use the same factors to identify repetitive violations of HACCP requirements. Table 2 shows the plant size and the number of noncompliance records and repetitive violations for the 16 plants we examined. We found the following variations: Inspectors differed in determining when a violation was repetitive, which led to inconsistent action on similar violations. For example, in one plant, two inspectors issued noncompliance records documenting three violations over a 15-day period that had the same inspection procedure (slaughter), element of the HACCP system (monitoring), and violation (fecal contamination). One inspector issued the first and second records 5 days apart; the other inspector issued the third record 10 days later. The first inspector did not link the first and second records and determine that the second record was repetitive. However, the inspector who wrote the third record linked it to the two earlier records, and determined that it was repetitive. Noncompliance records that contained the same information were not always identified as repetitive, which led to inconsistent action on the same violations and understating the potential seriousness of the problem. For example, on 23 occasions, an inspector in one plant wrote a noncompliance record followed within 2 days by another record containing the same information. However, the inspector linked the first record to the second and determined that the second was repetitive on only one occasion. Inspectors used different time limits in which violations could be linked as repetitive, which may misstate the seriousness of the problem. For example, inspectors at one plant used a calendar month. Violations occurring within the same month could be linked to one another as repetitive, but violations in a subsequent month could not be linked back to incidences in the previous months. Inspectors at another plant used a period of 4 years. At this plant, noncompliance records for some violations were linked as repetitive to as many as 225 other violations. FSIS has not given guidance on an appropriate length of time for linking violations, but for training purposes, it uses a rolling 90-day period as the time limit for linking violations as repetitive, meaning that an inspector would look back 90 days from the date of a violation. We also found that when inspectors identified violations as repetitive, they did not consistently document the basis for their decision—the record identification numbers of the previous violations. For example, at one plant, inspectors did not record the identification numbers for 75 percent of the previous repetitive violations, while at another plant, 46 percent of repetitive violations did not have this information. When documentation is lacking, FSIS cannot determine with any confidence the number of times a violation has been repeated and whether it warrants further enforcement action. At the district level, we found that officials in the 10 districts where we sampled noncompliance records used varying factors, such as the type of violation (e.g., fecal contamination) or element (e.g., record keeping), that they said should be considered important in determining whether violations were repetitive. District officials also disagreed on the time period in which violations could be considered repetitive; only one stated that they usually used the rolling 90-day period. FSIS’s Performance Based Inspection System, a database that captures the results of inspection activities, generates reports on the total number of HACCP inspections conducted and the percentage that resulted in violations. This information is reported by the type of inspection procedure (e.g., slaughter or processing) and the element of the HACCP system where the violation occurred (e.g., monitoring or record keeping). For example, the reports can identify the number and percentage of various HACCP inspection procedures at a plant that resulted in violations related to monitoring. FSIS’s managers told us they considered these reports adequate to identify the potential for a repetitive problem and trigger the need to explore individual noncompliance records to determine if a repetitive problem exists. Consistently and accurately linking repetitive violations is important because FSIS uses repetitive violations as a factor in assessing whether a plant has an effective HACCP system, whether an enforcement action is warranted, and whether the meat or poultry products from that plant are safe for consumers. However, the inspection database does not capture summary information on the number of repetitive noncompliance records an inspector issues to a plant, the nature of the repetitive deficiencies, or plant managers’ success or failure in taking effective preventive action. This type of summary information could assist managers in both overseeing inspectors’ performance and plants’ compliance with HACCP requirements. In addition, it could serve as one indicator for considering further enforcement action or for advising industry on the need to address a common problem. For example, managers could oversee inspectors’ performance by comparing inspectors’ rates of identifying repeat violations. If an inspector identified high rates, then a manager could investigate to determine if the inspector proposed or took further enforcement action. If the inspector identified low rates of repetitive violations, but the data showed high numbers of a particular type of violation, then managers could investigate to determine why these inspectors did not identify these as repetitive. Managers have some information on repetitive violations, but not in summary format. Inspectors enter information into the database on an electronic version of the noncompliance record. Once entered, FSIS inspectors, supervisors, and managers from almost any location nationwide can review these individual noncompliance records. However, to assess the extent of repetitive violations that a particular inspector identified, a manager or supervisor would need to view every noncompliance record—a cumbersome process. FSIS officials maintain that the individual inspector is responsible for assessing the extent of repetitive violations, making a professional judgment on the need for further enforcement action, and bringing this matter to the attention of managers. However, access by managers to summary information on the repetitive violations that inspectors already identified would facilitate management’s oversight of HACCP implementation. Although FSIS headquarters and district officials told us throughout our work that they had sufficient data on repetitive violations, in its August 2, 2002 letter, FSIS stated that it now recognizes that it needs to improve and strengthen its data systems to support management decision making on repetitive violations. The letter stated that FSIS has implemented several systems over the past 6 months in an effort to address its need for better inspection information from its data systems and is testing software that will enable district officials and managers to extract information and summary reports to help identify problem areas. The letter also stated that FSIS is pilot testing an early warning system for district officials that draws on data from various FSIS databases. FSIS is not ensuring that all plants take prompt and effective corrective action to return to compliance with regulatory requirements after violations have been identified in three areas. First, FSIS does not consistently ensure that plants quickly take effective action to eliminate repetitive violations, particularly those of the zero tolerance standard for visible fecal contamination. Second, FSIS does not ensure that plants take prompt action to meet the Salmonella performance standard after a second consecutive failure. Finally, when FSIS suspends inspection services at a plant because of serious violations, it generally places those suspensions in abeyance, allowing the plants to continue operating. However, it rarely identifies a time frame for the plant to take corrective actions, and it does not track the actual time the plant takes to make the correction. The longer that FSIS allows plants to remain out of compliance with regulatory requirements, the greater the risk that unsafe food will be produced and enter the marketplace. According to FSIS regulations, enforcement action is warranted when plants fail to demonstrate that their HACCP systems adequately prevent multiple or recurring violations. However, FSIS inspectors do not consistently initiate enforcement actions in such cases. For example, in the 1,180 noncompliance records we examined at 16 plants, the violation of FSIS’s zero tolerance standard for fecal contamination was the most common type of repetitive violation. Each time an inspector documents this violation, FSIS regulations require the plant to take corrective action to remove the contamination. However, FSIS did not take withholding or suspension enforcement actions at any of the 11 plants where repetitive fecal contamination was identified. For example, FSIS issued 96 noncompliance records to one plant for these violations and although 88 percent of these records were linked as repetitive, FSIS did not initiate a withholding or suspension enforcement action. District officials stated that FSIS did not initiate an enforcement action because the plant had “done a good job” of addressing violations that were brought to its attention previously and the number of noncompliance records issued to the plant for fecal contamination was “not out of line” for a large plant. In addition, the officials said that violations of the fecal standard are bound to occur and most of the fecal contamination was minuscule—about one- eighth to one-quarter of an inch in diameter. In another case, inspectors issued 154 noncompliance records to a plant for fecal contamination during the fiscal year, and they identified 109 of the deficiencies (71 percent) as repetitive, yet took no withholding or suspension enforcement action. For this plant, an FSIS official told us that the inspector did not recommend enforcement action because, in the inspector’s professional opinion, the findings did not warrant it. However, because fecal matter can harbor serious contaminants, including E. coli 0157: H7, any fecal matter is a potentially serious health risk. FSIS’s zero tolerance standard for visible feces recognizes this risk. At plants where FSIS conducted an in-depth verification review, the noncompliance records also indicate that FSIS is not ensuring that plants quickly take effective action to eliminate repetitive violations. For example, at one slaughter plant, over 9-months, FSIS inspectors documented 27 instances of animals presented for slaughter that had levels of antibiotic drug residues that exceeded the amounts allowed by FSIS. On the earliest noncompliance record we reviewed, dated August 2000, the FSIS inspector wrote that the finding of excessive drug residue indicates, “that there may be an inadequacy in HACCP plan to control food safety hazards identified in hazard analysis.” However, it was not until April 2001, 8 months later, that the plant implemented a program designed to prevent drug residues from entering its products. FSIS has not established consistent criteria for inspectors to consider when assessing whether repetitive violations warrant a withholding or suspension enforcement action. According to FSIS officials, the decision to pursue an enforcement action is left to the professional judgment of each plant inspector. However, some district officials and inspectors we interviewed indicated that they would benefit from having FSIS identify a uniform set of factors for them to assess when considering whether an enforcement action is warranted. These officials suggested, for example, the length of time between repetitive violations, the number of repetitive noncompliance records issued, the nature of the violations, and the plant’s efforts and/or success in implementing preventive actions. FSIS officials told us they recognize the need to establish criteria for assessing whether repetitive violations warrant enforcement action and are in the process of updating a policy directive to include such criteria. FSIS expects to implement this directive in early 2003. In addition, for repetitive violations, FSIS does not require inspectors to document whether they had considered and recommended or decided against an enforcement action. Such documentation would assist other inspectors at the same plant in determining whether enforcement actions are warranted when they issue additional noncompliance records for similar violations. This documentation could also assist supervisors and district office officials in overseeing plants’ implementation of HACCP requirements. FSIS does not ensure that plants take prompt corrective actions after they fail to meet the Salmonella performance standard. The HACCP regulations require that plants take immediate action to meet this standard if they have failed a set, but they do not explain what is meant by “immediate action.” However, our analysis of elapsed time shows that plants are not taking prompt corrective actions in these instances. After a plant fails a second consecutive set of Salmonella tests, FSIS requires the plant to reassess its HACCP plan to determine if it should make any changes. In addition, FSIS has conducted in-depth verification reviews to evaluate the design and implementation of HACCP plans at plants that failed a second set of Salmonella tests. In 2000 and 2001, FSIS conducted in-depth verification reviews at 31 of these plants. In one case, FSIS conducted an in-depth verification review at one plant that had failed three of the past four sets of tests. However, the failure that triggered the review was the first set in a new series. Following the in-depth verification review, 14 plants passed a third set of tests and 5 failed. As of April 2002, for the remaining plants, sampling was in process or FSIS was waiting to begin the third set of tests. As shown in table 3, our analysis of time frames for each step in the process, from first-set failure to passing a third set of Salmonella tests, shows that considerable time elapsed. These time frames are not consistent with ensuring that plants immediately meet the performance standard after a failure, as the regulations require. Our analysis showed that, on average, it took FSIS about 3 months from the date of the second-set failure to begin an in-depth verification review. Once the in-depth verification review was complete, an average of 2½ months elapsed before FSIS sent its “reassessment” letter to the plant listing all of the deficiencies in the design and implementation of the HACCP plan found during the review. In one case, the period from review to FSIS letter was 284 days—or more than 9 months. The reassessment letter instructs the plant to respond to FSIS in writing within 30 days stating the changes that will be made to meet the Salmonella performance standard. We found that plants came close to meeting this time frame—replying within 37 days on average. On the other hand, FSIS does not consistently require that plants quickly take steps to correct the deficiencies identified by the in-depth verification reviews. As shown in table 3, FSIS has allowed plants to take an average of 608 days—or over 1½ years—from their first- set Salmonella failure until the successful completion of a third set of tests. Over half that time, or about 11 months, elapsed from the date of the in-depth verification review until the successful completion of the third set of tests. For example, at one plant in the Dallas district, 18 months elapsed from the date of the in-depth verification review until the completion of the third set of tests. (See table 4.) Officials in the Dallas District Office told us that 5 months elapsed between the date of the in-depth verification review and FSIS’s reassessment letter largely because of the amount of time needed to incorporate all of the in-depth verification review team’s comments and complete the report of the review’s findings. About 8 months elapsed from the date of the plant’s response to the reassessment letter until the third set of Salmonella tests began because, according to the district officials, the district did not closely monitor the progress of the changes the plant was making and because the plant requested and received FSIS’s permission to delay the third set until those changes were made. Because plants may continue to produce products that could pose a Salmonella risk from the first-set failure until they pass, it is important that the second- and third-set tests be scheduled and completed as soon as possible. An FSIS headquarters official acknowledged that, in some cases, the time between the second and third set of Salmonella tests has been too long. However, the official stated that plants sometimes make significant changes to their operations after an in-depth verification review and the time needed to reassess, modify and validate HACCP plans can be considerable. Nonetheless, in the Dallas district case described above, at least a portion of the delays were due to inattentive oversight by FSIS. In its August 2, 2002, letter to us, FSIS said it has designed and is ready to test a tracking system for the in-depth verification reviews to assist the agency in keeping those reviews timely and to allow for trend analysis of review results over time. FSIS further stated in that letter that USDA’s Under Secretary for Food Safety, in consultation with the Secretary of Agriculture, established a new office—the Office of Program Evaluation, Enforcement and Review—to ensure that its programs and policies are implemented and monitored correctly. The new office, which began operating on July 15, 2002, will conduct in-depth examinations of FSIS policies to determine if the policies are adequate or if additional actions are needed. The new office began by looking at the Salmonella testing program to determine whether it is accomplishing all it should to protect human health. It expects to report its findings by mid-September 2002. In addition, FSIS noted, “using [the GAO preliminary findings] as a guide, has begun to assess the adequacy of the field staff’s implementation of HACCP.” This preliminary report is also due in mid-September. FSIS is also not ensuring that plants take prompt corrective actions when it places plants’ suspensions in abeyance. When a suspension is in abeyance, FSIS inspection services resume, and the plant continues operating while it makes corrections. In analyzing 60 HACCP administrative enforcement case files for 2001 for plants in the Albany, Alameda, and Madison districts, at which FSIS had suspended inspection services, we found that 57 of the 60 suspensions were placed in abeyance. In half of the suspensions that were in abeyance (28 of the 57 cases), FSIS placed the suspension in abeyance on the same day the suspension was issued. Because there was either no or very limited interruption in inspection services at the plant, the effect on the plant, in terms of economic loss or disruption, was negligible. On January 24, 2001, FSIS published policy guidance stating that no plant’s suspension should remain in abeyance for more than 90 days without a specific “operational reason,” such as a violation that involved a process that the plant operates intermittently. Limiting the time that suspensions can remain in abeyance was also FSIS’s practice prior to the January 2001 policy notice establishing a specific time frame. Our sample of the 57 enforcement cases included 30 plants that had suspensions in abeyance that were closed after the 90-day policy went into effect in January 2001. Of these 30 enforcement cases, only 1 was closed within 90 days. The average number of days from suspension in abeyance to case closure was 316 days, or over 10 months. According to FSIS officials in charge of enforcement in the three district offices where we reviewed enforcement cases, the 90-day time frame for holding suspensions in abeyance was not met because (1) the district office did not require inspection personnel to report to them on whether the plants had completed their corrective and preventive actions within the 90-day period, (2) it often took longer than 90 days for inspection personnel to inform the district office that plants had completed their corrective and preventive actions and the cases could be closed, and (3) closing these cases was a low priority for the district office. Further, none of FSIS’s “Notice of Suspension of Inspection” documents or other correspondence in the enforcement files for the 30 cases we examined specified a date by which corrective actions were expected to be implemented and their effectiveness verified. As long as FSIS does not establish specific deadlines for plants with suspensions in abeyance to correct their problems, plants have little incentive to quickly implement and verify the effectiveness of their corrective actions. In addition, we were generally unable to verify that violations were corrected before FSIS issued the letter ending the suspension in abeyance and closing the case. The enforcement case files frequently did not contain evidence showing how and when the district offices determined that the plants had completed corrective and preventive actions. However, in the Albany District Office, 6 of the 21 closed enforcement files contained correspondence from inspection personnel to the district office documenting how and when the plant had corrected the violation and recommending closing the case. An FSIS headquarters official responsible for enforcement activities told us that he would expect to see documentation showing how decisions were reached in all case files. Moreover, in the Alameda district office, two of the four plants we reviewed continued to have violations of the same requirements for which the plant was suspended, according to the inspectors’ documentation. Nevertheless, the suspension remained in abeyance, and FSIS did not take any further enforcement action. For example, one suspension that was placed in abeyance on the day it was issued in October 2000 was the result of the plant’s repeated failure to keep adequate HACCP records to verify that critical control points were being properly monitored to ensure food safety. In March 2001, inspectors documented three more instances of the plant’s failure to keep the same type of HACCP records and two more instances in the following months until the case was closed in September 2001. FSIS also allows plants to have multiple suspensions in abeyance in effect simultaneously, each for a separate production process, or to have sequential suspensions in abeyance that last for extended periods of time. As a result, a plant can continually struggle to meet requirements and require special regulatory oversight for an extended period of time and yet remain in business. For example, the plant in the Alameda District mentioned above had sequential suspensions placed in abeyance. In October 2001, just 1 month after the earlier suspension was lifted, the district office sent the plant a letter indicating FSIS’s intention to take enforcement action because of the plant’s failure to collect product samples for E. coli testing, as required by the HACCP regulations. On the basis of the plant’s response to the letter, the district office deferred any enforcement action for 90 days. Recognizing that this was a problem plant, in November 2001, the district had a consumer safety officer conduct a comprehensive review of the plant’s HACCP system. Owing to the HACCP design and implementation problems discovered by the consumer safety officer, such as deficiencies in the hazard analysis and record keeping, inspection was again suspended in early December 2001 and the suspension was placed in abeyance 2 days later. In January 2002, because of the plant’s failure to adhere to its October 2001 plan to improve its E. coli sampling procedures, inspection was again suspended and then placed in abeyance 1 day later. Alameda district officials told us they recommended to FSIS headquarters that FSIS withdraw this plant’s grant of inspection and were told that there was insufficient cause to take this action. In its August 2, 2002, letter to us, FSIS stated that an administrative enforcement data system, which it implemented in January 2002, “for distributing copies, tracking status, and querying for information on administrative actions” provides, among other things, “status reports show suspensions in abeyance to assist District Managers in assuring proper follow up at these establishments.” It further stated that it sets “very specific timelines for the plant to meet with respect to corrective or preventive measures” and that its “in-plant personnel conduct verification activities to ensure they are meeting the conditions outlined in the timeline. If do not follow through on the timeline/plan, the suspension is reinstated.” FSIS’s letter went on to note that “he average time for the closure of suspension actions placed in abeyance in [fiscal year] 2002 has been 105 days.” However, unlike our analysis, this average time is based on FSIS enforcement cases for violations of sanitation standards as well as HACCP enforcement cases and, as the letter points out, does not include an unspecified number of cases that remain open. Meat and poultry plants have many incentives to operate safely and certainly many appear to be doing so under HACCP. Nevertheless, FSIS’s oversight and enforcement needs to be improved to ensure that it is achieving its intended food safety objectives. FSIS inspectors are currently not consistently identifying and documenting violations of HACCP regulatory requirements, and FSIS has not assessed the scientific soundness of all HACCP plans in a timely manner. Moreover, some FSIS inspectors still do not have a clear understanding of their roles, and FSIS managers have not been diligent in overseeing inspectors’ activities. Finally, until consumer safety officers complete their assessments, some plants may be operating with unsound HACCP plans. These weaknesses limit the effectiveness of the HACCP system in reducing the risks posed by pathogens and contaminants on meat and poultry. With regard to identifying repetitive violations—signs that a plant may be struggling to fully meet HACCP requirements—FSIS’s inspectors and managers are confused about the factors that should be considered. Until FSIS establishes clear, consistent criteria for determining and documenting repetitive violations—and ensures that its inspectors and managers understand these criteria—serious problems may go unrecognized. The extraction of summary information on repetitive violations from FSIS’s inspection database would help determine, among other things, when repetitive violations might indicate problems common to an industry sector or an FSIS district. Finally, the longer that FSIS allows plants to remain out of compliance with HACCP requirements, the greater the risk that unsafe food will be produced. When plants do not take actions that promptly and successfully prevent repetitive violations—such as multiple recurring violations of the zero tolerance standard for visible fecal contamination—FSIS managers and officials must take enforcement actions to compel plants to revise their HACCP plans to address these problems. The system that FSIS has in place to address plants that fail Salmonella performance standards— allowing plants to operate while increased food safety risks persist for months and months—needs to be reexamined. Similarly, FSIS’s practice of placing a plant in suspension but then immediately putting the suspension in abeyance for protracted periods of time negates an important incentive for plants to quickly correct problems. While some corrective actions could take a significant period of time to implement—and placing a suspension in abeyance might be warranted when FSIS is sure that interim actions will provide for food safety—the circumstances should be clearly established and progress closely monitored and documented to ensure that plants are returning to compliance as soon as possible. To ensure that all HACCP plans fully meet regulatory requirements, we recommend that the Secretary of Agriculture direct FSIS to provide inspectors with additional training on their roles and responsibilities under the HACCP system and use data, such as the results from the food safety system correlation reviews, to help target training to address specific weaknesses; develop procedures for its field supervisors and district managers to use to monitor inspector activities, including, among other things, ensuring that FSIS inspectors are consistently applying HACCP requirements; develop a risk-based strategy and time frames for consumer safety officers to complete their reviews of HACCP plans at all plants; and develop a strategy for its supervisors, managers, and officials to systematically use data, including annual data on noncompliance records by districts, to help oversee plants’ compliance with HACCP requirements. To ensure that FSIS inspectors and district officials use consistent criteria for identifying repetitive violations of HACCP regulatory requirements, we recommend that the Secretary of Agriculture direct FSIS to establish specific, uniform criteria for identifying repetitive violations; ensure that inspectors consistently document repetitive violations; modify data management systems to capture the extent to which inspectors are identifying repetitive violations at plants; and develop a strategy for its supervisors, managers, and officials to systemically use available data, including summary information, to help identify repetitive violations. To ensure that plants take prompt actions to correct violations, we recommend that the Secretary of Agriculture direct FSIS to establish clear, consistent criteria for inspectors to use when considering whether to recommend suspension because of repetitive violations; require its inspectors to document the basis for their decision on whether or not to recommend further enforcement action based upon documented repetitive violations; develop guidance with specific time frames for actions to be taken at plants that fail a second set of Salmonella tests, including time frames for FSIS to initiate an in-depth verification review, report the results of the review, and initiate a third set of tests; establish, and document in enforcement case files, time frames for plants with suspensions in abeyance to implement and verify the necessary corrective actions; and document in the enforcement case file how and when the district office determined that the plant had completed its corrective actions and, if the suspension is allowed to remain in abeyance for more than 90 days, the reason for the extension. We provided USDA with a draft of this report for review and comment. USDA concurred with our recommendations but believes the report does not fully acknowledge FSIS’s progress and continuous efforts to ensure that all plants meet regulatory requirements. Noting that FSIS has placed significant resources into the processes and systems that provided the data for our study, USDA states that FSIS has efforts ongoing to evaluate the same data and has been open about addressing these and other similar concerns and the need for associated program improvements. USDA describes a number of actions that FSIS has recently taken or is planning to take that are consistent with our recommendations. We believe that our report accurately reflects the status of FSIS’s ongoing and planned actions. If fully carried out and given diligent management attention, these actions could go a long way toward addressing the problems we found in FSIS’s oversight and enforcement of HACCP in U.S. meat and poultry plants and helping to reduce the risk of foodborne illness for American consumers. USDA’s comments are presented in appendix II. USDA also provided technical suggestions, which we incorporated into the report as appropriate. We conducted our review from August 2001 through August 2002 in accordance with generally accepted government auditing standards. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the date of this letter. At that time, we will send copies of this report to the congressional committees with jurisdiction over food safety issues; the Secretary of Agriculture; the Administrator, Food Safety and Inspection Service; the Director, Office of Management and Budget; and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov If you have any questions about this report, please contact me or Erin Lansburgh at (202) 512-3841. Key contributors to this report are listed in appendix III. Our review of the Food Safety and Inspection Service’s (FSIS) enforcement of the Hazard Analysis and Critical Control Point (HACCP) requirements focused exclusively on domestic meat and poultry slaughter and processing plants subject to federal oversight. To assess whether FSIS is ensuring that plants’ HACCP plans meet regulatory requirements, we analyzed data from several sources. These sources included the following: The findings on the adequacy of HACCP plans from the food safety systems correlation team review reports in six districts. The findings concerning HACCP plans from FSIS’s reports for the 47 in- depth verification reviews of plants’ HACCP systems completed in calendar years 2000 and 2001. The approximately 700 HACCP-related noncompliance records written at plants where FSIS conducted an in-depth verification review to determine the type of deficiencies inspectors identified in the year prior to the review. FSIS’s Performance Based Inspection System database to identify the number of plants in each district where no HACCP-related violations were documented during fiscal year 2001. We also visited 17 plants in California to view their HACCP systems in operation and observe FSIS’s oversight. We visited plants in each of FSIS’s three size categories—large (500 or more employees), small (10 to 499 employees), and very small (fewer than 10 employees or annual sales of less than $2.5 million). The plants we visited were engaged in the slaughter and/or processing of chickens, turkeys, hogs, and cattle. We reviewed HACCP-related documents and discussed the plant’s HACCP system with FSIS officials at each of the plants we visited. In addition, we obtained information from headquarters and district office officials on the goals, training, and responsibilities of consumer safety officers. We also reviewed the HACCP regulations, FSIS directives and other policy documents, and interviewed FSIS officials from headquarters and the Technical Service Center regarding the agency’s approach to reviewing HACCP plans. To determine whether FSIS is consistently identifying repetitive violations of HACCP requirements, we judgmentally selected 16 plants located in 10 FSIS districts. We selected these plants from among those where FSIS frequently found violations in fiscal year 2001. Specifically, we selected our sample from among those plants where 8 percent or more of the time, when FSIS conducted a HACCP inspection, it found a violation. Only about 4 percent of the total plants subject to HACCP inspection met this criterion. We excluded from our sample any plants that are participating in FSIS’s HACCP-Based Inspection Models Project or those that had been subject to an enforcement action. Of the 16 plants we selected, FSIS considers 6 to be large, 7 small, and 3 very small. Ten of the plants we selected were poultry plants and 6 were beef plants. We analyzed all of the HACCP-related noncompliance records provided by FSIS for fiscal year 2001 at these 16 plants—in total 1,180 records—to determine the extent to which inspectors had identified repetitive violations. We interviewed district officials from the 10 district offices to determine the factors they consider important in determining whether violations were repetitive. The district officials we spoke to included district managers; assistant district managers for enforcement; HACCP inspection coordinators; managers of inspection staff at a group of plants in a district, known as “circuit supervisors;” and veterinarians and an inspector at plants. We also interviewed FSIS headquarters officials and district officials to discuss issues raised from our review of the noncompliance records. We reviewed FSIS’s policy documents and training materials related to determining repetitive violations. To assess whether FSIS is ensuring that plants take prompt and effective action to return to compliance after the agency has identified HACCP violations, we analyzed data from three different sources. First, we analyzed the type and rate of repetitive violations identified by inspectors in our sample of 16 plants and spoke to FSIS officials in district offices to discuss why no further action was taken. Second, we analyzed FSIS’s data on the 31 plants that failed a second set of Salmonella tests and, at which FSIS conducted an in-depth verification review, to identify the time that elapsed between the first, second, and third sets of Salmonella tests. Third, we analyzed the case files for 68 HACCP administrative enforcement cases that were active in fiscal year 2001 from three FSIS districts (Albany, Alameda, Madison). We selected these three districts because they represented large, medium and small enforcement caseloads and were located in three different regions of the country. Albany and Alameda are the districts with the largest number of plants. We interviewed the assistant district managers for enforcement in each of the three districts regarding the actions taken on these cases. We also spoke to FSIS headquarters officials about enforcement issues and reviewed FSIS’s policy documents related to HACCP enforcement. We conducted our review from August 2001 through August 2002 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the August 26, 2002, letter from the U.S. Department of Agriculture. 1. USDA believes the report does not fully acknowledge FSIS’s progress and continuous efforts to ensure that all plants meet regulatory requirements. It noted that FSIS has placed significant resources into the processes and systems that provided the data for our study and that FSIS has efforts ongoing to evaluate the same data. Our draft report acknowledges that in response to reports from GAO and USDA’s Office of Inspector General, FSIS initiated the food safety systems correlation reviews and in-depth verification reviews and recognizes that these reviews have been useful in identifying problems with HACCP implementation. USDA describes a number of actions that FSIS has recently taken or is planning to take that are consistent with our recommendations. Many of these actions, if fully carried out, may go a long way toward addressing the problems we found in FSIS’s oversight and enforcement of HACCP. However, diligent management attention will be needed to ensure this. 2. USDA believes that the title of the report is misleading. We disagree. We believe the title accurately reflects the concerns detailed throughout the body of the report. 3. The July 25, 2002, FSIS notice 28-02—Action to Be Taken in Establishments Subject to Salmonella Testing—does not establish specific time frames for actions to be taken at plants that fail a second set of Salmonella tests as we recommend. 4. While the September 5, 2001, notice 36-01—Rules of Practice— identifies FSIS’s various enforcement tools and general circumstances in which each type would be appropriate, it does not establish clear, consistent criteria for inspectors to use when considering whether to recommend a suspension as an enforcement action in response to repetitive violations. We are recommending that FSIS do so. 5. FSIS’s August 9, 2002, notice 29-02—HACCP Verification Procedures and the 30-day Reassessment Letter—addresses our recommendation for the need for additional training for inspectors on their roles and responsibilities. However, FSIS’s efforts to provide training for inspectors on their roles and responsibilities, in response to our previous report recommendation, were not fully effective. We are keeping this recommendation because it is too early to tell whether this effort will be effective. 6. Our draft report acknowledged that FSIS had established a new office to ensure that its programs and policies are implemented and monitored correctly. While the review of the Salmonella testing program does not directly address any of our recommendations, it may help FSIS to provide inspector training and procedures for field supervisors and district managers to oversee inspector activities— which we do recommend—with respect to Salmonella requirements. 7. FSIS directive 5000.1—Enforcement of Regulatory Requirements in Establishments Subject to HACCP System Regulations (including regulations on Sanitation Standard Operating Procedures, E. coli Testing and Criteria, and Salmonella Performance Standards)—should help FSIS address several of our recommendations, including those related to ensuring that all HACCP plans fully meet regulatory requirements and ensuring that plants take prompt actions to correct violations. 8. FSIS directive 4430.3—In-Plant Performance System (IPPS) Reviews— should respond to our recommendation regarding procedures to monitor inspector activities. FSIS is planning to implement the new directive and begin training supervisors in October 2002. We are keeping this recommendation to ensure the directive is implemented as planned. 9. This new interactive computer tool that inspectors, supervisors, and managers can use to strengthen HACCP problem solving using fictional scenarios. It should help FSIS address our recommendations regarding inspector training and supervisor oversight of inspector activities. 10. The draft report acknowledged the budget constraints regarding the hiring of consumer safety officers. 11. FSIS is still testing the PBIS 5.0 and district early warning systems, which should provide useful data for FSIS managers to carry out their HACCP responsibilities. 12. FSIS does not believe that plants are given too much time to comply with regulatory requirements. We disagree. Our review of enforcement case files found that, on average, these cases were closed in 10 months rather than the 3 months (90 days) recommended by FSIS. In addition, while it may be FSIS’s policy to establish specific time frames for plants to make corrective actions, none of the 30 enforcement case files we examined for plants with suspensions in abeyance that were closed after the 90-day policy went into effect contained this information. 13. We were not able to determine whether there has been improvement in the average amount of time it takes FSIS to close HACCP-related suspensions in abeyance because the data FSIS provided us with included suspensions for both sanitation violations as well as those for HACCP violations. In addition, when they are closed, it is not known how the unspecified number of cases that currently remain open will affect the average closure time. 14. We did not question the appropriateness of plants having multiple suspensions. Rather, we questioned the appropriateness of placing suspensions in abeyance at plants that have had repeated problems or multiple problems. The examples cited in our report involved (1) a plant suspension that remained in abeyance even though the plant continued to violate the same requirements for which it had been originally suspended and (2) a plant that had multiple sequential suspensions placed in abeyance. In addition to those named above, Leo G. Acosta, Judy K. Hoovler, James L. Ohl, and Stephen D. Secrist made key contributions to this report. | Every year, some meat and poultry products are contaminated with microbial pathogens--such as Salmonella and E. coli--that cause foodborne illnesses and deaths. To improve the safety of meat and poultry products, the U.S. Department of Agriculture's (USDA) Food Safety and Inspection Service (FSIS) introduced additional regulatory requirements for meat and poultry plants. These requirements are intended to ensure that plants operate food safety systems that are prevention-oriented and science-based. These systems, called Hazard Analysis and Critical Control Point (HACCP) systems, were phased in from January 1998 through January 2000 at all meat and poultry slaughter and processing plants. As the foundation of the HACCP system, plants are responsible for developing HACCP plans that, among other things, identify all of the contamination hazards that are reasonably likely to occur in a plant's particular production environment, establish all of the necessary steps to control these hazards, and have valid scientific evidence to support their decisions. GAO found that FSIS is not ensuring that all plants' HACCP plans meet regulatory requirements. As a result, consumers may be unnecessarily exposed to unsafe foods that can cause foodborne illnesses. In particular, FSIS's inspectors have not consistently identified and documented failures of plants' HACCP plans to comply with requirements. In addition, although sound science is the cornerstone of an effective HACCP plan, FSIS does not expect its inspectors to determine whether HACCP plans are based on sound science because inspectors lack the expertise to do so. FSIS is not consistently identifying repetitive violations, according to GAO's review of 1,180 noncompliance records for fiscal year 2001. This has occurred, in part, because FSIS has not established specific, uniform, and clearly defined criteria for its inspectors to use in determining when a violation is repetitive. Furthermore, at the district level, FSIS officials' understanding of the criteria to consider in determining if a violation is repetitive varied. Also, in several instances, inspectors have not fully documented the basis for their decisions about repetitive violations on noncompliance records. FSIS is not ensuring that plants take prompt and effective action to return to compliance after a HACCP violation has been identified. The longer that FSIS allows plants to remain out of compliance with regulatory requirements, the greater the risk that unsafe food will be produced and marketed. |
Eradication of infectious diseases involves reducing worldwide incidence to zero, thereby obviating the need for further control measures. Elimination of infectious diseases involves reducing morbidity to a level at which they are no longer considered major public health problems. Elimination still requires a basic level of control and surveillance. Global disease eradication and elimination campaigns are initiated, primarily by WHO, to concentrate and mobilize resources from both affected and donor countries. WHO provides recommendations for disease eradication and elimination to its governing body, the World Health Assembly, based on two general criteria—scientific feasibility and the level of political support by endemic and donor countries. Formal campaigns were initiated for dracunculiasis and leprosy in 1991, and for polio and lymphatic filariasis in 1988 and 1997, respectively. Regional or subregional campaigns are also underway against measles, onchocerciasis, and Chagas’ disease. Disease eradication and elimination efforts are normally implemented by national governments of the affected countries. Developing countries typically receive assistance from bilateral and multilateral donors, nongovernmental organizations, and the private sector. Developing costs and time frames for these efforts is difficult due to challenges in gathering and verifying data from countries with minimal health infrastructure. Unpredictable and unstable country conditions, such as civil unrest, further complicate efforts to project how much these efforts will cost and how much time is needed. The appendix at the end of this statement provides a breakdown of costs and time frames for eradicating or eliminating each disease. WHO’s cost and time frame estimates, with the exception of measles, addressed all five of the relevant factors. However, the completeness of the data underlying the estimates varies by disease. Generally, estimates for those diseases with long-standing eradication or elimination campaigns are more complete, as the underlying data are based on actual experience in endemic countries. For the other diseases, WHO is still gathering data and refining its assumptions. Estimates for diseases with target dates of 5 years or longer are more speculative due to incomplete data and the difficulty in predicting sustained commitment and stable country conditions. We will briefly discuss the estimates for each disease and the barriers to be overcome. WHO’s cost estimate of $40 million for eradicating dracunculiasis included data on each of the five key factors and appears to be sound. Community-based programs to control this disease have been underway since 1980. Continuing civil unrest in some endemic areas of Africa precluded meeting the original 1995 target date for eradication. WHO now expects that all countries except Nigeria and Sudan will be free of dracunculiasis by 2005 at the latest, assuming safe access and appropriate funding. WHO’s cost estimate includes certification costs that will continue until 2011. The Centers for Disease Control and Prevention (CDC) and officials from the Carter Center believe that some country-level eradication goals may be met even sooner than WHO estimated. The main barrier to eradication is ongoing civil strife in the endemic region. Experts also point to the need for continued national and donor support. WHO’s cost estimate of $1.6 billion for eradicating polio is generally sound. It includes well-developed data on all five factors based on experience in controlling the disease. Many countries began polio vaccinations in the 1970s and 1980s. Most experts agreed that global interruption of the wild polio virus will occur by 2002 or shortly thereafter. Global certification is to take place about 3 years after the last case is reported—probably around 2005. However, some experts have raised concerns about the ability of less developed countries to maintain the required level of polio vaccinations and surveillance until eradication is achieved. In addition, WHO is concerned about the ability of some countries to detect and report acute flaccid paralysis, a key component of polio surveillance. According to WHO, unless sufficient resources are mobilized to improve detection capability, eradication cannot be certified. WHO’s cost estimate of $225 million for eliminating leprosy includes well-developed data on all key elements and appears to be sound. The current elimination strategy is based on the multidrug therapy begun in 1981. Endemic countries have made great progress toward eliminating leprosy since that time, but some challenges remain. WHO noted that it is possible that some countries with concentrated pockets of leprosy might need to continue campaigns beyond the target year 2000 to reach the global leprosy elimination target of less than 1 case per 10,000 people. In addition, ongoing civil strife in endemic areas and difficult country conditions may preclude meeting all targets. Also, since leprosy patients are often ostracized and hidden, case identification is difficult. However, experts generally agreed that WHO’s cost and time frame estimates appeared reasonable. WHO’s estimate of $4.9 billion for global measles eradication by 2010 is speculative. While vaccine costs are well known, we found several areas in which the current estimates may be low or based on incomplete data. Essentially, data are incomplete regarding the number of children to be vaccinated, administrative costs, the number of mass campaigns that may be needed, and the costs of surveillance in less developed countries. Finally, the estimate does not include certification costs. WHO officials noted that they used information from their previous experience with polio eradication in developing the measles estimate. The vaccine administration and surveillance costs for polio are adjusted upward to account for difficulties in administering an injectable rather than an oral vaccine. Many international health experts believe that measles is the next candidate for a formal global eradication effort, pointing to some successes in controlling measles in the Americas as well as support from developing countries where measles is a major cause of mortality among children. However, experts also point out that there are some challenges to eradicating measles by 2010. Measles is highly contagious, requiring higher routine vaccination rates than smallpox and polio. In addition, outbreaks can occur even in areas of high routine vaccination coverage. Furthermore, costly mass campaigns are necessary to catch those still susceptible after routine vaccination because the vaccine is not 100-percent effective. Finally, some industrialized countries do not perceive measles to be a major public health problem and have not initiated measles elimination efforts. More than half of the estimated cost of measles eradication is expected to be incurred by developed countries. WHO and CDC estimate the cost of eradicating measles in less developed countries at up to $1.8 billion. WHO’s estimate of $143 million for eliminating onchocerciasis is speculative. It incorporates data on all key cost elements, but data on the size of the target population are incomplete. The control programs for West Africa and Latin America have been ongoing for a period of time and are likely to reach their elimination targets within or near the costs and target dates estimated by WHO. However, WHO is still mapping disease prevalence for the 19 African countries in the most recent control program. WHO’s earlier estimates may have underestimated the population eligible for treatment upon which the cost and time frame estimates were based. For example, the latest estimate for those to be treated in this area is 42 million, compared to the original estimate of 35 million. Also, WHO does not yet have a reliable estimate on the number to be treated in the Democratic Republic of the Congo (formerly Zaire). Although WHO included data on all cost factors, the $391 million estimated for eliminating Chagas’ disease is speculative for two reasons—not all countries have submitted estimates, and countries that are targeted for elimination of Chagas’ disease by 2010 only submitted estimates through 2005. The first regional program began in the southern portion of South America in 1991. Data from this region are more complete, and the program appears to be on track for completion by 2005. However, the efforts in the Central American and Andean countries only began last year and are targeted for completion by 2010. Costs and time frames in these countries are less certain because three countries have not submitted cost estimates or prevalence and incidence data, and all countries submitted cost data only through 2005. The $228 million estimated for eliminating lymphatic filariasis is very speculative. While all cost factors were addressed in the estimates, the data are very preliminary. WHO has limited historical data on costs because formal campaigns have only recently begun in some of the 73 countries in which lymphatic filariasis is known to be endemic. Also, WHO has not yet completed its assessments to establish the number of people to be treated in endemic countries and to determine whether there are other endemic countries. The United States currently spends about $391 million a year on these diseases. This includes about $300 million on polio and measles prevention programs and leprosy treatment in the United States and about another $91 million abroad for all the diseases under discussion except leprosy. Most of this amount would be saved if eradication and elimination goals were met and efforts to combat the diseases were ceased or reduced. The overall savings to the United States if polio were eradicated are estimated to be at least $304 million a year. This includes about $230 million in public and private expenditures—including administration—for controlling polio within U.S. borders and about $74 million for the global eradication efforts. CDC estimates that an additional $20 million will be spent in the United States each year due to a 1996 CDC recommendation to administer two doses of the more expensive injectable vaccine before the two doses of oral vaccine. The overall savings to the United States as a result of eradicating measles are estimated at about $61.7 million a year, including about $50 million for domestic vaccine costs and about $11.7 million for global measles efforts. The $50 million only includes the cost of the vaccine and not administration expenses. Immunization against measles is included in the vaccine for mumps and rubella, and the United States would continue administering the mumps and rubella vaccine even if measles were eradicated. Additional savings would be realized from preventing periodic measles epidemics in the United States. CDC estimates that the last measles epidemic of 1989-1991 cost $150 million. The United States spends about $25 million a year for the other five diseases. The U.S. Department of Health and Human Services spends about $20 million a year to treat a small number of leprosy patients in the United States. The U.S. Agency for International Development (USAID) funds the dracunculiasis effort at $500,000 a year and the onchocerciasis control programs at $3.5 million a year. CDC spends more than $1 million for overseas efforts against dracunculiasis, Chagas’ disease, and lymphatic filariasis. The United States does not currently track domestic costs related to Chagas’ disease. However, U.S. blood banks may begin screening donated blood for the disease due to a significant number of infected Latin American immigrants in certain areas. An American Red Cross official estimated that this would cost about $25 million a year. International public health experts identified several diseases that pose health threats to the United States and that are technically possible to eradicate with existing vaccines: rubella, mumps, hepatitis B, and Hib. CDC suggested rubella and mumps could be considered as part of the measles eradication effort, since vaccinations against all three are often administered in one trivalent shot. CDC estimated that the United States spends about $255.5 million a year in administering this vaccination. Rubella is considered a significant health burden in the form of birth defects and is being discussed as an eradication initiative for the Americas. However, health experts generally believe that the costs to eradicate mumps would be difficult to justify because the global burden is considered low. The primary challenges in eradicating rubella and mumps are diagnostic difficulties and the additional costs that would be incurred. Hepatitis B is considered a possible candidate because the vaccine is effective and relatively inexpensive, and a good diagnostic tool is available. Hepatitis B is viewed as a major public health threat, causing almost 1.2 million deaths per year, usually from liver cancer or chronic liver disease. CDC estimates that the U.S. public and private sectors spend from $308 million to $383 million a year for hepatitis B vaccines alone. The major barrier to an eradication initiative is that some people are chronic carriers and would have to die before the disease could be considered eradicated. Hib is a bacterial infection that is the most common cause of childhood meningitis. About 400,000 to 700,000 children in developing countries die each year from the disease. U.S. public and private sectors spend about $162 million a year on Hib vaccines. According to CDC, Hib has potential for eradication, but more needs to be known about the vaccine before this disease could be an eradication candidate. WHO told us that rubella, hepatitis B, and Hib could be eventual candidates for eradication due to their associated public health burdens and the success in controlling these diseases in some parts of the world. However, they noted that, due to the high costs associated with eradication efforts, it is important to limit the number of ongoing efforts, and they do not support adding campaigns at this time. As the first and only disease to be eradicated through human intervention, smallpox is used as evidence that disease eradication is technically feasible. According to some experts, the smallpox effort yielded lessons that have since been applied to other efforts, such as the role of surveillance and the ability to garner resources for massive campaigns. It also showed that eradication can be cost-effective. Using 1967 estimated smallpox costs as a baseline measure and adjusting for annual birth rates, we estimated the cumulative present value global savings in 1997 dollars for the period 1978-1997 at $168 billion. For the United States, cumulative savings from smallpox eradication are estimated at almost $17 billion. The United States spent about $610 million in 1997 dollars for domestic smallpox control in 1968 and about $130 million in 1997 dollars during 1968-1977 on the overseas eradication effort. We estimated the annual real rate of return for the United States at about 46 percent a year since smallpox was eradicated. Smallpox had characteristics that experts consider desirable for eradication. The disease was easily diagnosed, and all infection resulted in visible symptoms. The vaccine was effective in only one dose, stable in heat, and inexpensive. Polio and measles share many of the desirable eradication characteristics of smallpox. Both diseases are caused by viral agents, are found only in humans, and have effective interventions available that provide long-lasting immunity. However, certain differences exist that may limit the usefulness of smallpox as a model for other eradication efforts. Smallpox was less infectious than either polio or measles and required less immunization coverage. Polio and measles require mass campaigns in addition to routine coverage to interrupt virus transmission. Polio and measles are also difficult to diagnose without laboratory confirmation. The vast majority of polio infections show no symptoms, and the typical paralytic manifestations of polio can be due to other causes. Dracunculiasis differs from smallpox in that is a parasitic disease and not vaccine preventable. However, like smallpox, it is vulnerable to eradication because the interventions are inexpensive and effective, and the infection is easily diagnosed. Mr. Chairman, this concludes our prepared remarks. We would be happy to answer any questions you or the Committee members may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO discussed the World Health Organization's (WHO) estimates for eradicating or eliminating seven infectious diseases--dracunculiasis, polio, leprosy, measles, onchoceriasis, Chagas' disease, and lymphatic filariasis--worldwide, focusing on: (1) the soundness of WHO's cost and timeframe estimates; (2) U.S. spending related to these diseases in fiscal year 1997 and any potential cost savings to the United States as a result of eradication or elimination; (3) other diseases that international health experts believe pose a risk to Americans and could be eventual candidates for eradication; and (4) U.S. costs and savings from smallpox eradication and whether experts view smallpox eradication as a model for other diseases. GAO noted that: (1) WHO and other experts it contacted generally agreed on five factors necessary to estimate the cost of eradicating or eliminating a disease: (a) product costs; (b) information on disease incidence, prevalence, and the size of the target populations; (c) administrative and delivery costs; (d) disease monitoring and surveillance costs; and (e) primarily for eradication, the costs of certifying that countries are free of the disease; (2) GAO focused its assessment on the accuracy and completeness of the underlying data for these five factors; (3) WHO's estimates and GAO's analysis did not include an assessment of opportunity or indirect costs that may be incurred as a result of eradication campaigns; (4) the soundness of WHO's cost and timeframes varied by disease; (5) generally, the estimates were most sound for those diseases closest to meeting eradication or elimination goals, including dracunculiasis, polio, and leprosy; (6) estimates for these three diseases were based on firm data about target populations and intervention costs from ongoing initiatives; (7) for the other diseases, WHO's estimates are more speculative because underlying data are incomplete or unavailable; (8) WHO officials acknowledged this fact and said that estimates are continuously revised as better data become available; (9) the United States spent about $391 million in 1997 to combat these diseases; (10) the United States spent $300 million on polio and measles prevention and on leprosy treatment in this country; (11) about another $91 million went for overseas programs, primarily the polio eradication campaign; (12) savings to the United States from eradicating or eliminating these diseases would result primarily from not having to vaccinate U.S. children against polio and measles; (13) experts GAO contacted identified four other diseases that pose health threats to the United states and could be possible candidates for eradication; (14) WHO told GAO that, while it may be technically possible to eradicate these diseases with existing vaccines, the international community cannot support too many eradication initiatives at one time; (15) the United States has saved almost $17 billion as a result of the eradication of smallpox in 1977; (16) the savings were due to the cessation of vaccinations and related costs of surveillance and treatment; (17) experts generally agreed that the primary lesson from smallpox is that a disease can actually be eradicated; and (18) however, smallpox had unique characteristics that made it particularly vulnerable to eradication and therefore has limitations as a model for current efforts. |
Over the past 2 years, the term “Year 2000 Problem” has become increasingly familiar. This problem is rooted in the way in which automated information systems have, for the past several decades, typically represented the year—using two digits rather than four—in order to conserve electronic data storage space and reduce operating costs. Thus 1998 would be represented as simply 98. In this format, however, 2000 is indistinguishable from 1900 because both are represented only as 00. As a result, if not modified, computer systems or applications that use dates or perform date- or time-sensitive calculations may generate incorrect results beyond 1999, reading 00 as 1900 rather than 2000. As we testified before the Congress a year ago, correcting this problem, in government as in the private sector, will be labor-intensive and time-consuming—and must be done while systems continue to operate.Many of the federal government’s computer systems were originally designed and developed 20 to 25 years ago; are poorly documented; and use a wide variety of computer languages—many of which are obsolete. Some applications include thousands, tens of thousands, or even millions of lines of code, each of which must be examined for date-format problems. Other system components—hardware, operating systems, communications interfaces, and database software—may also be affected by the date problem. Many data exchanges and interdependencies also exist among federal, state, and local governments; the private sector; foreign countries; and international organizations. Therefore, systems are also vulnerable to failure caused by incorrectly formatted data provided by other systems, which are noncompliant. Examples of such data exchanges include the following situations. Taxpayers can pay their taxes through data exchanges between the taxpayer, financial institutions, the Federal Reserve System, and the Department of the Treasury’s Financial Management Service and Internal Revenue Service. State disability determination systems provide data on an individual’s medical eligibility for disability benefits to the Social Security Administration which uses this data to support payments to disabled persons. Medical providers obtain payments for their medical services through data exchanges between the provider, Health Care Financing Administration (HCFA) and its contractors, the Social Security Administration, the Department of the Treasury, the Federal Reserve System, and financial institutions. Commercial and military aircraft and ships within the United States and in foreign countries and organizations interface with the Global Positioning System, which consists of satellites, ground systems, and receivers, for navigation purposes as well as for precision targeting and smart bombs. The public faces a high risk that critical services provided by the government and the private sector could be severely disrupted by the Year 2000 computing crisis. Financial transactions could be delayed, flights grounded, power lost, and national defense affected. The many interdependencies that exist among governments and within key economic sectors could cause a single failure to have adverse repercussions. While managers in the government and the private sector are taking many actions to mitigate these risks, a significant amount of work remains, and time frames are unrelenting. The federal government is extremely vulnerable to the Year 2000 issue due to its widespread dependence on computer systems to process financial transactions, deliver vital public services, and carry out its operations. This challenge is made more difficult by the age and poor documentation of some of the government’s existing systems and its lackluster track record in modernizing systems to deliver expected improvements and meet promised deadlines. Unless this issue is successfully addressed, serious consequences could ensue. For example: Unless the Federal Aviation Administration (FAA) takes much more decisive action, there could be grounded or delayed flights, degraded safety, customer inconvenience, and increased airline costs. Payments to veterans with service-connected disabilities could be severely delayed if the system that issues them either halts or produces checks so erroneous that it must be shut down and checks processed manually. The military services could find it extremely difficult to efficiently and effectively equip and sustain their forces around the world. Federal systems used to track student loans could produce erroneous information on loan status, such as indicating that a paid loan was in default. Internal Revenue Service tax systems could be unable to process returns, thereby jeopardizing revenue collection and delaying refunds. The Social Security Administration process to provide benefits to disabled persons could be disrupted if interfaces with state systems fail. In addition, the year 2000 could also cause problems for the many facilities used by the federal government that were built or renovated within the last 20 years and contain embedded computer systems to control, monitor, or assist in operations. Many of these systems could malfunction due to vulnerability to the Year 2000 problem. For example, heating and air conditioning units could stop functioning properly and card-entry security systems could cease to operate. Year 2000-related problems have already been identified. For example, an automated Defense Logistics Agency system erroneously deactivated 90,000 inventoried items as the result of an incorrect date calculation. According to the agency, if the problem had not been corrected (which took 400 work hours), the impact would have been catastrophic and would have seriously hampered its mission to deliver materiel in a timely manner. In another case, the Department of Defense’s Global Command Control System, which is used to generate a common operating picture of the battlefield for planning, executing, and managing military operations, failed testing when the date was rolled over to the Year 2000. In order to assist federal agencies in addressing their Year 2000 risks, we developed an enterprise readiness guide that offers a structured, step-by-step approach for reviewing the adequacy of agency planning and management of its Year 2000 program. The guide describes five phases of a Year 2000 program: awareness, assessment, renovation, validation, and implementation. Over 30,000 copies of the guide—which was released to the public as an exposure draft in February 1997 and issued in September 1997—have been requested. We have also reviewed the Year 2000 programs of a number of federal agencies and have issued over two dozen reports and testimonies on this issue. (For a complete list of our reports and testimonies on the Year 2000 issue, see the “Related GAO Products” section at the end of this report.) In general, our reviews found that progress has been uneven. As discussed below, some agencies are significantly behind schedule and are at high risk that they will not fix their systems in time. Other agencies have made progress, although risks remain and a great deal more work is needed. Our reports have numerous recommendations which the agencies have almost universally agreed to implement. Federal Aviation Administration (FAA). FAA has been severely behind schedule in completing basic awareness and assessment activities. In our January 1998 report, we concluded that at its current pace, FAA would not make it in time. Moreover, FAA had not (1) analyzed the impact of its systems’ not being Year 2000 compliant, (2) inventoried and assessed all of its systems for date dependencies, or (3) developed contingency plans to ensure continuity of operations. Accordingly, we made several recommendations including that FAA should (1) assess how its business lines and the aviation industry would be affected if the Year 2000 problem were not corrected in time and use this information to help rank the agency’s Year 2000 activities, (2) complete its inventory of all information systems and determine each one’s criticality and decide whether each system should be converted, replaced, or retired, and (3) craft Year 2000 contingency plans for all business lines. FAA has agreed to implement our recommendations. Social Security Administration (SSA). A federal leader in addressing Year 2000 issues, SSA had made significant progress in assessing and renovating mission-critical mainframe software. However, we found that SSA remained at risk in that not all mission-critical systems necessary to prevent the disruption of benefit payments will be corrected before January 1, 2000. At particular risk are the 54 state disability determination systems that had not yet been assessed. In addition, SSA faced the risk that inaccurate data would be introduced into its databases by the hundreds of federal and state agencies and thousands of businesses with which it exchanges data files. Also, SSA had not developed contingency plans. We made several recommendations to the Commissioner of SSA to address these areas. SSA agreed with all of our recommendations and identified specific actions that it would take to ensure an adequate transition to the year 2000. Department of Veterans Affairs (VA). We reported that at VA, the Veterans Benefits Administration is addressing the Year 2000 problem but needed to take additional action to correct its systems in time.Accordingly, we made 10 specific recommendations, such as (1) completing an analysis to determine whether the Veterans Benefits Administration’s internal applications, interfaces, and third-party products were Year 2000 compliant and (2) developing a Year 2000 contingency plan. VA agreed to implement these recommendations. In a later review, we found that VA had initiated a number of these actions but that substantial risks remained. Department of Defense. We recently reported that the Department of Defense, which is responsible for about a third of the federal government’s reported mission critical systems, has taken positive actions to increase awareness, promote sharing of information, and encourage components to make Year 2000 remediation efforts a priority, but that its progress in fixing systems has been slow. However, Defense lacked key management and oversight controls to enforce good management practices, to direct resources, and to establish a complete picture of its progress in fixing systems. Accordingly, we recommended that the Secretary of Defense (1) establish a strong department-level program office, (2) expedite efforts to establish a comprehensive, accurate departmentwide inventory of systems, interfaces, and other equipment needing repair, (3) clearly define criteria and an objective process for prioritizing systems for repair based on their mission-criticality, (4) ensure that system interfaces are adequately addressed, (5) develop an overall, departmentwide testing strategy and a plan for ensuring that adequate resources are available to perform necessary testing, (6) require components to develop contingency plans, and (7) prepare complete and accurate Year 2000 cost estimates. The Department of Defense concurred with our recommendations. We have also recommended improvements in the Year 2000 programs of the Air Force, Logistics Systems Support Center, the Defense Finance and Accounting Service, and the Defense Logistics Agency, including the need to develop contingency plans. Health Care Financing Administration (HCFA). HCFA administers the Medicare program, the nation’s largest health insurer. HCFA expects to process over 1 billion claims and pay $288 billion in benefits per year by 2000. In May 1997, we reported that the Heath Care Financing Administration had not taken enough initial steps, such as developing an assessment of the potential severity of the century change, to ensure that it can avoid the systems-related service disruptions that may occur as the year 2000 approaches. HCFA agreed to implement our recommendations that it identify responsibilities for managing and monitoring Year 2000 actions, prepare an assessment of the severity and timing of potential Year 2000 impact, and develop contingency plans for critical systems. Federal Deposit Insurance Corporation. The Federal Deposit Insurance Corporation is the deposit insurer of approximately 11,000 banks and savings institutions which are responsible for over $6 trillion in assets and have insured deposits totaling upwards of $2.7 trillion. We found that while the Federal Deposit Insurance Corporation has taken aggressive efforts to ensure that the banks it oversees mitigate Year 2000 risks, it still faces significant challenges in providing a high level of assurance that individual banks will be ready. We recommended that the Federal Deposit Insurance Corporation work with other federal bank, credit union, and thrift institution regulators to, for example, revise their Year 2000 work program, complete guidance to institutions to mitigate risks associated with corporate customers and reliance on vendors, and establish a working group to develop contingency planning guidance. The Federal Deposit Insurance Corporation also agreed to our recommendations to (1) develop a tactical plan and explicit road map of the actions it plans to take based on the results of its June 1998 bank assessments and (2) ensure that adequate resources are allocated to complete its internal systems’ Year 2000 assessment and develop contingency plans for each of its mission critical systems and core business processes. National Credit Union Administration. The National Credit Union Administration supervises and insures more than 7,200 federally chartered credit unions and insures member deposits in an additional 4,200 state-chartered credit unions. In October 1997, we reported that the National Credit Union Administration had recognized the severity of the Year 2000 problem, developed a plan, and initiated action, such as issuing several letters to credit unions alerting them of Year 2000 risks. At the same time, however, in response to our recommendations, the National Credit Union Administration agreed to take several actions to strengthen their Year 2000 efforts, including requiring credit unions to (1) report on the precise status of their Year 2000 efforts at least quarterly, including the status of addressing their interfaces and (2) implement the necessary management controls to ensure that these financial institutions have adequately mitigated the risks associated with the Year 2000 problem. Audit offices of some states, including Arizona, Florida, Michigan, New York, and Virginia, and the District of Columbia have also identified significant Year 2000 concerns. Some of these risks include the potential that systems supporting benefit programs, motor vehicle records, and criminal records (i.e., prisoner release or parole eligibility determinations) may be adversely affected by the Year 2000 problem. These audit offices have made recommendations including the need for increased oversight, Year 2000 project plans, contingency plans, and personnel recruitment and retention strategies. America’s infrastructures are a complex array of public and private enterprises with many interdependencies at all levels. Key economic sectors that could be seriously affected if their systems are not Year 2000 compliant are: information and telecommunications; banking and finance; health, safety, and emergency services; transportation; utilities; and manufacturing and small business. The information and telecommunications sector is especially important because it (1) enables the electronic transfer of funds, the distribution of electrical power, and the control of gas and oil pipeline systems, (2) is essential to the service economy, manufacturing, and efficient delivery of raw materials and finished goods, and (3) is basic to responsive emergency services. Illustrations of Year 2000 risks follow. According to the Basle Committee on Banking Supervision—an international committee of banking supervisory authorities—failure to address the Year 2000 issue would cause banking institutions to experience operational problems or even bankruptcy. Moreover, the Chair of the Federal Financial Institutions Examination Council, a U.S. interagency council composed of federal bank, credit union, and thrift institution regulators, who is also the Comptroller of the Currency, stated that banking is one of America’s most information-intensive businesses and that any malfunctions caused by the century date change could affect a bank’s ability to meet its obligations. He also stated that of equal concern are problems that customers may experience that could prevent them from meeting their obligations to banks and that these problems, if not addressed, could have repercussions throughout the nation’s economy. According to the International Organization of Securities Commissions, the year 2000 presents a serious challenge to the world’s financial markets. Because they are highly interconnected, a disruption in one segment can spread quickly to others. FAA recently met with representatives of airlines, aircraft manufacturers, airports, fuel suppliers, telecommunications providers, and industry associations to discuss the Year 2000 issue. Participants raised the concern that their own Year 2000 compliance would be irrelevant if FAA were not compliant because of the many system interdependencies. Representatives went on to say that unless FAA was substantially Year 2000 compliant on January 1, 2000, flights would not get off the ground and that extended delays would be an economic disaster. Another risk associated with the transportation sector was described by the Federal Highway Administration which stated that highway safety could be severely compromised because of potential Year 2000 problems in operational transportation systems. For example, date dependent signal timing patterns could be incorrectly implemented at highway intersections if traffic signal systems run by state and local governments do not process four-digit years correctly. One risk associated with the utility sector is the potential loss of electrical power. For example, Nuclear Regulatory Commission staff believe that safety-related safe shutdown systems will function but that a worst-case scenario could occur in which Year 2000 failures in several nonsafety-related systems could cause a plant to shut down, resulting in the loss of off-site power and complications in tracking post-shutdown plant status and recovery. With respect to the health, safety, and emergency services sector, according to the Department of Health and Human Services, the Year 2000 issue holds serious implications for patient care and scientific research activities of the federal government, and for the nation’s health care providers and researchers in general. Medical devices and scientific laboratory equipment may experience problems beginning January 1, 2000, if the computer systems, software applications, or embedded chips used in these devices contain two-digit fields for year representation. In addition, according to the Gartner Group, health care is substantially behind other industries in Year 2000 compliance and it predicts that at least 10 percent of mission-critical systems in this industry will fail because of noncompliance. In addition to the risks associated with the nation’s key economic sectors, one of the largest, and largely unknown, risks relates to the global nature of the problem. With the advent of electronic communication and international commerce, the United States and the rest of the world have become critically dependent on computers. However, there are indications of Year 2000 readiness problems in the international arena. In September 1997, the Gartner Group, a private research firm acknowledged for its expertise in Year 2000 issues, surveyed 2,400 companies in 17 countries and concluded that “hirty percent of all companies have not started dealing with the year 2000 problem. Small companies, health care organizations, educational institutions, and many companies in 30 percent of the world’s countries are at a high risk of seeing year 2000 mission-critical failures due to a lack of readiness.” In this survey of companies in 17 countries, the Gartner Group also ranked certain countries and areas of the world. According to it, countries/areas at level I on its scale of compliance—just getting started—include Eastern Europe, many African countries, many South American countries, and several Asian countries, including China. Those at level II—completed the inventory process and have begun the assessment process—include Japan, Brazil, South Africa, Taiwan, and Western Europe. Finally, some companies in the United States, the United Kingdom, Canada, and Australia are at levels II while others are at level III. Level III indicates that a program plan has been completed and dedicated resources are committed and in place. Although there are many national and international risks to key economic sectors related to the Year 2000, our limited review of these key sectors found a number of private-sector organizations that have raised awareness and provided advice through publications, conferences, and guidance. For example: The Securities Industry Association established a Year 2000 committee in 1995 to promote industry awareness, and since then has established other committees and subcommittees to address key Year 2000 issues, such as testing, and has issued guidelines. The Electric Power Research Institute sponsored a conference in 1997 with utility professionals to explore the Year 2000 issue in embedded systems. Representatives of several oil and gas companies formed a Year 2000 energy industry group, which meets regularly to discuss the Year 2000 problem. The International Air Transport Association formed an information management committee and organized Year 2000 seminars and briefings for many segments of the airline industry. In addition, information technology industry associations, such as the Information Technology Association of America, have published newsletters, issued guidance, and held seminars to focus information technology users on the Year 2000 problem. As the Year 2000 has grown nearer and the scope of the problem has become clearer, the federal government’s response to the crisis has grown as well. At the urging of congressional leaders and others, OMB and the federal agencies have dramatically increased the amount of attention and oversight given to this issue in the last year. Moreover, last month the President issued an executive order establishing a President’s Council on Year 2000 Conversion and recognizing the national and international aspects of the problem. Congressional oversight has played a key role in focusing OMB and agency attention on the Year 2000 problem. In addition, Congressional hearings on the international, national, governmentwide, and agency-specific Year 2000 problems have exposed the threat that the Year 2000 poses to the public. In the fall of 1995, OMB asked SSA to be champion for the Year 2000 issue for the federal government. In this role, SSA formed an informal interagency working group on the Year 2000, chaired by the Assistant Deputy Commissioner for Systems of the Social Security Administration, which met for the first time in November 1995. This interagency working group subsequently developed best practices for the Year 2000 conversion. The group later evolved into the Chief Information Officer (CIO) Council’s Year 2000 Committee. The committee has two objectives: (1) re-emphasize information technology management practices to ensure that mission critical systems work on, before, and after January 1, 2000, and (2) identify joint efforts to leverage resources for solving the Year 2000 problem. In April 1996, OMB sent a memorandum to agency senior information resource management officials and CIOs requesting that agencies’ 5-year information resources management plans include their Year 2000 strategy. In addition, OMB stated that agencies should avoid acquiring commercial off-the-shelf products and application software that are not year 2000 compliant, except in emergency situations. In a follow-up to this memorandum, OMB sent a memorandum to the deputy heads of departments and agencies urging them to discuss the Year 2000 issue with their managers and computer professionals. On February 6, 1997, OMB issued a broader Year 2000 strategy for the federal government. The strategy was predicated on three assumptions: (1) senior agency managers will take whatever action is necessary to address the problem, (2) a single solution to the problem does not exist, and (3) given the limited amount of time available, emphasis will be placed on mission-critical systems. At the department or agency level, OMB’s strategy relied on the CIOs to direct agency Year 2000 actions. To monitor individual agency efforts, OMB required the major departments and agencies to submit quarterly reports on their progress. Specifically, OMB asked agencies to report where they stand with respect to completing the assessment, renovation, validation, and implementation phases. OMB’s first governmentwide progress report, based on 24 agencies’ May 1997 reports, was transmitted to selected congressional committees on June 23, 1997. While acknowledging that much work remained, OMB expressed its belief that agencies had made a good start in addressing the problem and reported that agencies had identified no mission-critical systems that were behind schedule. In July 1997 testimony, we disagreed with OMB’s position, stating that we believed that there was ample evidence that OMB and key federal agencies needed to heighten their levels of concern and move with more urgency. First, most agencies’ reported schedules left little time to resolve unanticipated problems. Second, OMB’s perspective was based on agency self-reporting which had not been independently validated. Third, entities may have interpreted the term “mission critical” in various ways. Fourth, OMB, in its governmentwide schedule, established only 1 month for the validation phase which is critical for thorough testing and, according to the Gartner Group, testing could consume over 40 percent of the time and resources of the entire Year 2000 program. In this testimony, we also identified other major areas—data exchanges, systems prioritization, and contingency planning—that we considered essential for OMB to emphasize. In response to information provided by agencies in their August quarterly report and the issues raised at the July hearing, OMB began taking more aggressive action on Year 2000 matters. For example, in the next governmentwide report, dated August 15, 1997, and released in September, OMB noted increasing concern with agencies’ progress and announced additional initiatives to address the Year 2000 problem. The report stated that while progress had been made overall, it was not uniform across the agencies. Accordingly, OMB placed agencies in three tiers based on their progress in addressing the Year 2000 problem: (1) 4 agencies showed insufficient evidence of progress, (2) 12 agencies showed evidence of progress but OMB also had concerns, and (3) 8 agencies appeared to be making sufficient progress. OMB established a rebuttable presumption for agencies in the first tier that it would not fund requests for information technology investments in the fiscal year 1999 budget formulation process unless they were directly related to fixing the Year 2000 problem. OMB also announced other initiatives in its August 15, 1997, governmentwide report. First, OMB emphasized that validation activities were critical to success and stated that it planned to meet with agencies in the following months to discuss the adequacy of scheduled timetables for completing validation. Second, OMB said that it would address interfaces with systems external to the federal government, including those of state and local governments and the private sector. Third, OMB asked agencies for a summary of the contingency plan for any mission-critical system that was reported behind schedule in two consecutive quarterly reports and planned to summarize such plans in future reports to the Congress. OMB’s report issued in December 1997 and dated as of November 15, 1997, stated that while all agencies had shown progress, the extent of that progress was mixed. OMB expressed its concern about whether agencies will have enough time to adequately test mission-critical systems in production settings. Writing that “the sense of urgency should be clear to both our private-sector suppliers and to those with whom we exchange data,” OMB accelerated two of its governmentwide target milestones. It moved up the date for completion of renovation by 3 months (from December to September 1998), and for implementation by 8 months (from November 1999 to March 1999). Along with accelerated target completion dates, OMB acknowledged its expectation that some systems will not meet the [March 1999 implementation] target. Because of this, in January 1998, OMB asked agencies—for their February 15, 1998 reports—to identify steps they are taking to develop contingency plans for systems that may not meet the deadline. Further, following the lead of several private companies, OMB also asked agencies to report on independent verification activities, in which independent entities determine whether agency systems have in fact been made Year 2000 compliant. OMB’s last report, issued on March 10, 1998, stated that while good progress has been made, it is not rapid enough overall. Only 9 of the 24 departments and agencies summarized in OMB’s governmentwide report were determined to be making satisfactory progress. (The Departments of the Interior and Veteran Affairs, the Environmental Protection Agency, General Services Administration, National Aeronautics and Space Administration, National Science Foundation, Nuclear Regulatory Commission, Small Business Administration, and the Social Security Administration). Data exchanges between the federal government and the states are also critical to ensuring that billions of dollars of benefits payments are made to millions of recipients. Consequently, in October 1997 the Commonwealth of Pennsylvania hosted the first State/Federal CIO Summit. Participants resolved to (1) use a four-digit contiguous computer standard for data exchanges between states and federal agencies, (2) establish a national policy group, cochaired by the administrator of OMB’s Office of Information and Regulatory Affairs and the president of the National Association of State Information Resource Executives (who is also California’s CIO), and (3) create a joint state/federal technical group, cochaired by the chair of the federal CIO Council Year 2000 Committee and the chair of the National Association of State Information Resource Executives’ Subcommittee on Year 2000. We participated in this summit and have also initiated a governmentwide review of actions to address the Year 2000 problems associated with electronic data exchanges. Although the federal government’s Year 2000 efforts to date have primarily focused on government agencies, we and congressional leaders have urged the administration to expand the federal government’s Year 2000 outlook beyond federal agencies and their programs. On February 4, 1998, the President issued an executive order which could achieve this goal. The executive order states that agencies shall (1) assure that no critical federal program experiences disruption because of the Year 2000 problem, (2) assist and cooperate with state, local, and tribal governments where those governments depend on federal information or where the federal government is dependent on those governments to perform critical missions, (3) cooperate with private sector operators of critical national and local systems, and (4) communicate with their foreign counterparts to raise awareness of and generate cooperative international arrangements. To implement these policies, the order states that each agency head shall assure that efforts to address the Year 2000 problem receive the highest priority attention in his/her agency. The executive order also established the President’s Council on Year 2000 Conversion led by an Assistant to the President and comprised of one representative from each of the executive departments and from other federal agencies as may be determined by the Chair. The Chair of the Council was tasked with the following Year 2000 roles: (1) overseeing the activities of agencies, (2) acting as chief spokesperson in national and international forums, (3) providing policy coordination of executive branch activities with state, local, and tribal governments, and (4) promoting appropriate federal roles with respect to private sector activities. In addition, the executive order requires the Chair and OMB to report to the President quarterly on the progress of agencies in addressing the Year 2000 problem. The increased attention that the administration has given to solving the Year 2000 problem could help minimize the disruption to the nation as the millennium approaches. In particular, the new President’s Council on Year 2000 Conversion can initiate the additional actions needed to mitigate the many risks and uncertainties associated with the Year 2000. These actions could include fixing the government’s highest priority systems first and developing contingency plans. Agencies have taken longer to complete the awareness and assessment phases than is recommended. This leaves less time for the critical renovation, validation, and implementation phases. For example, the Air Force has used nearly 46 percent of its available time completing the awareness and assessment phases while the Gartner Group estimates that no more than 26 percent of an organizations’ year 2000 effort should be spent on these phases. Consequently, priority-setting is absolutely essential. As illustrated in figure 1, according to the February 1998 agency quarterly reports, about 35 percent of federal agencies’ mission-critical systems were considered to be Year 2000 compliant. This leaves over 3,500 mission-critical systems (45 percent), as well as thousands of nonmission-critical systems, still to be repaired and over 1,100 systems (15 percent) to be replaced. It is unlikely that agencies can complete this vast amount of work in time. Accordingly, it is critical that the Executive Branch identify those systems that are of the highest priority. These include those that, if not corrected, could most seriously threaten health and safety, the financial well being of American citizens, national security, or the economy. Despite the importance of making sure that the most critical systems are fixed and thoroughly tested, OMB has not set governmentwide priorities to help agencies determine which systems perform the most essential services and direct resources to correct these systems first. OMB’s most recent guidance sets the same deadline (March 1999) for agencies to implement Year 2000 fixes for both mission and nonmission-critical systems. While OMB made this change with the intention of fixing systems in time for them to be thoroughly tested and implemented well in advance of January 1, 2000, this change could have the unintended consequence of diverting agency attention from the most critical systems. Agencies must also ensure that their mission critical systems can properly exchange data with other systems and are protected from errors that can be introduced by external systems. For example, agencies that administer key federal benefits payment programs, such as the Department of Veterans Affairs, must exchange data with the Department of the Treasury which, in turn, interfaces with financial institutions, to ensure that beneficiary checks are issued. It is important that the executive branch consider this issue because to complete end-to-end testing, agencies must secure the cooperation of other agencies and the private sector. In its February 1998 quarterly report, the Department of Transportation cited a concern about its inability to control end-to-end testing of system operations involving telephone companies and third-party operators of telecommunications links. Transportation stated that these private-sector entities must be committed to ensuring that mission-critical communications are not affected by the Year 2000. However, the executive branch has not directed that operational end-to-end testing be conducted of all steps in this process and that this testing be independently verified and validated. Without such testing and independent verification and validation, the agency authorizing the payments could find its Year 2000 efforts failing even if its own systems are Year 2000 compliant. OMB’s reports on agency progress do not fully and accurately reflect the federal government’s true progress because not all agencies are required to report their progress and OMB’s reporting requirements are incomplete. For example, OMB had not until recently required independent agencies to submit quarterly reports. Accordingly, the status of these agencies’ Year 2000 programs has not been monitored centrally. On March 9, 1998, OMB asked an additional 31 agencies, including the Securities and Exchange Commission and the Pension Benefit Guaranty Corporation, to report on their progress in fixing the Year 2000 problem by April 30, 1998. OMB plans to include a summary of those responses in its next quarterly report to the Congress. However, unlike its reporting requirements for the major departments and agencies which requires them to report quarterly, the March 9th memorandum stated that OMB did not plan to request that the independent agencies report again until next year. Since the independent agencies will not be reporting again until 1999, it will be difficult for OMB to be in a position to address any major problems. In providing comments on this report, the Chairman of the President’s Council on Year 2000 Conversion stated that he and OMB will ask these agencies to report more frequently if, based on their April 1998 reports, it is apparent that there are problems. Agencies are required to report their progress in repairing noncompliant systems but are not required to report on their progress in implementing systems to replace noncompliant systems, unless the replacement effort is behind schedule by 2 months or more. Because federal agencies have a poor history of delivering new system capabilities on time, it is essential to know agencies’ progress in implementing replacement systems. OMB’s guidance does not specify what steps must be taken to complete each phase of a Year 2000 program (i.e., assessment, renovation, validation, and implementation). Without such guidance, agencies may report that they have completed a phase when they have not. For example, while the Defense Logistics Agency told us that it had completed the assessment phase, we found that it had not addressed several critical steps associated with the assessment phase, such as prioritizing systems for correction. As previously noted, our enterprise readiness guide provides information on the key tasks that should be performed within each phase. In a December 1997 letter to OMB, the Chairman, Subcommittee on Government Management, Information and Technology, House Committee on Government Reform and Oversight, expressed similar concerns, stating that “OMB needs to require agency plans and reports that are more comprehensive and more reliable.” In January 1998, OMB asked agencies to describe their contingency planning activities in their February 1998 quarterly reports. These instructions stated that contingency plans should be established for mission-critical systems that are not expected to be implemented by March 1999, or for mission-critical systems which have been reported as 2 months or more behind schedule. Accordingly, in their February 1998 quarterly reports, several agencies reported that they planned to develop contingency plans only if they fall behind schedule in completing their Year 2000 fixes. Agencies that develop contingency plans only for systems currently behind schedule, however, are not addressing the need to ensure the continuity of a minimal level of core business operations in the event of unforeseen failures. As a result, when unpredicted failures occur, agencies will not have well-defined responses and may not have enough time to develop and test effective contingency plans. Contingency plans should be formulated to respond to two types of failures: those that can be predicted (e.g., system renovations that are already far behind schedule) and those that are unforeseen (e.g., a system that fails despite having been certified as Year 2000 compliant or a system that cannot be corrected by January 1, 2000, despite appearing to be on schedule today). Moreover, contingency plans that focus only on agency systems are inadequate. Federal agencies depend on data provided by their business partners as well as on services provided by the public infrastructure (e.g., power, water, transportation, and voice and data telecommunications). One weak link anywhere in the chain of critical dependencies can cause major disruptions to business operations. Given these interdependencies, it is imperative that contingency plans be developed for all critical core business processes and supporting systems, regardless of whether these systems are owned by the agency. In its latest governmentwide Year 2000 progress report, issued March 10, 1998, OMB clarified its contingency plan instructions. OMB stated that while it requires agencies to report on their contingency plans under the circumstances described above, contingency plans should be developed for all core business functions. On March 18, we issued an exposure draft of a guide to help agencies ensure the continuity of operations through contingency planning. The CIO Council worked with us in developing this guide and intends to adopt the guide for federal agency use. OMB’s assessment of the current status of federal Year 2000 progress is predominantly based on agency reports that have not been consistently verified or independently reviewed. Without such independent reviews, OMB and others, such as the President’s Council on Year 2000 Conversion, have no assurance that they are receiving accurate information. For example, as previously discussed, we have found agencies reporting that they have completed the assessment phase when critical work in this phase remained. In another example, the Defense Finance and Accounting Service had not performed adequate testing to assert that certain systems it had reported as compliant were capable of transitioning into the year 2000. Specifically, managers of three systems reported as compliant indicated that they had performed some tests on the transfer and storage of dates, but had not completed all Year 2000 compliance tests. We are also concerned about whether agencies have completed the assessment phase or are accurately reporting their status. Over two-thirds of the agencies stated that they had completed the assessment phase by November 1997, but in February 1998, several of these same agencies reported significant changes in the total number of mission-critical systems or increases in the number of systems being replaced, repaired or retired—decisions that should have been made during the assessment phase. For example, although the Department of Energy reported that it had completed the assessment phase in November, it reported in February 1998 that the number of mission-critical systems had decreased by 21 percent (468 systems to 370) with corresponding decreases in the number already compliant, being replaced, and being repaired. Most of these changes were attributed to reclassifying systems as nonmission critical. Classification of systems should have been completed in the assessment phase. In addition, from November 1997 to February 1998, the Department of Agriculture increased the number of systems being replaced by 350 percent (from 58 to 261) and increased the number being retired by 17 percent (126 to 147), even though it reported that its assessment was complete in November 1997. There was no explanation for these changes in Agriculture’s February report. OMB has acknowledged the need for independent verification and has asked agencies to report on their independent verification activities in their February 1998 quarterly reports. Accordingly, the agencies described their current or planned verification activities in their February reports, which included internal management processes, reviews by the agencies’ inspectors general, and ongoing or planned contracts with vendors to perform independent verification and validation. While this has helped provide assurance that some verification is taking place through internal checks, reviews by inspectors general, or contractors, the full scope of verification activities required by OMB has not been articulated. It is important that the executive branch set standards for the types of reviews needed to provide assurance regarding the agencies’ Year 2000 actions. Such standards could encompass independent assessments of (1) whether the agency has developed and is implementing a comprehensive and effective Year 2000 program, (2) the accuracy and completeness of the agency’s quarterly report to OMB, including verification of the status of systems reported as compliant, (3) whether the agency has a reasonable and comprehensive testing approach, and (4) the completeness and reasonableness of the agency’s business continuity and contingency planning. The CIO Council’s Year 2000 Committee has been useful in addressing governmentwide issues. For example, the Year 2000 Committee worked with the Federal Acquisition Regulation Council and industry to develop a rule that (1) establishes a single definition of Year 2000 compliance in executive branch procurement and (2) generally requires agencies to acquire only Year 2000-compliant products and services or products and services that can be made Year 2000 compliant. The Year 2000 Committee has also established subcommittees on (1) best practices, (2) state issues and data exchanges, (3) industry issues, (4) telecommunications, (5) buildings, (6) biomedical and laboratory equipment, (7) General Services Administration support and commercial off-the-shelf products, and (8) international issues. The committee’s effectiveness could be further enhanced. For example, currently agencies are not required to participate in the Year 2000 Committee. Without such full participation, it is less likely that appropriate governmentwide solutions can be implemented. Further, while most of the committee’s subcommittees are currently working on plans, they have not published these with associated milestones. It is important that these plans and accompanying milestones be finalized and publicized quickly so that agencies can use this information in their Year 2000 programs. It is equally important that implementation of agency activities resulting from these plans be monitored closely and that the subcommittees’ decisions be enforced. Another governmentwide issue that needs to be addressed is the availability of information technology personnel. According to the Information Technology Association of America, the United States has a shortage of 346,000 information technology personnel. In their February 1998 quarterly reports, the Departments of Agriculture, Health and Human Services, Justice, Labor, State, and Veterans Affairs as well as the Small Business Administration and Patent and Trademark Office reported that they or their contractors had problems obtaining and/or retaining information technology personnel. We also identified staffing concerns at the National Credit Union Administration, Army’s Logistics Systems Support Center, and VA’s Veterans Benefits Administration.The Internal Revenue Service has also stated that it needs to address critical recruitment and retention issues related to the Year 2000 problem as well as other information technology projects. Currently, no governmentwide strategy exists to address recruiting and retaining information technology personnel with the appropriate skills for Year 2000-related work. Until recently, the CIO Council had not addressed this issue. We have not performed an analysis of the government’s information technology personnel needs to address the Year 2000 problem. However, before the personnel issue reaches a grave condition, it would be prudent for the CIO Council to identify and champion personnel strategies, such as obtaining waivers to rehire retired federal personnel and identifying incentives to retain needed staff, that could be implemented quickly by agencies with staffing problems. While a draft of this report was out for comment, this issue was discussed at the March 18, 1998, meeting of the CIO Council. The Office of Personnel Management (OPM) provided the council with information on the tools that are currently available to help agencies obtain and retain staff. In addition, the council agreed that OPM and the Human Resources Technology Council would form a working group to look at any additional tools that could be made available to help agencies obtain and retain staff for the Year 2000 challenge. This working group is tasked with providing recommendations by May 1998. On March 30, 1998, OPM issued a memorandum stating that the Year 2000 problem was an “unusual circumstance” which would allow OPM to grant agencies waivers to allow them to rehire former federal personnel without financial penalty on a temporary basis to address the Year 2000 problem. This same memorandum advised the agencies of their ability to make exceptions to the biweekly limitation on premium pay when the head of an agency or designee determines that an emergency involving a direct threat to life or property exists. Given the sweeping ramifications of the Year 2000 issue, other countries have set up mechanisms to solve the Year 2000 problem on a nationwide basis. Several countries, such as the United Kingdom, Canada, the Netherlands, and Australia, have appointed central organizations to coordinate and oversee their governments’ responses to the Year 2000 crisis. In the case of the United Kingdom, a ministerial group is being established, under the leadership of the President of the Board of Trade, to tackle the Year 2000 problem across the public and private sectors. In addition, the British Prime Minister has stated that he will use his country’s European Union presidency to raise the profile of the Year 2000 crisis throughout Europe and the world. These countries have also established public/private forums to address the Year 2000 problem. For example, in September 1997, Canada’s Minister of Industry established a government/industry Year 2000 task force of representatives from banking, insurance, transportation, manufacturing, telecommunications, information technology, small and medium-sized businesses, agriculture, and the retail and service sectors. The Canadian CIO is an ex-officio member of the task force. It has been charged with providing (1) an assessment of the nature and scope of the Year 2000 problem, (2) the state of industry preparedness, and (3) leadership and advice on how risks could reduced. The Canadian task force issued a report in February 1998 with 18 recommendations to all levels of government and to private sector associations and businesses. These recommendations are intended to promote public/private sector cooperation as well as to prompt remedial actions. The task force published its report 4 months earlier than planned because of the seriousness of the Year 2000 situation. According to the task force it made this decision, “trusting that our recommendations, designed to focus business attention and bring about action on this critical issue, will be implemented with similar urgency.” Among these recommendations were that (1) formal action plans, if not already in place, be immediately implemented by every business leader, chief executive officer, president, and business owner and that these plans, along with progress reports, be shared with all trade partners in the Canadian national supply chain—with due consideration to commercial and legal circumstances, (2) all levels of government, before introducing legislation or regulatory changes, consider the impact that these changes may have in terms of reprogramming information systems and diverting resources from Year 2000 preparedness efforts, (3) all lending institutions as a prerequisite for loans and the insurance community for issuance/renewal of an insurance policy, should require the availability of a formal Year 2000 plan, and (4) regulators at all levels of government complete an assessment of the impacts that Year 2000 failures in their regulated industries would have on their regulatory objectives, and revise, where appropriate, their compliance assessment procedures, and exert, where possible, “moral suasion” on the importance of Year 2000 preparedness. In the United States, the President’s February 4, 1998, executive order could serve as the linchpin that bridges the nation’s and the federal government’s various Year 2000 initiatives. While the Year 2000 problem could have serious consequences, there is no comprehensive assessment of the nation’s readiness. As one of its first tasks, the President’s Council on Year 2000 Conversion could formulate such a comprehensive assessment in partnership with the private sector and state and local governments. Many organizational and managerial models exist that the Conversion Council could use to build effective partnerships to solve the nation’s Year 2000 problem. Because of the need to move swiftly, one viable alternative would be to consider using the sector-based approach used recently by the President’s Commission on Critical Infrastructure Protection as a starting point. The Commission also called for a framework for implementing a national infrastructure protection policy, working in conjunction with state and local governments and the private sector. One possible way to create a Year 2000 national coordination approach could involve federal agency focal points working with sector infrastructure coordinators. These coordinators would be created or selected from existing associations and would facilitate sharing information among providers and the government. Using this model, the President’s Council on Year 2000 Conversion could establish public/private partnership forums composed of representatives of each major sector that, in turn, could rely on task forces organized along economic sector lines, if necessary. Such groups would help (1) gauge the nation’s preparedness for the Year 2000, (2) periodically report on the status and remaining actions of each sector’s year 2000 remediation efforts, and (3) ensure the development of contingency plans to assure the continuing delivery of critical public and private services. While the Year 2000 crisis has the potential to be catastrophic, the very real risks can be mitigated and disruptions minimized with proper attention and management. At the federal level, additional attention to the systems that serve the highest priorities, such as health and safety, would help ensure that the most essential government services continue without disruption beyond 1999. Moreover, the executive branch could improve oversight of federal agencies’ Year 2000 efforts by requiring business continuity and contingency plans for all mission-critical systems and instructing all key agencies to report regularly on the status of their Year 2000 efforts. A coordinated, public/private effort, under the leadership of the executive branch, could provide a forum and bring together the key players in each key economic sector to effectively coordinate the nation’s Year 2000 efforts and assure that each sector, as well as sector interdependencies, are being adequately addressed. Further, public/private forums, in conjunction with the President’s new Year 2000 Conversion Council, could be instrumental in developing business continuity and contingency plans to safeguard the continued delivery of critical services for each key economic sector. While we do not foresee the federal government as dictating policy or requiring specific solutions, it is, however, uniquely positioned to publicize the Year 2000 computing crisis as a national priority, take a leadership role, and identify, assess, and report on the risks and necessary remediation efforts associated with the nation’s key economic sectors. Such plans would be most effective if they bring to bear the combined and considerable influence of the federal government, state and local governments, and the private sector. To more effectively oversee the activities of federal agencies to address the Year 2000 crisis, we recommend that the Chairman of the President’s Council on Year 2000 Conversion establish governmentwide priorities, and ensure that agencies set agencywide priorities, for the most mission-critical business processes and supporting systems, using criteria such as the potential for adverse health and safety effects, adverse financial effects on American citizens, detrimental effects on national security, and adverse economic consequences; for the selected priorities, designate a lead agency to be responsible for ensuring that end-to-end operational testing of these processes and supporting systems occurs across organizational boundaries, and that independent verification and validation of such testing has been performed; identify all federal agencies beyond the departments and agencies currently reporting that are central to the success of Year 2000 readiness and require them to provide regular reports to OMB; require, as part of the quarterly reporting requirement, agencies to report to OMB on their progress in implementing systems intended to replace noncompliant systems; identify and publicize expectations on the key activities that should be accomplished for each of the assessment, renovation, validation, and implementation phases, and direct agencies to adhere to these expectations in reporting on the status of their programs; require agencies to develop contingency plans for all critical core business require agencies to develop an independent verification strategy to involve inspectors general or other independent organizations in reviewing agency Year 2000 progress, to include (1) assessing whether the agency has developed and is implementing a comprehensive and effective Year 2000 program, (2) providing an independent assessment of the agency’s quarterly report to OMB, (3) assessing whether the agency has a reasonable and comprehensive testing approach, and (4) assessing the completeness and reasonableness of the agency’s business continuity and contingency planning; ensure that agencies participate in the CIO Council’s Year 2000 Committee and that the CIO Council’s Year 2000 Committee subcommittees establish and publicize plans, milestones, and enforcement mechanisms; and develop a personnel strategy which includes (1) determining the need for various information specialists, (2) identifying any administrative or statutory changes that would be required to waive reemployment penalties for former federal employees, and (3) identifying ways to retain key Year 2000 staff in agencies through the turn of the century. To steer the United States through the Year 2000 crisis, we recommend that the Chairman of the President’s Council on Year 2000 Conversion develop a comprehensive picture of the nation’s Year 2000 readiness, which would include identifying and assessing the risks of the nation’s key economic sectors, including those posed by international links and by the failure of critical infrastructure components; establish public/private partnership forums composed of representatives of each major economic sector to help (1) gauge the nation’s preparedness for the Year 2000, (2) periodically report on the status and remaining actions of each sector’s Year 2000 remediation efforts, and (3) ensure the development of contingency plans to assure the continuing delivery of critical public and private services. The Chairman of the President’s Council on Year 2000 Conversion provided comments on the recommendations contained in this report on March 23, 1998. A copy of these comments is reprinted in appendix II. We also met with the Chairman on March 30, 1998, to further discuss the need to implement our recommendations and to obtain clarification of his written comments. Regarding our recommendation on setting priorities, the Chairman stated that agencies have established their priorities by identifying their mission-critical systems. Further, the Chairman stated that the council’s focus at this time should be to assist agencies as they work to ensure that all of their mission critical systems are ready for the year 2000. He added that it may be necessary at a later date for agencies to further prioritize these systems. While priority setting is always an iterative process, it would be prudent to give this more concentrated attention now. Only a little over one-third of the 24 agencies analyzed by OMB in its governmentwide report were making satisfactory progress and many critical large departments and agencies were not. For example, we are reporting today that the Department of Defense, which is responsible for about one-third of the government’s mission-critical systems, has not yet determined, at the department level, which systems have the highest impact on its mission. Consequently, we are recommending that DOD clearly define criteria and an objective process for prioritizing systems for repair based on their mission criticality, and ensure that the most mission-critical systems will be repaired first. The department concurred with our recommendation and stated that “. . . the Secretary of Defense will define criteria and a process for prioritizing systems for repair based on the needs and mission of the Department of Defense. This process will be implemented no later than June 30, 1998.” The time to reassess priorities and make difficult decisions is now, while agencies can concentrate attention on those systems that are essential to public health and safety, the financial well being of American citizens, national security, or the economy. If priorities are not clearly set, the government may find that its highest priority systems are not ready in time but that they could have been corrected had management attention and resources been properly focused earlier. To help identify the government’s most critical systems, (1) the Council on Year 2000 Conversion should set governmentwide priorities and (2) agencies must ensure that all component entities evaluate their systems using consistent priority-setting criteria that accurately reflect the agencies’ core mission. Regarding our related recommendation on end-to-end operational testing and independent verification and validation of such testing, the Chairman stated that agencies are currently developing such plans and obtaining independent verification and validation for their systems. He added that the council and OMB will monitor these activities. In our March 30 meeting with the Chairman, he added that if any difficulty arises in getting agencies to cooperate with respect to end-to-end testing, he or OMB will intervene to resolve the matter. Because time is short and thorough end-to-end testing of critical systems and processes across organizational boundaries is essential, the council should ensure that a lead agency for each high priority business process is designated to develop and ensure the implementation of an end-to-end test plan, which includes independent verification and validation. Unless responsibility is clearly assigned, it will be difficult to ensure that all organizations participate constructively and expeditiously. Further, the President’s Council on Year 2000 Conversion will have to assume leadership and take whatever actions are warranted should difficulties arise in obtaining needed participation and cooperation from state and local governments and the private sector. We modified our recommendation to clarify our position. With respect to our recommendation to require all critical agencies to report their progress quarterly, the Chairman’s written response pointed to the recent OMB memorandum that required an additional 31 agencies to report to OMB on their Year 2000 progress in April 1998 and again in a year’s time. However, this requirement does not currently pertain to all critical governmental and quasi-governmental agencies such as the U.S. Postal Service. The Chairman also stated that agencies considered central to the success of Year 2000 readiness should report their progress to OMB more frequently but did not state which agencies are considered central to the government’s Year 2000 readiness or how frequently these agencies will be required to report their progress. The Chairman later told us that OMB is considering expanding the list of reporting entities to include other organizations. In addition, he stated that he and OMB will ask the additional 31 agencies to report more frequently than annually if, based on their April 1998 reports, it is apparent that there are problems. Since (1) all agencies which are critical to the nation’s Year 2000 readiness should be monitored and (2) problems could surface at any point in the Year 2000 remediation process, especially during the latter testing and implementation phases, it is imperative that all critical agencies be identified and be required to report to OMB regularly and be included in OMB’s governmentwide progress report. Moreover, just because an agency is not experiencing problems in April 1998 does not mean that it will not later encounter problems. Therefore, it is important to continue monitoring the progress of agencies which reported making adequate progress to ensure that such progress continues. The Chairman disagreed with our recommendation to require agencies, as part of their quarterly reports, to cite their progress in implementing systems intended to replace noncompliant systems. He stated that the current requirement—under which agencies provide an exception report to OMB on replacement systems that have fallen 2 months or more behind schedule—is an appropriate level of reporting. The Chairman stated that OMB and the council will monitor this issue closely to determine if more reporting is required in the future. However, waiting until later is very risky, given the federal government’s poor record of delivering new systems capabilities when promised, and the immutability of the Year 2000 milestone. Over 1,100 mission-critical systems—22 percent of the government’s noncompliant mission-critical systems—are due to be replaced. To monitor their progress effectively, we believe that the President’s Council on Year 2000 Conversion, OMB, and the Congress need more thorough reports, including information on whether the replacement systems have been tested. In reference to our recommendation related to consistent agency reporting, the Chairman stated that the council will encourage OMB to have agencies report on their progress consistent with the CIO Council’s best practice guide and our enterprise readiness guide. In our March meeting, the Chairman stated that agencies should use the criteria on the Year 2000 phases contained in our enterprise readiness guide when completing their quarterly reports. He added that OMB will likely encourage agencies to do so in its next quarterly report guidance. If OMB requires agencies to use the criteria set forth in our guide, this will satisfy our recommendation. With respect to our recommendation to require agencies to develop contingency plans for core business processes and supporting systems, the Chairman agreed that it is important to develop contingency plans for all core business functions. He did not, however, believe that agencies would be making the most efficient use of the time remaining by developing contingency plans for every supporting system. We clarified that we are not advocating the development of contingency plans for individual mission-critical systems. Rather, contingency plans should be developed for each core business process. A core business process may rely on one or more mission-critical systems which the contingency plan would address as part of its identification and mitigation of potential system failures. Moreover, those program managers responsible for core business processes should take a leading role in developing business continuity and contingency plans because they best understand their business processes and how problems can be resolved. In this manner, the business continuity and contingency planning activity generally complements, rather than competes with, the agency’s Year 2000 remediation activities. We revised our recommendation to clarify our position. In his written response, the Chairman did not specifically address whether the council would require agencies to develop an independent verification strategy. Instead, he agreed that independent assessments of agencies’ Year 2000 programs and their testing and planning approaches are important, stating that the council will examine how best to promote those assessments. The Chairman stated that he would work with the President’s Council on Integrity and Efficiency to encourage inspectors general to play a role in this area. In order to assure agencies, OMB, and the President’s Council on Year 2000 Conversion that their Year 2000 activities are effective, agencies must develop independent verification strategies which, in accordance with our recommendations, should be required by the President’s Council on Year 2000 Conversion. In a later meeting, the Chairman stated that he and OMB will consider issuing more explicit directions on independent verification to the agencies, especially with regard to establishing standards for the type of verification and evaluation desired. To improve the effectiveness of the CIO Council’s Year 2000 Committee, we recommended that the Chairman ensure that (1) agencies participate in the committee and (2) the Committee’s subcommittees establish and publicize plans, milestones, and enforcement mechanisms. Regarding the first recommendation, the Chairman stated that in his meetings with agencies, he will continue to encourage their awareness of, and participation in, the activities of the Year 2000 Committee. With respect to the second recommendation, he said that he was satisfied that the committee is developing plans and milestones for its work and that OMB and the President’s Council on Year 2000 Conversion will continue to consult with the Committee on appropriate enforcement mechanisms. If the nation is to negotiate the millennium change successfully, the Chairman needs to ensure that the Year 2000 Committee and its subcommittees continue to play a central role in addressing the federal government’s Year 2000 problem. Without full participation of the agencies as well as publicity of the subcommittees’ plans, milestones, and enforcement mechanisms, it is less likely that appropriate solutions to governmentwide problems will be identified and effectively addressed. Although the Chairman agreed that the President’s Council on Year 2000 Conversion should view the Year 2000 problem as more than a federal systems problem and should adopt a global perspective, he did not address our recommendation to develop a comprehensive picture of the nation’s Year 2000 readiness, and he did not fully agree with our recommendation to establish a national coordination structure using private/public partnerships in appropriate sector-based forums. The Chairman stated that he believed that the President’s Council on Year 2000 Conversion needed to be a catalyst, facilitator, and coordinator. He later told us that the council should only create and directly manage new national forums for specific sectors of the economy. He noted that to begin with, such partnerships would be appropriate in the energy and telecommunications sectors. In addition, the Chairman stated that the council can be effective by enlisting and supporting an agency, such as the Department of Health and Human Services, to coordinate an outreach approach to the health care industry. These agencies would be empowered to determine the appropriate measures the government should take to ensure progress in these industries. Senior executives of these coordinating agencies would be the agency’s representatives on the council, which would then monitor and coordinate the agency’s outreach activities and help ensure that there are not gaps in the coverage. We believe that the President’s Council on Year 2000 Conversion must posture itself to be in an informed position to provide Year 2000 leadership for the nation as a whole. To provide such leadership, the council must develop an approach to receive the best guidance directly from the private sector and state and local government bodies, in addition to views and perspectives garnered by federal agency executives. Moreover, while the federal agencies should play an important role in any Year 2000 assessment of our nation’s key economic sectors, they may not always be in the best position to discharge responsibility for all outreach efforts in an economic sector. First, the problems that agencies face in ensuring their own Year 2000 compliance are daunting. Second, some sectors, such as telecommunications, health, safety, and emergency services, utilities, and manufacturing and small business have limited federal government involvement. As a result, in some sectors, the leadership role may be more appropriately placed in the private sector or state and local government. To clarify our position, we have modified our recommendation related to this issue. In addition to the comments of the Chairman of the President’s Council on Year 2000 Conversion, OMB staff and the Chairwoman of the CIO Council’s Year 2000 Committee provided comments on the facts presented in the report, and generally agreed with these facts. OMB staff and the Chairwoman offered technical comments on selected sections of the report, and we have incorporated their suggested changes as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate and House Committees on Appropriations and the House Committee on Government Reform and Oversight; Ranking Minority Member of the Subcommittee on Financial Services and Technology, Senate Committee on Banking, Housing and Urban Affairs; the Chairman of the President’s Council on Year 2000 Conversion; and Director of the Office of Management and Budget. Copies will also be made available to others upon request. Please contact me at (202) 512-2600 or Joel Willemssen, Director, Civil Agencies Information Systems, at (202) 512-6408, if you or your staff have any questions concerning this report. We can also be reached by e-mail at dodarog.aimd@gao.gov and willemssenj.aimd@gao.gov, respectively. To describe the Year 2000 risks facing the government and the nation, we relied on the work that we have performed in the Year 2000 area over the past 2 years that has encompassed evaluating and reporting on the progress of several individual agencies. (See Related GAO Products at the end of this report for a complete list of all our Year 2000 reports and testimonies.) In addition, we reviewed and assessed major departments and agencies’ quarterly reports as well as OMB’s governmentwide reports. We also researched information on private-sector and international activity related to the Year 2000 problem through the Internet and other sources. We did not independently assess the reliability of the information provided by these sources. We also discussed the Year 2000 issue with leading experts in certain key economic sectors and, where available, obtained and reviewed reports by state and foreign audit organizations. To describe the evolution of the federal government’s Year 2000 strategy and identify additional actions that can be taken to prepare the nation for the Year 2000, we evaluated the Year 2000 efforts of OMB and of the CIO Council, including reviewing OMB’s quarterly reports and other documents. We also reviewed the February 4, 1998, executive order establishing the President’s Council on Year 2000 Conversion and met with the Chairman of this council. In addition, we interviewed officials from OMB and attended meetings of the CIO Council’s Year 2000 Committee and its subcommittees. We also reviewed the President’s Commission on Critical Infrastructure Protection’s October 1997 report. We conducted our review from December 1997 through March 1998. We performed this review in accordance with generally accepted government auditing standards. We also provided a draft of this report for comment to the Chairman of the President’s Council on Year 2000 Conversion, OMB staff, and the Chairwoman of the CIO Council’s Year 2000 Committee, and incorporated their comments as appropriate. Their comments are discussed in the “Agency Comment and Our Evaluation” section. The following are GAO’s supplemental comments on the Chairman of the President’s Council on Year 2000 Conversion’s letter of March 23, 1998. Additional comments are contained in the “Agency Comments and Our Evaluation” section. 1. Report revised to reflect modified recommendation. 2. Report revised to reflect modified recommendation. 3. The report was revised to reflect that the CIO Council’s Subcommittee on the Year 2000 was renamed the Committee on Year 2000. The Committee on Year 2000 now has subcommittees rather than subgroups. 4. Report revised to reflect modified recommendations 5. The testimony of the Chairman of the President’s Council on Year 2000 was not reprinted. It is available upon request. Defense Computers: Year 2000 Computer Problems Threaten DOD Operations (GAO/AIMD-98-72, April 30, 1998). Year 2000 Computing Crisis: Federal Regulatory Efforts to Ensure Financial Institution Systems Are Year 2000 Compliant (GAO/T-AIMD-98-116, March 24, 1998). Year 2000 Computing Crisis: Strong Leadership Needed to Avoid Disruption of Essential Services (GAO/T-AIMD-98-117, March 24, 1998). Year 2000 Computing Crisis: Business Continuity and Contingency Planning (GAO/AIMD-10.1.19, Exposure Draft, March 1998). Year 2000 Computing Crisis: Office of Thrift Supervision’s Efforts to Ensure Thrift Systems Are Year 2000 Compliant (GAO/T-AIMD-98-102, March 18, 1998). Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998). Post-Hearing Questions on the Federal Deposit Insurance Corporation’s Year 2000 (Y2K) Preparedness (GAO/AIMD-98-108R, March 18, 1998). SEC Year 2000 Report: Future Reports Could Provide More Detailed Information (GAO/GGD/AIMD-98-51, March 6, 1998). Year 2000 Readiness: NRC’s Proposed Approach Regarding Nuclear Powerplants (GAO/AIMD-98-90R, March 6, 1998). Year 2000 Computing Crisis: Federal Deposit Insurance Corporation’s Efforts to Ensure Bank Systems Are Year 2000 Compliant (GAO/T-AIMD-98-73, February 10, 1998). Year 2000 Computing Crisis: FAA Must Act Quickly to Prevent Systems Failures (GAO/T-AIMD-98-63, February 4, 1998). FAA Computer Systems: Limited Progress on Year 2000 Issue Increases Risk Dramatically (GAO/AIMD-98-45, January 30, 1998). Defense Computers: Air Force Needs to Strengthen Year 2000 Oversight (GAO/AIMD-98-35, January 16, 1998). Year 2000 Computing Crisis: Actions Needed to Address Credit Union Systems’ Year 2000 Problem (GAO/AIMD-98-48, January 7, 1998). Veterans Health Administration Facility Systems: Some Progress Made In Ensuring Year 2000 Compliance, But Challenges Remain (GAO/AIMD-98-31R, November 7, 1997). Year 2000 Computing Crisis: National Credit Union Administration’s Efforts to Ensure Credit Union Systems Are Year 2000 Compliant (GAO/T-AIMD-98-20, October 22, 1997). Social Security Administration: Significant Progress Made in Year 2000 Effort, But Key Risks Remain (GAO/AIMD-98-6, October 22, 1997). Defense Computers: Technical Support Is Key to Naval Supply Year 2000 Success (GAO/AIMD-98-7R, October 21, 1997). Defense Computers: LSSC Needs to Confront Significant Year 2000 Issues (GAO/AIMD-97-149, September 26, 1997). Veterans Affairs Computer Systems: Action Underway Yet Much Work Remains To Resolve Year 2000 Crisis (GAO/T-AIMD-97-174, September 25, 1997). Year 2000 Computing Crisis: Success Depends Upon Strong Management and Structured Approach, (GAO/T-AIMD-97-173, September 25, 1997). Year 2000 Computing Crisis: An Assessment Guide (GAO/AIMD-10.1.14, September 1997). Defense Computers: SSG Needs to Sustain Year 2000 Progress (GAO/AIMD-97-120R, August 19, 1997). Defense Computers: Improvements to DOD Systems Inventory Needed for Year 2000 Effort (GAO/AIMD-97-112, August 13, 1997). Defense Computers: Issues Confronting DLA in Addressing Year 2000 Problems (GAO/AIMD-97-106, August 12, 1997). Defense Computers: DFAS Faces Challenges in Solving the Year 2000 Problem (GAO/AIMD-97-117, August 11, 1997). Year 2000 Computing Crisis: Time is Running Out for Federal Agencies to Prepare for the New Millennium (GAO/T-AIMD-97-129, July 10, 1997). Veterans Benefits Computer Systems: Uninterrupted Delivery of Benefits Depends on Timely Correction of Year-2000 Problems (GAO/T-AIMD-97-114, June 26, 1997). Veterans Benefits Computers Systems: Risks of VBA’s Year-2000 Efforts (GAO/AIMD-97-79, May 30, 1997). Medicare Transaction System: Success Depends Upon Correcting Critical Managerial and Technical Weaknesses (GAO/AIMD-97-78, May 16, 1997). Medicare Transaction System: Serious Managerial and Technical Weaknesses Threaten Modernization (GAO/T-AIMD-97-91, May 16, 1997). Year 2000 Computing Crisis: Risk of Serious Disruption to Essential Government Functions Calls for Agency Action Now (GAO/T-AIMD-97-52, February 27, 1997). Year 2000 Computing Crisis: Strong Leadership Today Needed To Prevent Future Disruption of Government Services (GAO/T-AIMD-97-51, February 24, 1997). High Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the year 2000 computing crisis facing the nation, focusing on: (1) the year 2000 risks facing the government and nation; (2) the evolution of the federal government's year 2000 strategy; and (3) additional actions that can be taken by the Executive Branch to prepare the nation for the year 2000. GAO noted that: (1) while progress has been made in addressing the federal government's year 2000 readiness, serious vulnerabilities remain; (2) many agencies are behind schedule; (3) at the current pace, it is clear that not all mission-critical systems will be fixed in time; (4) much more action is needed to ensure that federal agencies satisfactorily mitigate year 2000 risks to avoid debilitating consequences; (5) vital economic sectors of the nation likewise remain vulnerable to problems that the change of century will bring; (6) moreover, a high degree of information and systems interdependence exists among various levels of government and the private sector in each of these sectors; (7) these interdependencies increase the risk that a cascading wave of failures or interruptions of essential services could occur; (8) as the change of century grows closer and the breadth of year 2000 work that remains has become known, the federal government's response to the crisis has increased; (9) originally, the Office of Management and Budget (OMB) expressed a high degree of confidence about the federal government's ability to meet the year 2000 deadline; (10) more recently, as many agencies have reported their limited progress in solving the year 2000 problem, OMB has become increasingly concerned; (11) accordingly, at the urging of key congressional leaders, OMB has improved its response to the crisis by issuing much needed policies and increasing its monitoring of agencies; (12) most encouraging is the President's recent announcement of the establishment of a President's Council on Year 2000 Conversion to oversee federal efforts and promote public/private relationships; and (13) the establishment of the President's Council on Year 2000 Conversion provides an opportunity for the Executive Branch to take further key implementation steps to avert disruptions to critical services. |
In September 1978, the governments of Egypt and Israel signed the Camp David Accords, which, on March 26, 1979, culminated in the Treaty of Peace, signed by the leaders of Egypt and Israel and witnessed by the President of the United States. While annex I, article VI of the treaty specifically proposes that U.N. forces and observers supervise these security arrangements, the United States committed in a formal exchange of letters with the presidents of Egypt and Israel to ensure the establishment of an acceptable alternative multinational force if the U.N. process failed. Efforts were made during the following 2 years to secure a U.N. force and observers as contemplated by the Treaty of Peace. However, on May 18, 1981, the President of the United Nations Security Council announced the proposal to establish U.N. forces and observers in the Sinai had been rejected. Consequently, on August 3, 1981, a Protocol to the treaty was signed by the governments of Egypt and Israel and witnessed by the United States, establishing the Multinational Force and Observers (MFO). The MFO is an independent, international peacekeeping organization, established outside the U.N. framework, to monitor Israeli and Egyptian compliance with Treaty of Peace provisions. Since 1982, the MFO has acted as an observer, reporter, and monitor of security provisions, as well as an active liaison between Israel and Egypt. The MFO was jointly conceived by Israel and Egypt, with a firm U.S. diplomatic, military, and financial commitment. The Protocol, when combined with annex I of the Treaty of Peace, serves as the mandate and charter of the MFO. It sets forth the organization, functions, privileges, and immunities of the MFO and its members. The Protocol specifically substituted the MFO for the U.N. force and observers stipulated in the treaty, making the MFO responsible for monitoring compliance with, and reporting of any violations of, the military limitations specified in the treaty. Annex I to the Treaty of Peace establishes three security zones (A, B, and C) within the Sinai and one in Israel (zone D) along the international border and specifies military personnel and equipment limitations of each. Figure 1.1 illustrates the zones. Planning and preparation for MFO deployment occurred from August 1981 until its deployment in March 1982 with significant U.S. involvement. During this period, (1) the MFO was headquartered in Northern Virginia, (2) the U.S. Army Corps of Engineers accomplished all new construction in the Sinai at the site of a vacated Israeli air base in the Northern Sinai and at a totally undeveloped area in the Southern Sinai, and (3) the United States assisted in obtaining MFO participants from other governments. Although deployed in March 1982, the MFO formally assumed its functions on April 25, 1982, in conjunction with the day of final Israeli withdrawal from the Sinai. Since inception of the MFO, the U.S. government has provided diplomatic, military and financial support. The scope of these contributions are discussed in chapters 2 and 3. Under the Protocol, the mission of the MFO is to undertake the functions and responsibilities stipulated in the treaty for the U.N. forces and observers. Specifically, these functions are: Operation of checkpoints, reconnaissance patrols, and observation posts along the international boundary and line B, and within zone C. Periodic verification of the implementation of the provisions of the Treaty of Peace, to be carried out not less than twice a month unless otherwise agreed by the Parties. Additional verification within 48 hours after receipt of a request from either party. Ensuring the freedom of navigation through the Strait of Tiran. In addition to military forces at checkpoints in the Sinai, the MFO has a Coastal Patrol Unit and civilian observers who conduct both ground and air surveillance. The annex to the Treaty’s Protocol prescribes specific guidelines and responsibilities for the MFO organization, management, and operation. The Director General of the MFO is responsible for overall management and control and has staff at four locations: (1) MFO Headquarters in Rome, Italy; (2) Force Headquarters and operations in the Sinai; (3) offices representing the Director General in Cairo; and (4) Tel Aviv. Figure 1.2 shows the organizational structure of the MFO. The MFO headquarters staff in Rome, at the time of our review, was composed of 15 international personnel, the majority being from the United States, and 16 Italian nationals. The Director General, always a U.S. national, serves a 4-year term, which may be renewed or terminated by the Parties to the treaty. The Director General and his staff oversee all MFO operations, including legal and financial matters, contracts, procurement, facilities management, personnel and recruitment, morale and welfare programs, troop rotation arrangements, and program evaluation. Additionally, they handle all diplomatic matters between the MFO, Egypt, and Israel, as well as the governments of the countries that provide troops and financial contributions to the MFO. The Protocol also gives the Director General, his deputy, the force commander, and their spouses and minor children the privileges and immunities accorded to diplomatic convoys in accordance with international law. The functions of the force in the Sinai are controlled from the Force Commander’s Headquarters at the northern base at el Gorah by the force commander, appointed by the Director General with the approval of the Parties. The force commander is of general officer rank, serves a 3-year term, and cannot be from the United States. Sinai activities fall into four main operational areas: the operation of troops in the field and ships at sea to provide a constant presence; reconnaissance and verification of zones A, B, C, and D by the Civilian Observer Unit; liaison between the MFO and the two host nations; and logistical support required to sustain the force. The MFO in the Sinai is composed of military and civilian contingents, each performing specific operational functions. The United States, Colombia, and Fiji provide infantry battalions that perform observation missions in zone C from 31 remote observations posts and checkpoints. In addition, the United States, Canada, France, the Netherlands, New Zealand, Uruguay, Italy, Norway, and Australia provide support units such as engineers and headquarters staff personnel to the MFO. The size of the military force at the time of our review was about 1,987. The United States provides the largest contingent to the MFO, about 985 troops (50 percent of the force), including a logistics support battalion that shares logistical support tasks with MFO support contractor in the Sinai, with other contingents, and with the MFO offices in Cairo and Tel Aviv. The MFO offices in Cairo and Tel Aviv serve as the MFO diplomatic representative to the receiving state and manage procurement and financial functions. A civilian observer unit of 15 U.S. nationals performs observation and verification missions in zones A, B, C, and D. The MFO also includes 30 other civilians, and approximately 127 international hire civilian contractor personnel stationed in the Sinai performing a variety of support functions, including laundry and food preparation. The MFO support contractor also utilizes approximately 520 Egyptian nationals. Table 1.1 shows the role and responsibilities of each participating nation as well as the number of personnel allotted. The MFO logistics operations are directed by the Director General through the director of logistics, facilities, and contracts, and are carried out in the field by the force in the Sinai and the offices in Cairo and Tel Aviv. Headquarters logistics responsibilities involve implementing the Director General’s logistics policies regarding procurement, maintenance, engineering and facilities, transportation, contracting, stock control, and property accountability and disposal. At the force level, the chief of support, a U.S. Army colonel, is responsible for all support activities, including supply, transportation, food services, contracting, maintenance, and engineering. Field offices in Cairo and Tel Aviv procure supplies from commercial vendors primarily located in these countries. Logistical functions within the force as of November 1994 are predominantly performed by the 428 troops of the U.S. 1st Support Battalion. These operations are discussed in chapter 2 of this report. In addition to the United States, France, Uruguay, New Zealand, Canada, and the Netherlands also provide MFO with logistics support. Specifically, France provides MFO with a fixed-wing aviation unit consisting of 1 DHC-6 Twin Otter and 17 aircrew, support, and maintenance personnel. The Uruguayan and New Zealand contingents provide MFO with drivers and engineers. Canada provides air traffic control support, and the Netherlands provides signal communications specialists. The MFO also uses support contractors to perform many logistics functions, including administrative and clerical support; maintenance of facilities; vehicles, grounds, and electronic equipment; fire prevention; food services; personal services (barber and tailor/laundry); and receipt, distribution, and storage of certain classes of supplies. U.S. military and financial participation in the MFO is managed by the State Department’s Bureau of Near Eastern Affairs, with the Department of Defense (DOD) input regarding military matters. The Bureau, established by a State Department notice dated March 5, 1982, serves as the single focal point for the U.S. government regarding liaison and coordination of all aspects of U.S. participation in the MFO. This includes the responsibility for overseeing U.S. interests in MFO operations such as the budgeting of U.S. funding to the MFO, assessing whether the U.S. contributions and other resources provided to the MFO are being properly used, and annually reporting U.S. costs incurred and military participation to Congress. The Army serves as the DOD’s executive agent for matters pertaining to U.S. military participation in and support of the MFO. The MFO mission is assigned to the Commander, XVIIIth Airborne Corps, U.S. Forces Command. We initiated this study in response to a request from the Chairman and Ranking Member of the House Committee on International Relations to examine U.S. participation in the MFO. Our specific objectives were to describe and assess (1) the level of U.S. participation, training, and operational impacts; (2) the actual cost of MFO operations, the U.S. contribution, and any cost-saving opportunities; (3) State oversight of the U.S. contribution; and (4) views of the State Department and other relevant parties on the MFO performance and lessons learned. For objectives 1, 2, and 4, we performed our work at the MFO Headquarters in Rome, Force Headquarters in the northern and southern Sinai, remote observation posts throughout the Sinai, and MFO offices in Cairo and Tel Aviv. At the MFO Headquarters, we met with the Director General and officials from the following offices: (a) comptroller; (b) policy, planning, and operations; (c) logistic, facilities, and contracts; and (d) political affairs and general counsel. In the Sinai, we visited the MFO North Camp, where we interviewed the force commander, senior U.S. military officials at the Force Headquarters, civilian observers, U.S. infantry battalion and 1st Support Battalion personnel, and support contractors performing logistical functions. The Director General directed that all documents we reviewed and/or requested be individually reviewed and cleared by the general counsel prior to release. Aside from this administrative formality, the MFO assisted us with accommodations in the field and generally cooperated with this review. To gain Israeli and Egyptian government perspectives on MFO effectiveness as a peacekeeping operation, we met with Egyptian and Israeli officials from the Headquarters of the Egyptian Liaison Agency With International Organizations and the Israeli Defense Force Liaison Unit. For objectives 2, 3, and 4, we interviewed officials and reviewed documents from the DOD and Department of State. We performed our work at the State Department Bureau of Near East and South Asian Affairs; the Office of the Under Secretary of Defense (Policy); the Army Operations, Readiness and Mobilization Directorate Operations and Contingency Plans Division; Politico-Military Affairs Division; DOD Joint Chiefs of Staff Strategic Planning Directorate (J5); Department of the Army Budget; Headquarters, XVIIIth Airborne Corps, Fort Bragg; and the Headquarters Forces Command Operations and Budget office, Fort McPherson, Georgia. We performed our review from February 1994 to February 1995 in accordance with generally accepted government auditing standards. We obtained agency comments from State, DOD, and the MFO. Since inception of the MFO, the United States has always provided significant military and civilian support. The United States provides the largest military contingent, constituting 49.6 percent of the total force at the time of our review. U.S. forces perform infantry battalion functions, provide a large proportion of MFO logistical and medical support, and serve on the headquarters staff in the Sinai. In addition, the United States gives the MFO direct use of the U.S. Army’s logistics system, including access to excess defense articles. According to MFO and U.S. Army officials, opportunities may exist to reduce the number of U.S. Army logistical personnel. U.S. troops assigned to the MFO must receive predeployment training, training while deployed, and training upon completion of their MFO tour. According to Army officials, the MFO commitment contributes to the strain on Army resources. To help alleviate the strain, starting in January 1995, the Army pilot tested a mixed infantry battalion comprising active duty, National Guard, and Reserve forces. U.S. military forces deployed to the MFO include an infantry battalion, a logistics support battalion, and Force Headquarters staff personnel. An infantry battalion tailored to the MFO mission is drawn from active units of the XVIIIth Airborne Corps every 6 months. The overall strength of U.S. armed forces participating in the MFO as of November 1994 was 985, which is below the 1,200 member maximum limit authorized by Congress. Appendix IV shows U.S. and other participant force strength in the MFO since inception. The infantry battalion deployed to the MFO totals approximately 529 persons and is stationed at South Camp at Sharm el-Sheikh. This battalion operates observation posts and checkpoints and conducts patrols in the southern sector of the Sinai, which runs along the Gulf of Aqaba, from Sharm el-Sheikh to Taba. In addition, a logistics support battalion of 428 people based at both North and South Camps provides staff for (1) two dispensaries; (2) an explosive ordnance disposal detachment; (3) a transportation element that handles long-distance ground transportation; (4) a small maintenance detachment for U.S.-made radios and weapons; (5) a supply and service unit that deals with the requisition, receipt, storage, and distribution of all classes of supply; (6) an aviation unit, including 10 helicopters, crews, and maintenance personnel; and (7) an Army post office detachment. Figure 2.1 shows the percentage of logistical troops by MFO participating nation. Additionally, 28 officers and enlisted men are assigned to various positions on the force commander’s staff at el-Gorah. In 1982, at MFO request, the Army authorized the MFO to purchase supplies and equipment from DOD’s supply system. The MFO has used this authorization since 1982 to procure significant portions of its supplies, ranging from 80 percent of its supplies in 1982 to 20 percent in 1993. The MFO also has access to excess defense articles, defined as property items no longer needed by the particular service and not originally procured in anticipation of military assistance or sales. The MFO authorization is identical to that of any U.S. Army unit, and as with other Army units, receives a higher priority than other U.S. services requesting excess Army articles. In fiscal years 1993 and 1994, the MFO acquired excess articles that became available during the closing of U.S. Army installations in Europe. The MFO paid the shipping costs and received such items as generators, binoculars, tables, refrigerators, and medical equipment ranging from heart monitors, centrifuges, and ultrasonic cleaners to treadmills. The transfer of this equipment benefited the MFO in a number of ways. For example, according to MFO and Army officials, the MFO medical facility was substantially upgraded as a result of excess Army articles, and some medical problems that once required emergency medical evacuation to Israel can now be performed in-house. According to DOD officials, the continuous subtraction of the equivalent of two light infantry battalions, and associated administrative headquarters support to the MFO, when combined with other global commitments, contributes to straining Army infantry and support resources—particularly as the Army downsizes. However, they did not provide specific details on the operational impact. In January 1995, the Joint Chiefs of Staff conducted a study to assess options and strategies regarding U.S. military participation in the MFO. The study concluded, among other things, that there is no military requirement for the deployment of elite or even active U.S. forces to the MFO. The study further concluded that the costs to the Army of participating in the MFO are: a reduction of one infantry brigade equivalent from the combat-ready force structure caused by the continuous commitment of three active/reserve infantry battalions for MFO unique training, deployment, and post-MFO requalification; a loss of support personnel in specific skill fields deployed for 1 year to the 1st Support Battalion; and a negative impact on personnel readiness of other units caused by the ripple effect of the special personnel requirements of the MFO. Predeployment training focuses on the MFO mission and is provided in the United States. It includes individual, collective, and specialized tasks tailored to support the mission. Individual training tasks include peacekeeping skills and procedures; MFO rules of engagement, observation and reporting procedures; desert operations and survival, aircraft, vehicle, and uniform recognition; and Arabic customs and language. Collective training includes vehicle patrolling, outpost operations, and squad-level operations. Specialty training includes food handling and cooking, generator operation, and remote field sanitation operations. Light infantry units assigned to the MFO receive a minimum of 3 months of predeployment training. Support troops receive a 1-week predeployment orientation at Fort Bragg. Shortly after arriving in the Sinai, all troops receive orientation training to complement predeployment training and to ensure units are prepared to undertake their missions. It includes follow-on training to previous instruction that can be conducted under actual environmental conditions as well as new subjects that were not suitable for inclusion in predeployment training. Troops assigned to infantry or logistics support battalions receive orientation training that includes standards of conduct, minefield procedures, and preventive medicine. Specialized training in communications, desert driving, and special equipment usage is also provided where applicable. According to MFO officials, orientation training lasts about 1 week. Each contingent also conducts continuation or in-Sinai training in appropriate mission related subjects, such as peacekeeping skills and procedures, weapons qualification, and night vision techniques. According to MFO officials, the frequency and type of in-Sinai training is based on the respective unit commander’s assessment of need or as directed by the force commander. According to DOD officials, the MFO commitment necessitates post-deployment training for Army units deployed. U.S. forces returning from MFO duty must receive post-deployment training in required individual and collective skills before returning to their normal military functions. According to Army officials, required skills of many returning units are degraded during their MFO experience. According to DOD officials, peace operations require a significant change in orientation for military personnel. While most facets of normal military operations apply to peace operations, peace operations require an adjustment of attitude and approach. According to DOD officials, commanders at the home station must allocate sufficient resources and time for training in order to regain collective and individual standards required for the unit’s primary war fighting mission. This post-deployment training, redevelops skills and abilities that may have been affected by the nature of MFO peace operations. For example, while performing the MFO mission, U.S. units are prohibited from (1) all parachute jumping and training involving parachute drops of equipment; (2) detonating explosives, mines, and grenades for training; and (3) conducting live firing by elements larger than a platoon size. The extent of post-deployment training required is determined by the U.S. home station commander. According to DOD officials, individual post-deployment training generally takes about a month and collective training about 3 months. In October 1993, the Army Chief of Staff approved a pilot program to organize, train, and deploy a composite light infantry battalion of Army National Guard and Reserve volunteer soldiers and regular Army soldiers to the MFO. The program, officially designated “MFO Sinai Initiative,” was designed to determine the extent to which reservists can be used to enhance the Army’s ability to perform peacekeeping missions as a way to relieve the strain on active forces. The composite force deployed to the MFO in January 1995 following individual and collective training at Fort Bragg, North Carolina, in November 1994. The U.S. Army plans to rotate composite battalions in the future depending on the success of the pilot initiative, the availability of volunteers, and other factors. According to DOD, the cost of implementing the pilot initiative is about $15 million. This amount is in addition to other DOD costs to support the MFO. While the Sinai initiative marks the first time reservists will be used to support active troops in the MFO operation, it does not mark the first time they have been used for peacetime operations. For example, reservists have supported active forces in operations involving disaster relief and humanitarian assistance. In the Sinai initiative, the National Guard and Reserve, whose participation is strictly voluntary, will constitute 80 percent of the force; active service soldiers, in positions of leadership, will constitute the remaining 20 percent. Despite the recent transfer by MFO of some U.S. logistical functions to its existing support contractor, U.S. logistical troop levels have not been correspondingly reduced. In August 1994, MFO began transferring some U.S. logistical supply functions, such as the storing of commercial vehicle parts and construction materials, to a contractor. According to MFO management, the U.S. soldiers responsible for this function will be replaced by contractor employees who are more experienced in managing an inventory system of commercial items. These same MFO officials indicated that these U.S. logistical troops continue to be needed for emergencies, contingency operations, and other logistics support functions such as moving materials, closing warehouses, and counting stocks. In addition, according to U.S. Army documentation, since transportation support is conducted with commercial vehicles and augmented by drivers from New Zealand and Uruguay, an opportunity exists to transfer responsibility for transportation support to the contractor and/or other participating states. In June 1995, after the completion of our fieldwork, State officials told us that MFO had eliminated six 1st Support Battalion positions and was considering replacing U.S. truck drivers with Egyptian contractors. However, they agreed with DOD officials that changes in U.S. force levels were subject to political constraints. U.S. participation in the Civilian Observer Unit was established by a letter from the Secretary of State to the Foreign Ministers of Egypt and Israel that accompanied the signing of the Protocol to the treaty on August 3, 1981. The letter offered an observer unit composed of American citizens to verify party compliance with Treaty of Peace provisions. Presently, the unit contains 15 U.S. nationals, approximately half being on transfer from the U.S. government and under contract to the MFO, the other contracted directly by the MFO. Quite separate from the observation carried out in zone C by the three infantry battalions of the force, only the Civilian Observer Unit performs regular observation and verification missions throughout all four zones of the treaty area in Egypt and Israel. Verification missions last from 2 to 4 days and employ MFO helicopters and vehicles to move the teams of observers throughout the four zones. During these missions, observers are accompanied by Israeli or Egyptian liaison officers, depending on which country the zone resides. During the course of a complete cycle of missions, the observers cover all the Egyptian and Israeli installations within the four zones to verify treaty limitations on personnel, armaments, and military infrastructure. Verification missions occur at least twice a month. Observers must also be prepared to undertake additional verifications within 48 hours of a request from either the Israeli or Egyptian government. According to MFO officials, violations of the provisions of the treaty are rare. They are typically the result of technical errors by individuals regarding military restrictions and have been easily rectified by the Parties. According to the Director General’s 1994 Trilateral Report, in fiscal year 1993, there were three deviations from the terms of the treaty. The details of violations are reported only to the Parties. Thus, we could not verify the violations or their rectification. In fiscal year 1993, the operating budget of the MFO totaled $56.1 million, excluding in-kind contributions and nonreimbursable costs borne by participating and donor nations. The operating budget is funded primarily by assessed contributions from the United States, Egypt, and Israel, with each country being assessed one-third of the cost, after small contributions from Germany and Japan. The 11 participating nations provide the military personnel and equipment and supplies. Since MFO inception in 1982, the United States has provided the largest percentage of MFO funding and resources. In fiscal year 1993, the incremental cost of U.S. participation was $18.6 millon, while the total cost was $64.4 million. This includes the annual assessment cost of $17.8 million and DOD costs of $46.6 million for troops. As a result of troop, personnel, and other cost reductions, the operating costs of the MFO have steadily declined since 1989, which has decreased the U.S. assessment cost accordingly. However, the total cost of the U.S. participation in the MFO has increased during recent years due to the higher military salaries paid to U.S. soldiers and reimbursement costs for food and base support. The total cost of the MFO consists of its annual budgeted operating costs, in-kind contributions, and nonreimbursable costs borne by the participating and donor nations. The operating costs include expenses such as personnel, supplies and materials, contractual services, troop rotations, and equipment acquisition. In addition, there are in-kind contributions and nonreimbursable costs borne by the developed participating nations, particularly the United States, France, and Italy. These include capital equipment and excess property donations, and the salaries of the troops provided by these countries. Also, the MFO is reimbursed by participating developed nations for providing food, lodging, and base support to the troops of these nations while they are on duty at the MFO. For the United States, this is done through a credit to the account of the MFO for the amount of expense (offset cost) that the United States would have incurred for lodging and base support had its troops remained at home. According to MFO officials, the MFO does not have sufficient information to determine the total amount of unbudgeted contributions provided by the participating nations. The MFO provides transportation, food, lodging, base support, and a modified U.N. rate for troops of developing countries participating in the MFO. The operating budgets of the MFO for fiscal years 1989 through 1993 and their funding sources are shown in table 3.1. The total annual operating expense of the MFO since its inception in fiscal year 1982 is shown in figure 3.1. A detailed discussion on the contribution of troops, equipment and logistical support provided by the participating nations is discussed in chapter 2. The funding and resources the United States provides to the MFO includes (1) the annual assessment contribution of one-third of the MFO operation costs and (2) about 50 percent of the MFO military contingent. The MFO also receives U.S. Army excess defense articles as discussed in chapter 2. The cost of providing U.S. troops to the MFO is paid out of the DOD regular operating budget. In contrast, the one-third U.S. assessment is paid directly from appropriated funds to the State Department for peacekeeping operations. Table 3.2 shows the costs of the U.S. participation in the MFO by category for fiscal years 1989 through 1993. Table 3.2 illustrates that while the actual cost of the U.S. participation in the MFO for fiscal year 1993 was $64.4 million, the incremental or additional cost to the United States for its participation was $18.6 million. The $45.8 million difference represents DOD costs that were either reimbursed by the MFO ($2.8 million) or costs that DOD would have incurred had its troops remained in the United States ($36.1 million salary costs and $6.9 million offset costs for MFO food and base support provided to U.S. troops). Of the $18.6 million incremental costs, $17.8 million is for the U.S. annual assessment and the remaining $0.8 million is the DOD incremental cost for predeployment training and unreimbursed travel. Table 3.2 does not include the costs of excess defense articles and capital equipment donated by the United States to the MFO. The cost of these activities is not tracked by DOD. The MFO has progressively reduced its operating cost since fiscal year 1982. Figure 3.1 illustrates the decreases in the operating budget. MFO stated that it is implementing measures to further reduce these costs, to maintain current budgetary levels despite inflation costing about $1 million per year. While the decrease in MFO operating costs has resulted in corresponding reductions in the U.S. incremental costs, the total cost of the U.S. participation has gradually increased since 1989. This is because although U.S. troop levels have decreased, their salaries and the offset costs have increased. Also shown in figure 3.1, the operating budget of the MFO has progressively decreased from $103 million in fiscal year 1983, the year after its inception, to $56.1 million in fiscal year 1993. MFO fiscal year 1982 budget was about $225 million, primarily for start-up costs that included construction of bases and facilities. Cost reductions of $28.8 million between fiscal years 1983 and 1989 were primarily due to the completion of start-up activities and the stabilization of operations. Since fiscal year 1989, cost reductions of $18.1 million have primarily resulted from significant reductions in military and civilian personnel strength and through a host of cost-reduction initiatives by MFO management including reductions in force vehicles, resale of used vehicles, and tighter inventory controls. The MFO total military strength was substantially reduced by 586 troops between 1988 and 1993 to 2,063 troops. However, many of these reductions came from contingents of developing nations, such as Fiji and Colombia, which maximized MFO cost reductions because the MFO pays transportation, maintenance costs, and a modified U.N. rate for these troops. In addition, MFO civilian personnel, excluding support contractor personnel, were reduced from 63 in fiscal year 1987 to 49 in fiscal 1993, which resulted in further cost reductions. The primary reasons for the increased actual cost of U.S. participation in the MFO are increases in both military pay and the offset costs credited by DOD to the MFO for providing food, lodging, and base support to U.S. troops. While the U.S. authorized troop strength at the MFO decreased from 1,045 in fiscal year 1990 to 984 in fiscal year 1993, military pay raises increased the salary cost of these troops from about $31 million in fiscal year 1990 to $36.1 million for fiscal year 1993, and U.S. offset costs almost doubled from $3.6 million to $6.9 million, primarily because of changes in the Army’s procedure for calculating these costs. According to Army officials, this procedure incorrectly included in the offset the costs of certain services not provided to U.S. troops by the MFO. Prompted, in part, by our review of the offset issue, DOD and MFO were able to agree on a methodology to compute offset costs for fiscal year 1994 and future years. The MFO is widely viewed by United States and international officials as effectively performing its duties in a cost-efficient manner. This view is primarily held because of the sustained peace between Egypt and Israel, which has provided a supportive environment for the mission’s success and for active cost containment measures. According to State, MFO, Egyptian, and Israeli officials, the MFO has helped sustain peace between Egypt and Israel by serving as liaison and monitor of the treaty provisions. According to many officials interviewed, the MFO operational success can be attributed to several factors, including inherited advantageous conditions resulting from the way the MFO was established, the Israeli/Egyptian commitment to peace, significant U.S. military and financial support, and financial co-responsibility placed on the Parties. As a result of the favorable circumstances surrounding the establishment of the MFO, particularly when compared to other peacekeeping operations, some officials believed that the MFO model may not be readily applicable to more challenging peacekeeping scenarios. However, the factors contributing to the MFO operational success may serve as lessons learned for future peacekeeping operations. State, DOD, Israeli, and Egyptian officials all view the MFO as effectively performing its mission of monitoring, liaison, and reporting treaty provisions and violations. State Department officials view the MFO as an instrument of U.S. foreign policy in the Middle East that should remain until sustained regional peace is achieved. According to State officials, the MFO is an operationally and cost-effective peacekeeping operation that has helped bridge confidence and communication between Egypt and Israel. U.S. Army officials, while viewing the MFO as operationally effective, have concerns about the level of U.S. participation, the operational impacts to the Army, and the lack of an end date. These officials view the MFO as an indefinite Army commitment. According to Egyptian liaison officials, the MFO has helped build confidence between the Israelis and Egyptians by supervising adherence to the treaty. The liaison system promotes mutual dialogue and has assisted in solving some challenges of both parties. These Egyptian officials, although agreeing with their governments support of the MFO, expressed concerns about the open ended term of the MFO and questioned whether the MFO could be reduced to an observer only force. Egyptian officials were pleased with the reductions in costs but would like to see additional cuts. According to Israeli officials, the MFO has been successful in supervising the conditions of the treaty and in building the confidence of the Parties. It is their view that the MFO works because it has effectively supplemented Israel’s and Egypt’s strategic interests by securing the provisions of the treaty and providing a large U.S. military role. Officials viewed the United States as essential to the MFO success and emphasized that any significant reductions in U.S. forces could send a signal of lessened U.S. commitment during current and future regional peace initiatives. According to DOD officials, the MFO began under almost optimum conditions and was provided opportunities for success that are not typical of most peacekeeping operations. Consequently, these officials believe that the MFO model would not apply to more challenging and hostile peacekeeping scenarios. The MFO was preceded by a panoply of cease fire and withdrawal agreements, negotiations, and U.N. peacekeeping forces between October 1973 and March 1979. These activities effectively transformed the Sinai Peninsula from a violent battlefield to a tranquil state prior to the deployment of the MFO. Thus, the MFO inherited a peaceful operating environment. In addition, the MFO began with (1) a firm commitment to peace between the Parties, as indicated by a formal treaty of peace and a thorough Protocol; (2) an established geographic buffer zone in which to operate; (3) substantial U.S. government military and financial commitments; (4) a barren, scarcely populated operating environment; and (5) a largely U.S. Army managed logistics system. According to DOD officials, these conditions created an almost clinical environment for MFO operations. For example, the MFO buffer zone, zone C, is free from the hostilities of many peacekeeping operations. The operating area is large, stretching over 10,000 square miles, but is largely unpopulated. Consequently, according to DOD, any military or terrorist threat to MFO ground forces in the Sinai is minimal. These officials believe that this MFO model may not directly apply to an environment that is urban or densely populated with potentially hostile parties over which a central government would have little control and where urban guerilla warfare is a possibility. In addition, officials emphasized that the MFO always had a U.S. managed and designed logistics system with a direct link to the U.S. Army. The MFO compares best with a traditional U.N. Chapter VI peacekeeping operation responsible for observing and reporting as opposed to a peace enforcement Chapter VII operation. This is primarily because the MFO mandate is to supervise the security arrangements of the Treaty of Peace by observing and reporting violations and demanding rectification. The MFO was not intended to serve as a fighting force or to repel national or factional armies. According to DOD officials, the MFO strength lies not in its military capability, but in the commitment of Israel and Egypt to peace, and the political support of the participating states. According to U.S. and international officials, while the MFO has been successful, there are several lessons that can be learned from its structure and operation. In terms of U.S. commitment and oversight, the MFO arrangement has an open-ended U.S. participation agreement, without a formal requirement for periodic U.S. reassessments, and has no formal executive board to oversee its operations. The positive lessons from the MFO are that it: (1) began with a detailed charter or mandate fully supported by all parties, (2) makes parties of the peace treaty financially accountable, (3) incorporated standardized and interoperable field equipment, and (4) has an active liaison system with the Parties. U.S. participation in the MFO does not have an end date or incremental drawdown provision. According to DOD and Army officials, U.S. arrangements in any similar future peacekeeping operation should include provisions for drawdown and eventual termination. Other participating developed nations have periodic renewal provisions in their participation agreements. Consequently, these nations formally renegotiate their participation with the MFO at specified intervals. In contrast, the United States does not have any renewal provision in its participation agreement, thus periodic reassessment is not formally accomplished. According to U.S. Army officials, there should be formal periodic reassessments of the level of U.S. military participation in the MFO, particularly in light of other global demands. According to these officials, over a decade of Israeli-Egyptian peace warrants such reassessment, particularly in light of growing military requirements elsewhere, and reduced budgets and resources. In addition, the MFO does not have any formal executive oversight such as a board of directors or an independent audit entity as discussed in chapter 5 of this report. While the broad management discretion granted to the Director General by the Protocol has benefits such as cost cutting flexibility, a more formal oversight mechanism could strengthen financial accountability and deter misuse of expenditures. Thus, we believe that any future operation should include a formal mechanism for adequate oversight of the U.S. contribution. On the other hand, a positive lesson can be learned from the way the MFO charter is constructed. The MFO charter, unlike many peacekeeping operations, provides details regarding the responsibilities, organization, operations, military command structure, financing, and administration of the MFO. According to MFO officials, there are few aspects of the MFO peacekeeping tasks that require further expansion or interpretation by the military staff of the MFO. According to DOD and State officials, few peacekeeping missions have ever deployed with such a complete working document as the MFO charter. In contrast, DOD officials note U.N. mandates are often ambiguous and ill-defined, thereby complicating peacekeeping operations. These officials cite favorable political circumstances and the existence of an agreement between the Parties as largely determining the specificity and realism of the mandate and ultimately the success or failure of the operation. These officials also stated that where the United Nations has been given similar favorable circumstances for mandates and terms of reference deriving from a disengagement agreement between motivated adversaries, results have been favorable. Another potential lesson learned is MFO financing method. According to MFO officials, unlike other peacekeeping operations, the Parties to the MFO share in direct funding, thus each has a vested interest in cost containment. The financial arrangements also make the MFO directly accountable to the fund’s contributors, resulting in a contractor-client relationship. According to MFO, State, and DOD officials, this arrangement is advantageous because it actively engages former adversaries in the financial planning of the peacekeeping operation. As for the contributions of the participating states, arrangements for external funding sources should be maximized while international interest is high. This could work to reduce the financial burden of the one-third assessment on the United States. According to MFO officials, the MFO waited several years before trying to recruit external donors, with only modest results. In addition, since its inception, the MFO has used a system of commercial procurement, contracting, and equipment standardization. MFO procurement emphasizes the use of local markets to increase competition and reduce costs. The MFO derives additional revenue from sales of used vehicle and excess scrap. Equipment standardization is also emphasized. According to MFO officials, the principle underlying MFO logistics was that to promote fairness and efficiency, each military unit, regardless of its resources, would receive the same type of equipment. In contrast, many U.N. peacekeeping operations maintain a variety of equipment and maintenance standards in different contingents. The sophisticated equipment in the observation posts, the vehicles, and the communications and mission-related equipment are all standardized and are the property of the MFO. According to MFO, this has been accomplished by procuring certain models of equipment from specific manufacturers, such as General Motors for commercial vehicles and Motorola for radio communication equipment. Standardization presents several logistical advantages: (1) maintenance is easier, (2) incoming battalions do not have to bring their own sophisticated equipment and vehicles with them and all their diverse maintenance problems, and (3) it reinforces the integrated appearance of the force. In addition, interoperability of communication and electronics systems is achieved. The MFO liaison system also serves as a model for developing peaceful relations and cooperation. According to MFO officials, the liaison system fosters contact and permits parties to address and resolve issues at graduated levels, serving as an instrument to adapt treaty conditions to changing realities on the ground. The State Department has responsibility for overseeing U.S. participation in the MFO and is required to annually report to Congress on MFO activities, including the cost to the United States. DOD provides State data on the total cost of deploying and maintaining U.S. troops at the MFO. We believe that State could improve its oversight as well as the quality of the annual reports it sends to Congress. These reports have contained inaccuracies and did not show the total U.S. cost of participation in the MFO, due in part to inaccurate data submitted by DOD on troop costs. State has taken a hands-off approach to MFO and does not adequately assess whether U.S. contributions to the MFO are spent efficiently and properly. For example, State was not knowledgeable of important changes in MFO policies and procedures that had an impact on U.S. costs. In addition, State does not (1) know if the MFO has adequate internal management and accounting controls in place to deter the misuse of U.S. contributions, (2) obtain and review all audit reports issued by the MFO external auditor, or (3) analyze MFO financial statements to detect items that may impact the U.S. contribution. Effective State oversight is needed because (1) MFO Director General has broad management authority, (2) MFO does not have a formal board of directors or governing body that provides executive oversight for the accountability of the expenditure of funds, and (3) MFO does not have an independent audit committee to oversee external audits. During our review, we observed that State officials were not knowledgeable of details related to salary, benefits, and other matters involving the MFO, which have had an effect on the cost of operation. For example, until we began our inquiry, State was unaware of many details relating to the Director General’s salary and benefits or other MFO expenditures made on his behalf. We also noted that MFO policies and procedures for designating dependents of MFO officials were changed by the MFO two times in 1992 and 1994. They were changed in 1992 to broaden the definition of dependent to include persons other than spouses, unmarried children, or dependent parents as dependents. In 1994, following the conclusion of our fieldwork, the policies and procedures were revised by the MFO to expand the definition of an authorized dependent. Specifically, the new regulation states that a person is an authorized dependent if he/she has been so designated by the MFO staff member and so approved by the Director General. While other members of the MFO may benefit from these changes, the MFO general counsel told us and congressional staff in February 1995 that the changes were made to accommodate the personal circumstances of the Director General, who was already receiving dependent benefits for individuals who were not his spouse or unmarried dependent children. In an August 10, 1994, letter to State, the Director General explained that housing used by the former Director General, who was a bachelor, was not suitable for his household and went on to explain the security and furnishing upgrades and improvements to his MFO-provided residence that were necessary to accommodate his household. He also stated that the MFO pays his dependents’ elementary and high school fees and annual dependent education travel, a benefit that is available to all members of the MFO international staff. In response to our inquiry, State Department officials said that they were aware that the Director General had a nontraditional family and that some accommodation would be necessary in order for him to accept the initial appointment in 1988. However, they stated that they were not aware of the specific changes made to MFO policies to satisfy this accommodation, which had an affect on benefits and privileges. In view of the fact that the Director General has such broad latitude to modify regulations and procedures without external approval, we believe it is important for State to be aware of all policy changes that may affect costs. The Protocol to the treaty establishing the MFO does not provide for a governing body for executive oversight of the MFO, or an independent audit entity. It gives the MFO Director General broad management authority, with a requirement to report developments relating to the functioning of the MFO to the Parties. According to MFO officials, the annual Trilateral meeting fulfills the purpose of a “board of directors” because the Director General makes a detailed statement covering MFO operations, administration for the prior fiscal year, and issues and funding requirements for the new fiscal year, and invites practical suggestions from representatives from the funds contributing countries participating in the meeting. In addition, annual budgets are submitted to financial contributors for approval. According to MFO officials, the U.S. government, as a participant, is on the “board of directors” of the MFO. State officials agree that the statements at the Trilateral meeting, informal discussions, and site visits throughout the year constitute adequate oversight. However, we believe that the Director General’s statements at the Trilateral meeting and informal discussions throughout the year do not constitute a sufficient oversight mechanism to prevent the potential misuse of U.S. contributions. In contrast, other international organizations have an independent governing body above the chief executive to oversee and approve operations and finances. For example, both the North Atlantic Treaty Organization (NATO) and the Organization for Economic Co-Operation and Development have councils to perform oversight of their operations and serve as the highest decision-making bodies. The MFO also does not have an independent audit entity between the Director General and the external auditor to oversee the audit and report to management on its performance and results and the disposition of any recommendations resulting from the audit. The MFO Director General selects, directs, and receives the report of the external auditor, Price Waterhouse. In contrast, other international organizations we examined such as NATO, the Organization of American States, and the European Union, all have independent external audit committees that perform or oversee external audits and are independent of the governing body or chief executive. The lack of a fully engaged “board of directors” or audit committee results in the Director General essentially having carte blanche authority to run the organization. We believe that in the absence of a formal executive governing body, improved State oversight of U.S. contributions is essential. State relies on the audit report of the MFO external auditor, Price Waterhouse, for assurance that the MFO has adequate internal controls. This report, along with a separate management letter, is prepared in accordance with generally accepted auditing standards and expresses the auditor’s opinion on whether the financial statements are free of material misstatement. However, generally accepted auditing standards do not require the report to include an opinion on the adequacy of the MFO internal controls. Accordingly, while the audit report provides assurance that the data in the MFO financial statements are free of material misstatement, it does not provide State assurance that the MFO has adequate internal accounting controls in place to deter the improper use of U.S. contributions. We found that State did not request, obtain, or review the annual management letter provided by the external auditor to the MFO management. We obtained copies of the management letter for fiscal years 1990, 1991, and 1993 and noted that although they do not express an opinion on the MFO internal controls, they do discuss internal control matters and problems noted during the audit, recommendations for corrective action, and responses by the MFO management. Although this letter would not provide State with a basis for determining whether the MFO internal controls were adequate, it does provide information on internal control problems found during the external audit and corrective actions taken by the MFO management. In order to determine whether the MFO internal controls are adequate, State could ask the MFO to engage its external auditor to perform a separate audit and issue an opinion on its internal controls. Since the United States is a primary contributor, State should then request that the MFO provide State with a copy of this report as the representative of the U.S. government. State Department officials believe they are fulfilling their oversight responsibilities by relying on the audit report, the MFO published financial statements, and the integrity of the MFO management, which is heavily staffed by former State Department employees. They did not want to micromanage the MFO. However, they agreed that periodic separate reviews of the MFO internal controls by the external auditor and reviews of the external auditor’s management letters to the MFO would provide further assurance that the MFO had adequate internal controls in place and would strengthen State’s oversight over U.S. contributions. During our review, we noted two items relating to U.S. contributions that prompted changes to the MFO financial statements and a reduction in the U.S. assessment for fiscal year 1994. These items could have been detected several years ago by State if it had regularly reviewed the MFO published financial statements and the FX account audit reports. In one instance, we noted that for fiscal year 1993 and prior years, the MFO financial statements did not disclose the amounts of DOD reimbursement to the MFO for providing food, lodging, and base support to U.S. troops on duty at the MFO ($6.9 million for fiscal year 1993). This reimbursement amount is not shown as revenue in the income statement, but is applied as a net against the expense of personnel in the MFO income statement with no explanatory footnote. After we informed MFO officials that this did not provide full disclosure of the U.S. contribution, they included an explanation in the MFO financial statements for fiscal year 1994. We also found that State was unaware of the total amount of loans made by the MFO from its operating budget to its FX account and how much of these loans remained outstanding. The FX is a self-sustaining consumer goods store that serves the MFO military and civilian personnel stationed in the Sinai. The MFO external auditor performs a separate audit on the FX account annually; however, State had not requested, obtained, or reviewed the reports resulting from these audits. Several weeks after our inquiry, an MFO official told us that the outstanding loan amount shown on the MFO financial statements did not agree with the outstanding amount shown on the FX financial statements. He stated that the FX financial statements showed that the FX owes a loan balance of $1.53 million to the MFO, while the MFO financial statements showed the loan owed to them was $1 million—or $530,000 less. The official noted that the reason for the differences was that the MFO had written off $530,000 of the FX loan on the books several years ago because they had determined this amount to be uncollectible, which is in accord with generally accepted accounting principles. State was unaware of this transaction, although the MFO had reported the loan write-off in its financial statements for fiscal year 1985, the year that it occurred. Prompted by our inquiry and the improved financial condition of the FX since the loan write-offs, the MFO reinstated the loan write-off on its fiscal year 1994 financial statements, and the resulting $530,000 of income will be credited to the three contributing countries, reducing the U.S. assessment for fiscal year 1995 by $177,000. State officials noted that in the past they did not believe it was necessary to request the audit reports of the FX account because it is a separate, self-sustaining account, funded from sales to the MFO soldiers. However, we believe that the United States has an interest in this account because the FX was established through loans from the MFO operating funds, one-third of which is paid by the United States. Also, U.S. military personnel make up about half of the soldiers who use the FX, which has total annual sales of about $5 million and annual income of about $553,000. MFO officials stated that the FX profits are used to fund morale support activities for the MFO military personnel. If State had been receiving and examining the audited financial statement of both the FX and the MFO, it could have noted the improved financial condition of the FX account and could have taken appropriate action so that the United States could have realized the reduction earlier. State officials stated that in the future they would request and review the external auditors report of the FX account in order to strengthen the performance of their oversight responsibilities. The legislation authorizing U.S. participation in the MFO requires that the President submit an annual report to Congress on the activities of the MFO that describes all costs borne by the U.S. government in its relationship with the MFO whether the United States was reimbursed for these costs or not. This report is prepared by the State Department with input from the Department of the Army, which is the DOD executive agent for matters pertaining to the MFO. We found that none of the previous reports included the annual assessment paid from the State’s budget to the MFO ($18.3 million for fiscal year 1993) as its share of the total operating costs of the MFO. This is covered separately in State’s congressional presentation and other budget presentations to Congress. State maintained that it does not include the annual assessment in the annual report because it would make the report too lengthy. However, State could include the amount of the assessment in the report and refer the reader to the congressional presentation for details on how this amount was computed. This would enable Congress to have access to the full cost of the MFO to the United States in one document. Subsequent to the completion of our fieldwork, State officials agreed that the annual assessment amount should be included in the MFO report to Congress and included it in the 1994 report. Also, we found that the annual report contained an inaccuracy in the amounts shown for the salary costs of military personnel for 1 year. For fiscal year 1992, military salary costs reported were only $12.1 million, which was less than half of what was reported for fiscal years 1991 and 1993. Army officials have recomputed the salary costs to correct the discrepancy. We recommend that the Secretary of State improve the oversight of the MFO by (1) examining the MFO annual published financial statements for discrepancies, (2) requesting and reviewing all reports issued by the MFO external auditors, (3) request the MFO to have its external auditor periodically perform a separate audit of the MFO management and internal accounting controls and provide a copy of the resulting report to State, and (4) include the U.S. annual assessment cost contribution of one-third of the MFO operating costs in its annual report to Congress on the MFO. In commenting on a draft of this report State disagreed with our conclusion that greater State oversight of U.S. contributions to the MFO is needed. State asserts that it has been U.S. policy to grant the MFO considerable latitude in the way it manages its operations and that this policy creates a limited framework for oversight. Consequently, State’s oversight of U.S. contributions is accomplished by frequent informal discussions and infrequent formal meetings, such as the annual Trilateral meeting. In addition, State asserts its review of the MFO external audit, published financial report, and annual budget submission provides an adequate oversight and reassessment mechanism. Nonetheless, State agreed to implement all but one of our recommendations to improve oversight. State’s comments on the report and our response are in appendix V of this report. We continue to believe that the reviews of the external auditor’s report, published financial reports, and annual budget submissions do not provide adequate oversight of U.S. contributions to the MFO. Under the MFO management and operating structure, once the budget is endorsed by the signatories, the Director General has great latitude over the expenditure of funds as well as the processes used to account for them. As pointed out in this report, this arrangement is unique to the MFO. In all other international organizations we observed, there is an executive oversight board that is independent of those charged with day-to-day operations. The actions that State has already taken in response to our review should improve its oversight capability; however, additional steps need to be taken. State objected to an annual audit of the MFO internal controls, and we changed the report to clarify the recommendation for periodic audits. The MFO provided general comments, citing its operational and financial successes since inception, and its continued efforts to reduce costs. We previously met with MFO officials on a draft of this report contents and made changes to the draft where appropriate. DOD agreed with all of the report findings relevant to DOD and reported that it has taken actions that address concerns we raised in a draft of this report about the accuracy on cost data it was providing to State regarding its participation in the MFO. If fully implemented, these actions should satisfy the intent of our recommendation. Therefore, we are no longer making a recommendation to DOD. | Pursuant to a congressional request, GAO reviewed U.S participation in the Multinational Force and Observers (MFO), focusing on: (1) U.S. contributions to MFO and measures taken to reduce MFO costs; (2) the operational impacts of U.S. participation in MFO; (3) the Department of State's oversight of U.S. participation in MFO; and (4) views of MFO performance and lessons learned. GAO found that: (1) the United States provides one-third of MFO operating expenses and the largest military contingent; (2) while U.S. annual assessments of MFO operating costs have steadily declined since 1989, the Department of Defense's (DOD) costs have increased, mainly due to salary increases; (3) Army operations have been impacted by the cumulative effects of DOD contingency efforts, but opportunities may exist to reduce the impact by reducing the number of logistical troops and using reserve forces; (4) despite MFO operational success and its ability to reduce certain costs, State needs to improve its oversight of U.S. participation in MFO because of inadequate internal controls and auditing procedures and the quality of its reporting to Congress; and (5) State and international officials view MFO as an operationally effective peacekeeping operation that has helped sustain peace between Egypt and Israel since 1982, while DOD views MFO as a limited operation that is not applicable to more hostile peacekeeping environments. |
The CSA places various plants, drugs, and chemicals such as narcotics, stimulants, depressants, hallucinogens, and anabolic steroids into one of five schedules based on the substance’s medical use or lack thereof, potential for abuse, and safety or potential for dependence. The act requires persons and entities who manufacture, distribute, or dispense controlled substances or listed chemicals to register with DEA, which by delegation from the U.S. Attorney General is responsible for administering and enforcing the CSA and its implementing regulations. Within DEA, the Office of Diversion Control (OD) is directly responsible for enforcing the provisions of the CSA as they pertain to ensuring the availability of substances—such as prescription drugs and listed chemicals—for legitimate uses while preventing their diversion. Given this overall mission, OD is responsible for preventing, detecting, and investigating the diversion of controlled substances. The CSA requires DEA to maintain a closed system of distribution of controlled substances in the United States from the point of import or manufacture through dispensing to patients or disposal. Under this system, most legitimate handlers of controlled substances— manufacturers, distributors, physicians, pharmacies, researchers, and others—must be registered with DEA and account for all controlled substances distributions. DEA registrants must renew their registration every year or every 3 years, depending on the type of registration. Table 1 presents the number and type of individuals and entities that are registered with DEA to manufacture, distribute, or dispense controlled substances. DEA maintains the list of registrants in the controlled substances database (i.e., CSA2), which includes registrants’ identifying information, such as first and last name, date of birth, and Social Security number (SSN) for individuals; and name and employer identification number (EIN) for businesses. As of March 2014, and as highlighted in table 1, the CSA2 consisted of records of more than 1.5 million registrations under the act, of which 93 percent were practitioners. The database is used to register practitioners as well as to certify a practitioner’s CSA status and is useful to health-maintenance organizations, clinics, health-insurance companies, pharmaceutical and medical-services firms, and others who must verify that a practitioner is registered to handle controlled substances. Registrants may only engage in those activities that are authorized under state law for the jurisdiction in which the practice is located. The CSA requires a separate DEA registration for each principal place of business or professional practice where controlled substances are manufactured, distributed, or dispensed. However, a practitioner who is registered at one location, but also practices at other locations, is not required to register separately for any other location within the same state at which controlled substances are only prescribed. States also play a role in overseeing the entities that handle controlled substances. All practitioner applicants to DEA must first demonstrate that they have received applicable licenses from their state. Further, according to DEA, 26 states and U.S. territories register practitioners wanting to handle controlled substances at the state level. Forty-nine states also have developed Prescription Drug Monitoring Programs (PDMP). PDMPs are statewide programs that collect data on prescriptions for controlled substances and enable prescribers, pharmacists, regulatory boards, and law-enforcement agencies (under certain restrictions) to access this information pursuant to applicable state laws and guidelines. PDMPs may aid the care of those patients with chronic, untreated pain or chemical dependency by providing patient prescription-history reports or electronic alerts to prescribers and dispensers to bring patients of concern to their attention. PDMP data can be also used to help identify patients and practitioners engaged in prescription drug abuse and diversion. For example, PDMP data can be used to identify individuals who have obtained controlled substances from multiple physicians without the prescribers’ knowledge of the other prescriptions (i.e., “doctor shopping”) and can be used to identify practitioners with patterns of inappropriate high levels of prescribing and dispensing. The manner and conditions of access to PDMP data vary from state to state depending on the laws that implement PDMP programs. Laws in each state determine which users are authorized to access PDMP data and provide the specific purposes that are allowed for this access. Each state determines which health-care occupations may prescribe or dispense controlled substances, as well as an occupation’s licensure requirements. To administer state licensure laws, depending on the state and occupation, legislatures create agencies, boards, or other entities to carry out licensing processes. See table 2 for an example of the variety of professions eligible to prescribe controlled substances in two different states and the relationship between the professions and licensing authorities. The CSA requires DEA to register a practitioner if the applicant is authorized to dispense controlled substances in the state in which he or she practices. DEA may deny an application if it determines that issuance of the registration would be “inconsistent with the public interest.” According to the CSA, DEA must consider several factors in determining whether such a registration would be inconsistent with the public interest, such as the recommendation of the appropriate state licensing board or disciplinary authority, the applicant’s compliance with applicable state, federal, or local laws relating to controlled substances, and such other conduct by the applicant that may threaten the public health and safety. Figure 1 below provides an overview of how state and DEA processes interconnect for controlled substance registration. Further, under the CSA, DEA has the authority to deny, suspend, or revoke an existing controlled substance registration for several reasons, including if a registrant has had a state license revoked, been convicted of a felony related to controlled substances, or been excluded or directed to be excluded from participating in federal health-care programs, such as Medicaid or Medicare, due to certain types of criminal convictions. If DEA decides to revoke, suspend, or deny a registration, it must serve upon the applicant or registrant an order to show cause why the action should not be taken. If continued registration poses an imminent danger to public health or safety, DEA can issue an immediate suspension order, which immediately deprives the registrant of the authority to handle controlled substances. Orders to show cause and immediate suspension orders, along with other adverse actions, are collectively known as registrant actions. DEA also has the authority to take a number of administrative actions against practitioners, including placing restrictions on the type of scheduled drugs practitioners can handle. Other administrative actions include issuing a letter of admonition to advise the registrant of any violations and necessary corrective actions, and developing a memorandum of agreement that outlines specific actions to be taken by the registrant and subsequent DEA actions if not corrected. Although DEA can issue these registrant actions and impose sanctions, a denial or revocation of a practitioner’s registration cannot be finalized until the practitioner has been given the opportunity to have an administrative hearing. Table 3 below provides the number and type of actions taken against controlled substances practitioner applicants and registrants from fiscal years 2011 to 2015. The Department of Justice (DOJ) Office of the Inspector General (OIG) reviewed the timeliness of DEA’s process for issuing final decisions on registrant adverse actions and, in May 2014, reported that the overall time it takes DEA to adjudicate all registrant adverse actions continues to be very lengthy. The OIG reviewed overall registrant adverse action processing for the period 2008 through 2012 and found that the average time for DEA to adjudicate registrant adverse actions, from initiation to final decision, was almost 2 years in 2009. By 2012, the time frame to complete adjudication of adverse actions had declined, but it still took 1 year, on average, for DEA to issue a final decision on any given registrant adverse action. According to the OIG, delays in adjudicating registrant adverse actions can have harmful effects on the general public, registrants, and DEA. The OIG reported that delays can create risks to public health and safety by allowing noncompliant registrants to operate their business or practice while the registrant adverse action is being adjudicated. For example, if a doctor is issued an order to show cause, that doctor can keep writing prescriptions until DEA makes a final decision. Each of the five states we examined has established several controls, with some common features for physician licensing and monitoring, as illustrated in figure 2 below. As reflected in the figure above, all five states we examined utilize a number of the same controls for issuing and renewing medical licenses, and for monitoring licensees. For example, according to our interviews with state officials and, where available, documentation on state processes, all five states had processes to confirm the identifying information for an applicant and for verifying the professional credentials of applicants. Also, all five states review disciplinary actions taken by other state medical licensing authorities by requiring applicants to arrange for one of three national clearinghouses to send this information to the state licensing authority for review. Officials in the five states we examined had established controls to renew and monitor physicians’ licenses. For example, officials from the five state medical boards said that they track disciplinary actions imposed on their licensees by receiving reports from the FSMB. This includes disciplinary actions that may have been implemented by a medical board in another state. Although all five states use some common controls, we found differences in how each state employs other key checks in the initial licensing process. For example, variations exist among the five states in how they conduct state and federal criminal-background checks for applicants. While all five states require applicants to answer one or more questions about a criminal record to which they must self-attest, two state authorities—in Connecticut and Vermont—accept the self- attestations and investigate only affirmative responses by applicants; in contrast, three state authorities—in Arizona, New Mexico, and Texas—conduct both state and federal criminal-background checks, regardless of the applicant’s attestation; and additionally, four of the five states—Arizona, Connecticut, Texas, and Vermont—review medical malpractice judgements for all medical license applicants, while one state—New Mexico—reviews medical malpractice judgements only for medical license applicants that have self-reported on their application. Additionally, the extent of reviewing the criminal backgrounds of licensees after initial licensure differs by state. Upon license renewal, licensees are again asked similar questions about their criminal record. Two states (Connecticut and Vermont) accept the renewing licensee’s self-attestation and investigate only affirmative responses. One state (Arizona) does not conduct any subsequent checks against state or federal criminal databases after initial licensure, while two states (Texas and New Mexico) regularly monitor state or federal criminal databases. For example, New Mexico contracts with a vendor that continuously monitors the state’s licensed physicians’ interactions with law-enforcement agencies nationwide using the FBI’s national database and other law-enforcement databases. In addition, at the time of our review, Texas was in the process of working on an agreement with the FBI to allow the board to monitor federal criminal backgrounds of licensees, in addition to the already-implemented quarterly state criminal-background checks. There are also differences among the five states in how prescription data are used to monitor top prescribers of controlled substances. Of the five states we examined, three states (Connecticut, New Mexico, and Texas) use data from the state’s PDMP to identify physicians with high incidences of prescribing controlled substances in order to initiate a follow-up with the physicians. The follow-ups are meant to determine the reasons for the high rate of prescriptions. For example, New Mexico Medical Board officials told us they monitor prescriber patterns by reviewing quarterly PDMP report cards. The board will send out letters to physicians who appear to have high-risk prescribing practices, and may issue formal complaints if the patterns continue. However, the extent to which the states have implemented their PDMP can vary. For example, Texas officials estimated that about 25 percent of the state’s controlled substance prescribers are registered in the program, while New Mexico requires every physician to register with the PDMP as a prerequisite to obtaining their state-level controlled substance license and mandates that physicians regularly use the state’s PDMP. Through its practitioner application and renewal processes, DEA employs several controls to assess whether an individual applicant is eligible for a controlled substance registration. These controls include comparing applicant identifying information for consistency with state licensure information and confirming that applicant medical licenses are current; confirming status of state controlled substance registration, if applicable; and determining whether an applicant has any drug-related offenses. In addition, DEA OD officials said they compare registrants to SSA’s public Death Master File (DMF) on a weekly basis to identify registrants who have died. DEA also receives information from state entities, other law- enforcement agencies, private citizens, former patients, and health practitioners on adverse actions related to professional health-care licenses or other issues that could call into question a registrant’s continued suitability to prescribe or handle controlled substances. However, according to DEA OD officials, the amount of communication with state entities varies significantly from state to state. See figure 3 for an overview of the process and controls DEA uses to register, renew, and monitor practitioners of controlled substances. DEA officials known as Registration Program Specialists hold primary responsibility for reviewing and processing applications of practitioners seeking to handle controlled substances. Registration specialists use several controls to verify information provided on a new application to determine applicant eligibility. These controls include the following: Comparing DEA applicant information to state licensing board information for inconsistencies. According to DEA OD officials, registration specialists are to compare identifying information on applications to identifying information maintained by the appropriate state licensing board. They perform this comparison by accessing public websites maintained by the state licensing boards that can be searched, for instance using the applicant’s license number or other identifying information. Registration specialists are to verify the name of licensee, type of license, license number, and expiration date and are to look for differences between the information associated with the state license and what the applicant put on the DEA registration application. Any differences could indicate potential fraud or other risks. Confirming that an applicant’s professional health-care license is current. Registration specialists are to use the state licensing board websites to verify licensure status with the respective state boards (medical, pharmacy, nursing, etc.). According to DEA OD officials, the registration specialists are not required to review administrative complaints or disciplinary actions taken by state licensing boards. If there are any conflicting data, the application is to be referred to a Diversion Investigator (DI) for further review. For states with a controlled substance registration, confirming applicant’s status. DEA’s CSA2 will notify the registration specialist if a separate state controlled substance registration is required. According to DEA OD officials, when applicants are from states that have their own CS registration requirement, the registration specialist is to review the state controlled substance authority’s website to determine whether the applicant’s name and state registration number match the information on the DEA application. The specialist is to also check to be sure that the state registration has not expired and that the registration is not restricted in any way. If there are any conflicting data, the application is to be referred to a DI for further review. Checking for any drug-related offenses or suspect associations. Registration specialists are to check the names of anyone listed on each initial application against DEA’s Narcotics and Dangerous Drugs Information System (NADDIS). This system contains information about drug offenders, alleged drug offenders, persons suspected of conspiring to commit, aid, or abet the commission of a drug offense, and other individuals related to, or associated with, DEA’s law- enforcement investigations and intelligence operation, among other things. If the registration specialists identify any inconsistency between the information in the application and any of the sources used for validation, the registration specialists will refer the application to a DI for further investigation. Reviewing applicant responses to liability questions. Applicants are also asked to answer four liability questions and to explain any affirmative responses. Questions include whether the applicant has ever been convicted of a crime in connection with controlled substances under state or federal law, or ever had a state professional license revoked, suspended, restricted, denied, or placed on probation. For any affirmative responses, the application will be forwarded to a DI for further investigation. Practitioners who have received authorization to handle controlled substances must renew their registrations every 3 years, and DEA uses some of the controls for the renewal process that are used for an initial registration. For example, registrants must again respond to the same liability questions that appear on the initial application concerning criminal activity and changes to their professional or legal status and are to report any criminal convictions related to controlled substances, or whether their state license or controlled substance registration has been revoked, suspended, or otherwise restricted. If the registrant does not self-report any liabilities and there are no changes to the information contained in the registrant’s record (such as changes to the registrant’s name, address, or state license number), then the renewal is automatically approved without further checks against state licensure websites. In addition, at renewal, the registration specialist is to review the historical records from the registrant’s initial application. DEA OD officials told us that the registration specialists do not conduct subsequent checks against NADDIS for renewals unless the applicant self-reports a criminal conviction related to controlled substances. DEA OD officials told us that they perform one systematic form of monitoring of registrants’ eligibility between renewal periods by conducting weekly checks of the public DMF. Specifically, DEA OD staff have established an automated process to compare the DEA registrants’ database against SSA’s public DMF every week to find possible matches, which can indicate that an individual registrant has died. Names and SSNs from the registrants’ database are compared to names and SSNs contained in the DMF. Registrations that match to DMF names and SSN are automatically retired in the system. A report of partial matches is generated by the system, and any partial matches will be researched further. On the basis of this research, registrations will be manually retired, if appropriate. DEA OD officials indicated that other monitoring activities may include states communicating directly with DEA to provide information and allegations of wrongdoing by registrants. For example, state medical licensing boards and state controlled substance authorities may provide practitioner complaint and disciplinary action or sanction information to DEA. Also, many of the investigations that DEA initiates are conducted pursuant to tips and complaints received from other law-enforcement agencies, private citizens, former patients, and health practitioners. DEA has established controls to aid in determining registrant eligibility. However, we found limitations in DEA’s processes to collect and validate registrants’ identifying information and verify continued registrants’ eligibility. These limitations include issues related to identifying registrants who were deceased, did not possess state-level controlled substance authority, or had criminal backgrounds that may have provided a sufficient basis to deny or revoke a registration. DEA’s controlled substance registration process involves applicants submitting key identifying information, some of which DEA staff are to verify. Specifically, individual applicants are required to provide DEA with key identifying information, such as first and last name and date of birth. Additionally, applicants must provide a taxpayer identification number, such as an SSN for individuals or an EIN for businesses, unless the applicant is fee-exempt. DEA’s system for processing applications has edit checks in place to ensure that SSNs entered are in the appropriate format (9-digit, numeric) and do not contain all repeating numbers (e.g., 999-99-9999). DEA’s CSA2 system recognizes and flags SSNs that are already in its system. This system control was designed to alert the registration specialist that an applicant has (or had) another DEA registration and to prevent reregistering individuals who may not be eligible based on actions taken against their previous or current registrations. According to DEA OD officials, this system control was established after a registrant who had been prosecuted by DEA reapplied and was approved for a new registration under a different address. Once the application information is submitted, DEA’s registration specialists are to compare the applicant’s name and state licensure information to the information maintained by the appropriate state licensing board. Our examination of DEA’s CSA2 data revealed gaps and other issues pertaining to registrants’ SSNs, as described below. Individuals registered using EINs instead of SSNs. As described above, DEA must collect taxpayer identification numbers for all non- fee-exempt individuals for the purpose of collecting and reporting on any delinquent amounts arising out of the individual’s relationship with DEA, pursuant to the Debt Collection Improvement Act of 1996. Instructions on DEA’s application form state that SSNs are required for individual registrations, and tax identification numbers (such as an EIN) are required for business registrations. Our analysis of DEA’s CSA2 data identified 41,909 of about 1.4 million individual registrations (about 3 percent) who were registered using an EIN instead of an SSN. We reviewed these results and identified 1,124 of the 41,909 records that contained text suggesting they were registered under official government capacity (e.g., “Limited to Official Federal Duties Only”), and therefore, not required to provide either an EIN or SSN. The remaining 40,785 records did not contain such text. However, depending on how an individual has structured his or her professional business activities, it may be appropriate for the individual to apply to DEA as a business instead of as an individual. Because DEA is required to collect taxpayer identification numbers for debt collection purposes, according to officials in DEA’s Office of Chief Counsel, DEA only has the legal authority to collect EINs, and not SSNs, from those individuals who apply as a business. As a result, DEA would have to obtain additional legal authority in order to require SSNs for all individuals. As discussed later, registering individuals with an SSN is essential to DEA’s use of the public Death Master File (DMF) as a control, in that SSNs (and not EINs) are needed to identify and retire deceased registrants. EINs do not allow DEA to use the DMF as a control mechanism. In addition, allowing EINs in place of SSNs limits DEA’s ability to identify other registrations for the same individual, particularly those with past adverse history. Potentially invalid SSNs. We identified 11,740 out of about 1.3 million SSNs associated with individual registrations whose SSN or date of birth (or both) could not be validated by SSA’s EVS. Specifically, we compared DEA registrants’ names, dates of birth, and SSNs to SSA’s records using EVS. EVS flags SSNs in which the name or date of birth (or both) do not match its records for the SSN, as well as SSNs that have never been issued. Specifically, of the 11,740 SSNs, we found 8,235 SSNs that did not match the name identified, 3,441 SSNs that did not match the date of birth, and 64 SSNs that had never been issued by SSA. Mismatches in names, SSNs, or dates of birth could be a potential identity fraud indicator but could also be due to data-entry errors or unreported name changes. As previously mentioned, DEA has procedures in place to compare identifying information, such as first and last names, from registrant applications to license information maintained by state professional licensing boards. In contrast, however, DEA does not have procedures to verify other identifying information, such as SSNs or dates of birth. For example, DEA does not have an agreement with SSA to access EVS as one possible option to verify the SSNs provided by DEA registrants. DEA officials said that while they had not previously considered strategies to validate SSNs and dates of birth, they were open to exploring options to do so. In our discussions, SSA officials said they would be open to the option of providing DEA with access to EVS, although it would require a legal review based on DEA’s intended use. Multiple individuals registered using same SSN. We identified 688 SSNs associated with multiple individuals, which is a risk indicator for potential fraud. Of the 688 SSNs, we identified 268 SSNs associated with names that reasonably appeared to be the same person, but whose names did not match due to possible typos (e.g., “Sally Simpson” and “Sally Simpsen”), name cognates (e.g., “Jonathan Smith” and “Jon Smith”), name inversions (e.g., “Jon Smith” and “Smith Jon”), or additional first or last names (e.g., “Mary Lynn Smith” and “Mary Smith,” or “Jane Smith Johnson” and “Jane Johnson”). However, the remaining 420 SSNs were associated with first or last names (or both) that reasonably appeared to be distinctly different. Different names registered with the same SSN could be a potential identity fraud indicator but could also be due to data-entry errors or individual name changes. We provided a list of these individuals to DEA for further investigation. DEA OD officials reviewed 449 of the 688 SSNs and provided several reasons why there were multiple names registered using the same SSN. DEA OD officials indicated that one reason this occurred was because some SSNs associated with these registrations were entered into the system prior to the implementation of the multiple SSN system flag. The system flags are generated when a new application is entered into the system. Therefore, according to DEA OD officials, the system would not have recognized duplicate SSNs among the existing registrations. Additionally, DEA OD officials told us that some of the names did not match due to individual name changes, data-entry errors, and other reasons that would require further DEA review. Because DEA did not review every SSN, it is unclear whether there are any other reasons this may have occurred. According to the Standards for Internal Control in the Federal Government, agencies should design processes that use the agency’s objectives and related risks to identify the information requirements needed to achieve the objectives and address the risks. In addition, agencies are to design controls to help ensure the completeness, accuracy, and validity of their data in order to help the agency achieve its objectives and respond to risk. These standards also require agencies to have appropriate control activities in place to ensure that the data used by the agency are accurate. As demonstrated by our analyses, DEA has an opportunity to enhance the integrity of its database by developing policies and procedures to collect and validate registrants’ SSNs. By not collecting and validating SSNs for all of its individual registrants, DEA is missing key information required to establish registrant identity and monitor eligibility. In particular, missing, invalid, or incorrect SSNs will reduce the effectiveness of DEA’s use of the public DMF to identify decedents because SSNs are needed for the matching process. Further, not having complete and accurate SSNs would limit DEA’s ability to identify other registrations held by the same individual and any past adverse history that may affect the eligibility of the registrant. By not requiring SSNs for all individual registrants, regardless of whether they apply as a business, and not taking steps to verify the SSNs, DEA is not well positioned to ensure the identities of its registrants. Additionally, not requiring SSNs for all individual registrants limits DEA’s ability to conduct any other potential data matching, which could improve the integrity of its registrants’ data and reduce the risk of potential misrepresentation or fraud. Of the approximately 1.4 million individual registrations in DEA’s CSA2, we found 764 registrants that may have been ineligible to have controlled substance registrations because the registrants were reported deceased by SSA, did not possess state-level controlled substance authority, or were incarcerated for felony offenses related to controlled substances. Each of these issues may adversely affect an individual’s registration. In addition, we also found 100 registrants who presented issues that may increase the risk of illicit diversion of controlled substances, such as registrants with active or recent warrants for offenses related to controlled substances, registrants incarcerated or with active or recent warrants for offenses unrelated to controlled substances, and registrants listed in the NSOR. We note that the numbers of potentially ineligible registrants, as well as registrants who may pose an increased risk of illicit diversion, may be more than the total number of registrants we identified because missing or incorrect SSNs reduced our ability to identify matches between the registrants’ data and other data we used. Table 4 shows a summary of DEA registrants we identified that may be ineligible or may pose an increased risk of controlled substance diversion. According to federal regulations, a DEA registration legally terminates immediately upon death of a registrant. To identify such individuals, DEA matches its database weekly against SSA’s public DMF, which is a publicly available subset of the death records that SSA maintains on deceased SSN-holders. According to DEA officials, registrants matching on SSN and name are automatically retired in CSA2. DEA officials also told us that the DEA OD Registration and Program Support Section Chief is to manually review any partial matches (e.g., instances in which the SSN matches, but name does not match) to determine whether additional actions are necessary. Removing deceased registrants from its database and retiring their registration can reduce the risk of someone obtaining and misusing the deceased registrant’s authority to handle, dispense, or prescribe controlled substances, thus limiting opportunities for the diversion of these substances. While DEA’s control is designed to identify and remove deceased registrants, our analysis identified 705 registrants that were reported deceased by SSA as of March 2014 (the most-current DEA data available at the time of our review). We identified these deceased registrants by comparing DEA’s CSA2 data of about 1.4 million individual registrations with SSA’s full death file, which lists all SSNs of people for whom SSA has received a record of death. Specifically, of the 705 reportedly deceased registrants, 420 had been deceased for 6 months or longer, including 236 who had been deceased over a year. Under current law, DEA is not eligible to access SSA’s full death file, the database we used to conduct our analysis. According to SSA officials, the public DMF contained about 16 million fewer records than the full death file as of March 2016. We previously reported that SSA officials expect that the proportion of state-reported death records that must be excluded from the public version will continue to increase over time. For example, for deaths reported in 2012 alone, the public DMF included about 40 percent fewer death records than the full death file. According to the Standards for Internal Control in the Federal Government, agencies should design procedures using information necessary to achieve their objectives and respond to risks. Because of the differences in the death databases, DEA may not have been alerted to the reportedly deceased individuals that we identified. In our discussions, DEA officials were open to the idea of exploring legislative options to obtain the full death file. By not identifying deceased registrants and not subsequently deactivating their registrations, DEA’s registry may be vulnerable to potential fraud leading to diversion of controlled substances. To better ensure that DEA’s registry maintains current registration information and to prevent others from potentially utilizing the registration information of deceased registrants, DEA could take additional steps by developing a legislative proposal to gain access to the more comprehensive full death file. As described previously, the CSA requires DEA to register a practitioner if the applicant is authorized to dispense controlled substances in the state in which he or she practices. DEA may deny an application if it determines that the registration would be inconsistent with the public interest. Two of the factors DEA must consider in this determination are the recommendation of the appropriate state licensing board or disciplinary authority and the applicant’s compliance with applicable state, federal, and local laws relating to controlled substances. Additionally, DEA also has the authority to suspend or revoke an existing controlled substance registration if a registrant has had a state license suspended or revoked, among other reasons. We found at least 57 individuals associated with 58 registrations who may have been ineligible for a controlled substance registration based on our analysis of actions taken against their respective state licenses, such as revocations of medical license or controlled substance privileges. We compared data from the FSMB on physician license information and disciplinary actions to data from CSA2. The FSMB maintains a central repository database for licensure information and disciplinary sanctions provided by all medical boards within the 50 states, Puerto Rico, and the District of Columbia, among other sources. By matching registrants’ information to information contained in the FSMB data, we were able to review an individual’s entire licensure history, including revocations and suspensions, for all medical licenses, across all U.S. states, Puerto Rico, and the District of Columbia, among others. We then reviewed supporting documentation for each of the actions identified in FSMB data using state medical board websites. To help identify revocations, surrenders, or suspensions occurring without reinstatement prior to March 6, 2014 (the most-current DEA data available at the time of our review), we limited our review of FSMB data to the most-recent action taken against the registrant prior to March 6, 2014. Therefore, the number of individuals with disciplinary actions we identified represents a minimum number. Our analysis of FSMB data identified 57 individuals who did not appear to possess active state-level controlled substance authority in the states where they held active DEA registrations, as of March 6, 2014. Specifically, of the 57 individuals, we identified 41 who had disciplinary actions that resulted in the revocation or surrender of their medical licenses, and 16 whose medical licenses were not revoked, but the state licensing board restricted the individuals’ controlled substance authority. These actions occurred between June 2011 and February 2014. For example: We identified a physician whose Ohio medical license was revoked in October 2011 for prescription drug–related crimes. In January 2012, the physician pled guilty in an Ohio county court to one count of engaging in a pattern of corrupt activity, six counts of trafficking in drugs, and one count of theft. The physician was sentenced to 3 years of imprisonment in February 2012 and was still actively registered with DEA as of March 2014. According to DEA OD officials, DEA was unaware that the registrant no longer possessed state-level controlled substance authority and therefore it did not initiate any action against the registration. The DEA registration subsequently expired in May 2014, approximately 2-½ years after the state authority was revoked. We identified a physician whose controlled substance registration from the District of Columbia was placed on immediate suspension for risk to public health and safety in April 2012 and later revoked in June 2013 after a patient died due to excessive and inappropriate controlled substances prescribing, according to a District of Columbia board action report. The physician was still actively registered with DEA as of March 2014. According to DEA OD officials, DEA was unaware that the registrant no longer possessed state-level controlled substance authority and therefore it did not initiate any action against the registration. The DEA registration subsequently expired in February 2015, almost 3 years after authority in the District of Columbia was inactivated. We provided information on these 57 individuals to DEA for further investigation. DEA OD officials provided information indicating the status of each registration, whether any action was taken against the registration, and whether there was knowledge of the state disciplinary action. In 36 of the 57 cases, CSA2 did not contain information on these individuals’ state licensure status or disciplinary actions, which meant that DEA OD staff could not make an informed decision on the eligibility of these registrants to continue to handle or prescribe controlled substances. According to DEA OD officials, DEA took action against 3 of the 36 registrations. However, the bases for these actions were unclear, and there was no indication that they were based on the loss of state-level controlled substance authority. As described earlier, DEA verifies an applicant’s state licensure information upon initial application by checking the relevant state board websites to ensure the applicant is appropriately licensed. However, DEA does not verify practitioners’ state licenses after initial registration to ensure they are still actively licensed by the state. Instead, it relies on the practitioner to self-report any disciplinary actions related to controlled substances at renewal every 3 years, or the individual state licensing boards to notify DEA of any actions taken against its registrants that may affect their controlled substance eligibility. According to DEA OD officials, the amount of communication between DEA and the state licensing boards varies significantly, so not all state licensing boards may notify DEA that the state has taken action against a DEA registrant. Furthermore, DEA is not required to and has not chosen to make use of perpetual vetting techniques; that is, regularly matching its database of registrants against databases containing medical sanctions, such as the database we used in this analysis. Therefore, DEA may not have been alerted to the information on the disciplinary actions that we identified. When asked why DEA does not monitor state licensure information after initial registration, agency officials said that they had not considered monitoring state licensure information, but would be open to exploring options to do so. As previously noted, the Standards for Internal Control in the Federal Government state that agencies should design procedures using information necessary to achieve their objectives and respond to risks. DEA’s reliance on state boards to alert them of any actions, complaints, or criminal offenses against one of its registrants could result in delays in receiving pertinent information about the eligibility of its registrants. In addition, if a state fails to notify DEA of an action against one of its registrants or the applicant does not self-report a disciplinary action, then DEA may not discover that the registrant is no longer eligible. By not making use of available resources to monitor the state licensure and disciplinary actions taken against its registrants, such as databases containing information on medical sanctions, DEA is not well-positioned to ensure the continued eligibility of its registrants. For example, databases containing information on medical sanctions, such as those maintained by the FSMB or the National Practitioner Data Bank (NPDB), capture information on multiple types of practitioners from many different sources, such as adverse actions taken by state boards, federal agencies, and professional societies. In addition, these data also include information on actions taken due to controlled substance violations, criminal offenses, and exclusions from federal health-care programs reported by the Department of Health and Human Services (HHS). One database, NPDB, also captures information from state law-enforcement and Medicaid fraud- control agencies. Utilizing these types of databases would allow DEA to regularly monitor adverse actions taken against its registrants across a broad spectrum of sources. Furthermore, utilizing these types of databases would allow DEA to monitor its registrants’ licenses and disciplinary actions across all states, not just the state in which they hold a DEA registration. Disciplinary actions occurring in other states could be relevant to DEA’s assessment of whether registering an individual would be inconsistent with the public interest. However, using these databases may have costs. Therefore, it would be important for DEA to balance the cost and benefit to using such databases with developing other approaches for monitoring its registrants’ state authority. Regardless of the approach used, without taking steps to verify registrants’ continued eligibility, DEA may not have complete or timely information about the continued eligibility of its registrants, thereby weakening the integrity of its registry. In furtherance of its mission to enforce the closed system of controlled substance distribution, DEA has promulgated regulations that require all applicants and registrants to provide effective controls and procedures to guard against theft and diversion of controlled substances. DEA has also published the Controlled Substances Security Manual (Manual), which clarifies the regulations and provides additional guidance to assist handlers of controlled substances in safeguarding them. For example, the Manual instructs practitioners to keep blank prescription forms and unused DEA Order Forms in a secure location to prevent against theft. The Manual also emphasizes that applicants and registrants who hire employees to work in or around areas where controlled substances are handled must carefully screen these employees, identifying this process as “a critical first step in diversion prevention,” “vital to fairly assess the likelihood of an employee committing a drug security breach,” and “essential to overall controlled substances security.” According to DEA, as part of the screening process, criminal-background checks with local law- enforcement authorities should be performed by the employer, and each potential employee should be required to answer the question, “Within the past five years, have you been convicted of a felony, or within the past two years, of any misdemeanor, or are you presently charged (formally) with committing a criminal offence?” Given DEA’s guidance to registrants that their employees with criminal convictions, or pending charges, may pose an increased risk of illicit diversion of controlled substances, we assessed the extent to which DEA’s internal controls help ensure individual registrants do not present similar issues that may increase the risk of illicit diversion of controlled substances. Our analysis of DOJ’s BOP SENTRY data, USMS’s warrant data, and the FBI’s NSOR data identified one individual who may have been ineligible to have controlled substance registrations because of crimes related to controlled substances. In addition, we found 94 individuals associated with 100 DEA registrations that presented issues that may increase the risk of illicit diversion of controlled substances, such as registrants with active or recent warrants for offenses related to controlled substances, registrants incarcerated or with active or recent warrants for offenses unrelated to controlled substances, and registrants listed in the NSOR for crimes such as sexual assault and exploitation of minors. Incarcerated registrants. We found 28 individuals associated with 32 DEA registrations who may have been either ineligible for a controlled substance registration or presented issues that may increase the risk of illicit diversion of controlled substances because they were incarcerated in federal prisons for crimes related to controlled substances, health-care fraud, or other crimes. Of the 28 incarcerated individuals, 1 was incarcerated for crimes related to controlled substances. In this case, the individual was convicted of possession of approximately 535 pounds of marijuana with the intent to distribute in September 2013, required to undergo treatment for substance abuse, and subsequently imprisoned in December 2013. The registrant surrendered her state-level authority in February 2014. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the crime and DEA did not initiate any action against the registrant. The registration subsequently expired in May 2015. In addition, 18 of the 28 individuals were incarcerated for crimes related to health-care fraud, of which 10 had been excluded from participating in federal health-care programs due to criminal convictions that may have provided a sufficient basis to deny or revoke a registration, while maintaining DEA registrations. One such registrant was convicted of defrauding Medicare in June 2013 following an investigation by the FBI and HHS OIG. The registrant was subsequently excluded from participating in federal health-care programs in April 2014. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the crime, nor did DEA initiate any action against the registrant. The individual was still actively registered with DEA as of January 2016. Furthermore, we identified an additional 9 individuals who were incarcerated for other crimes, such as sexual abuse and illicit acts as well as fraud, including bank, wire, and tax fraud. One such individual, a former doctor for DOJ’s BOP, was convicted in November 2012 and sentenced to federal prison in February 2013 for sexually abusing three inmates in the course of his employment with DOJ. Another individual was serving 8 years in federal prison after being convicted of attempting to travel to Canada to engage in illicit sexual conduct with a minor. According to DEA OD officials, the registrants’ CSA2 records did not contain any notes indicating awareness of the crime. The registrations subsequently expired in December 2014 and June 2014, respectively. Registrants with active or recent warrants. We identified five individuals associated with six DEA registrations who were listed in USMS warrant data, of which three possessed outstanding warrants. Of the five individuals with active or recent warrants, three individuals had warrants for offenses related to controlled substances. For example, we identified a physician with an active warrant who was indicted in October 2013 on multiple felony counts for knowingly and intentionally distributing controlled substances outside the scope of professional practice, health-care fraud, and making false statements in health-care matters, among others. The indictment alleged that the physician convinced patients to undergo medically unnecessary spinal surgeries, and then billed private and public health-care benefit programs, deriving significant profits for the fraudulent services. Additionally, according to Kentucky and Ohio medical board orders, the physician was presigning blank prescriptions so his employees (who lacked lawful authority) could issue prescriptions for controlled substances in his absence. In October 2013, the Kentucky medical board issued an emergency suspension due to immediate danger to public health and safety, followed by an Ohio medical board suspension in November 2013. Both medical boards later revoked the physician’s license in 2014. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the criminal allegations. The physician was still actively registered with DEA as of January 2016. Registered Sex Offenders. We identified 62 individuals associated with 63 DEA registrations who were also registered with the FBI’s NSOR for convictions involving sexual offenses. Types of offenses included actions such as sexual assault against patients and exploitation of a minor, among others. For example, we identified a physician who was convicted of four felony counts of gross sexual imposition and two misdemeanor counts of sexual imposition involving patients. The conviction led to an automatic suspension of the physician’s medical license in November 2012, and the license was subsequently revoked in January 2014. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the crime. The physician’s registration expired in April 2014. We identified another physician who pled guilty to two felony counts of sexual exploitation of a minor in October 2012 and subsequently surrendered his medical license and state-level controlled substance registration in February 2013. According to DEA OD officials, the registrant’s CSA2 record did not contain any notes indicating awareness of the crime. The DEA registration expired in May 2015. DEA is not required to and has not chosen to regularly match its database of registrants against databases containing criminal background, such as the databases we used in this analysis. Further, according to DEA OD officials, DEA only considers crimes related to controlled substances when evaluating whether to take action against an individual’s registration based on criminal activity. Therefore, DEA may not have been alerted to the criminal offenses, such as health-care fraud and sexual assault, we identified. We provided DEA with a list of the 95 individuals that matched these databases to determine whether it was aware of the criminal background, and what, if any, action it took against these individuals’ registrations. In response, DEA OD officials compiled a list indicating the status of each registration, whether any action was taken against the registration, and whether the registrant’s CSA2 record contained any notes indicating knowledge of the crime. In 43 of the 95 cases, CSA2 did not contain information on these individuals’ criminal history, which meant that DEA was not aware of the presence of issues that may have increased the risk of illicit diversion of controlled substances. DEA has controls in place to check for drug-related offenses, such as checking initial applicants against NADDIS; however, DEA does not conduct ongoing or subsequent checks against NADDIS for renewals unless the applicant self-reports a criminal conviction related to controlled substances. Additionally, while DEA receives information from state licensing boards about the criminal activity of its registrants, the extent and frequency to which the states monitor varies by state as do the sources that the states use for such monitoring. For example, as described earlier, two of the five states we visited only conduct criminal- background investigations if the state applicant self-reports a criminal offense. In addition, some states only monitor criminal activity occurring within the state, while others monitor criminal reports from states across the nation. Therefore, states without strong criminal-background controls may not have known to take action against the individual and, therefore, could not have notified DEA. In our discussions, DEA OD officials said they had not considered monitoring criminal backgrounds but were open to doing so. By relying on the applicant to self-report a criminal conviction or the states to notify DEA of actions taken against its registrants, DEA may be missing opportunities to develop a more-complete assessment of the continued eligibility of its registrants and risks to the closed system of controlled substance distribution. Additional criminal background controls and regular monitoring would allow DEA to promptly identify registrants with criminal backgrounds. By promptly identifying such registrants, DEA would obtain better assurance of the integrity of its registry and better identification of potential risks of illicit diversion. Although such monitoring could improve the integrity of the registry, such actions may have costs, and, given the relatively low number of individuals with unidentified criminal backgrounds, weighing those costs with the risks would be important. The Standards for Internal Control in the Federal Government state that agencies should identify and analyze relevant risks to achieve their objectives and form a basis for determining how risks should be managed. Additionally, GAO’s Fraud Risk Management Framework identified as a leading practice considering the benefits and costs to address identified risks when designing and implementing specific controls to prevent and detect fraud. Until DEA explores options that would balance the risk posed by individuals having criminal backgrounds with the cost of identifying those individuals and documenting associated decisions, DEA is not well-positioned to make an informed decision on how best to use its resources. As part of an overall effort to prevent the diversion of controlled substances for nonmedical use, having effective controls to ensure that only those who are authorized and eligible handle and prescribe controlled substances is essential. While many stakeholders are involved in making this determination, DEA plays a key role because it administers and enforces the Controlled Substances Act (CSA) and, in doing so, is responsible for ensuring that registering an individual to handle or prescribe controlled substances is not inconsistent with the public interest. DEA has implemented controls to register individuals to handle or prescribe controlled substances. However, as demonstrated by our analyses, DEA has the opportunity to enhance the integrity of its controlled substances registry by taking additional steps to collect and validate registrants’ identifying information and verify the continued eligibility of its registrants. Given that unique identifying information, such as SSNs, is critical to validating the identities and implementing controls to identify deceased registrants, obtaining legal authority to require such information and developing policies and procedures to validate this information would help ensure that DEA’s registrants are and remain eligible to prescribe and handle controlled substances. In addition, having complete and valid SSNs for all individual registrants would enhance DEA’s ability to identify other registrations held by each individual, including any past adverse actions taken against previous registrations, as it evaluates whether registering the individual would be inconsistent with the public interest. Furthermore, while DEA has taken steps to identify and retire deceased registrants in its database by using SSA’s public Death Master File (DMF), obtaining legal authority to access that agency’s more comprehensive full death file would help ensure that DEA is using the most-complete information available. This would better ensure that DEA maintains current information on the eligibility of its registrants and prevents others from potentially using the registration information of deceased registrants. Similarly, developing procedures to verify the continued eligibility of its registrants in other areas, such as verifying that registrants maintain appropriate state authority and have not been subject to disciplinary actions that may affect their eligibility, would help ensure that its registrants maintain eligibility to handle and prescribe controlled substances. Additionally, exploring options that weigh the risks posed by registrants with criminal backgrounds with the costs of identifying these individuals could better inform DEA about the potential for illicit diversion of controlled substances. Given DEA’s guidance to registrants that their employees with criminal convictions or pending charges may pose an increased risk of illicit diversion, taking steps to monitor its own registrants’ criminal backgrounds would help ensure that these registrants do not present similar issues that may increase the risk of illicit diversion of controlled substances. To help ensure that practitioners who may be ineligible do not possess a controlled substance registration and that practitioners who pose an increased risk of illicit diversion are identified, we recommend the Acting Administrator of DEA take additional actions to strengthen verification controls. Specifically, we recommend that the Acting Administrator of DEA take the following five actions: develop a legislative proposal requesting authority to require SSNs for all individuals, regardless of whether they hold an individual or business registration; develop policies and procedures to validate SSNs and apply the policies and procedures to all new and existing SSNs in the CSA2; such an approach could involve collaborating with SSA to assess the feasibility of checking registrants’ SSNs against EVS; develop a legislative proposal to request access to SSA’s full death identify and implement a cost-effective approach to monitor state licensure and disciplinary actions taken against its registrants; such an approach could include using data sources that contain this information, such as NPDB or FSMB; and assess the cost and feasibility of developing procedures for monitoring registrants’ criminal backgrounds, such as conducting matches against federal law-enforcement databases, and document decisions about the approach chosen. We provided a draft of this report to DOJ for its review, and DEA’s Office of Inspections provided written comments, which are reproduced in full in appendix II. We also provided relevant sections of a draft of this report to SSA and the appropriate licensing boards in the five states we visited— Arizona, Connecticut, New Mexico, Texas, and Vermont—to obtain their views and verify the accuracy of the information provided. In its written comments, DEA stated that it appreciates the intent of our recommendations, but raised concerns about its legal authority to take some of the actions we recommended. It also raised concerns about technical and fiscal challenges that it stated would make compliance with the recommendations burdensome. Despite these limitations, DEA stated that it is in the process of determining the feasibility of implementing actions that would permit it to comply with the recommendations utilizing the current legal framework and within reasonable cost parameters. DEA specifically agreed with our recommendation to identify and implement a cost-effective approach to monitor state licensure and disciplinary actions taken against its registrants, dependent on its determination that these actions are allowable under the authority of the CSA. DEA neither agreed nor disagreed with the remaining four recommendations. Instead, DEA described actions it has taken or plans to take in response to each recommendation. Regarding our first recommendation that DEA develop a legislative proposal requesting authority to require SSNs for all individuals regardless of whether they hold an individual or business registration, DEA stated that it is exploring the possibility and practicality of implementing changes to require SSNs for practitioners and mid-level practitioners and will pursue the actions necessary to legally authorize DEA to require such information. DEA further stated that, if new legislative authority is required, it defers to GAO to recommend legislative action to Congress. As we noted in the report, officials in DEA’s Office of Chief Counsel told us that they do not have legal authority to collect SSNs for individuals who apply as a business. We also noted that collecting SSNs is critical to validating identities and carrying out DEA’s existing controls to identify and remove deceased registrants and to identify other registrations held by each individual, including past adverse actions taken against previous registrations. We agree that DEA’s plans to pursue actions necessary to legally authorize DEA to require SSNs is a good first step and we continue to believe that DEA should develop a legislative proposal to request authority to require SSNs for all individuals. DEA developing its own legislative proposal would ensure the proposal is drafted in a way that addresses the actions necessary to legally authorize DEA to require SSNs for all individuals. Regarding our second recommendation to develop policies and procedures to validate SSNs and apply these to all new and existing SSNs in the CSA2, DEA said that it has initiated discussions with SSA to determine the legality and feasibility of using EVS to verify SSNs and outlined the issues that its review will focus on. We agree that these actions are good first steps in developing an approach to validate SSNs in the CSA2 and further agree that use of EVS is one possible approach to validate SSNs. As we noted in the report, validating SSNs will help establish registrants’ identities and help ensure that DEA has the information necessary to implement its existing controls and to identify other registrations held by each individual, including past adverse actions taken against previous registrations. Regarding our third recommendation to develop a legislative proposal to request access to SSA’s full death file, DEA stated that it is preparing a proposal to SSA to request access to the full death file. If SSA determines it cannot provide access to this data to DEA under existing law, DEA stated that it defers to GAO to advise the appropriate congressional representatives to seek legislative changes for DEA. As we noted in the report, DEA is not eligible under current law to access SSA’s full death file. We also noted that having access to the more comprehensive full death file would ensure that DEA is using the most-complete information available. As a result, this would better ensure it maintains current information on the eligibility of its registrants and prevent others from potentially using the registration information of deceased registrants. We continue to believe that DEA should develop a legislative proposal to request access to SSA’s full death file. DEA developing its own legislative proposal would ensure the proposal is drafted in a way that addresses the requirements necessary to grant DEA access to this information. With regard to our fourth recommendation to identify and implement a cost-effective approach to monitor state licensure and disciplinary actions taken against its registrants, DEA stated that it does not specifically have authority to access state medical licensing boards’ databases. However, our recommendation does not specifically require the use of state medical licensing boards’ databases and allows DEA flexibility in an approach for monitoring the information that it needs to help ensure the continued eligibility of its registrants. DEA concurred with our recommendation, dependent upon a determination that these actions are allowable under the authority of the CSA. DEA stated that it has met with FSMB representatives and is currently exploring the use of FSMB’s services to verify the existence and status of state licenses and to identify disciplinary information from the medical boards. We agree that use of FSMB’s services can be beneficial for validating the types of practitioners included in FSMB’s services, such as medical doctors, osteopathic doctors, and some physician assistants. However, these actions do not include other types of individual practitioners for which DEA should also develop processes to monitor state licensure and disciplinary actions, such as dentists, veterinarians, and pharmacists, among others. While these individuals represent a smaller percentage of DEA’s registrants, we believe it is important for DEA to monitor state licensure and disciplinary actions for these individuals as well to better ensure that its registrants are and remain eligible. Lastly, in response to our fifth recommendation that DEA assess the cost and feasibility of developing procedures for monitoring registrants’ criminal backgrounds, DEA stated that it has started discussions with BOP about effective ways of comparing DEA’s registrant data to BOP’s inmate data. DEA also stated that it is exploring the technical and financial feasibility of adding an additional query of NADDIS for renewal applications since this query is currently done only for new applications. We believe that developing procedures to monitor registrants’ criminal backgrounds using these databases would be beneficial for DEA to help ensure that its registrants are and remain eligible and do not possess an increased risk of illicit diversion. DOJ, SSA, and the New Mexico Medical Board also provided technical comments that were incorporated into the report, as appropriate. The Connecticut Departments of Public Health and Consumer Protection and the Texas Medical Board reported that they had no comments. The Arizona Medical Board, New Mexico Board of Pharmacy, Texas Department of Public Safety, and the Vermont Board of Medical Practice did not respond to our request for comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the Attorney General, the Acting Commissioner of SSA, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-6722 or bagdoyans@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. This report (1) identifies and describes the internal controls that selected states and the Drug Enforcement Administration (DEA) use to help ensure the eligibility of individuals to handle controlled substances, and (2) assesses the extent to which DEA’s internal controls help ensure that individuals listed in the controlled substances database are and remain eligible and do not present issues that may increase the risk of illicit diversion of controlled substances. To identify and describe the internal controls that selected states use to help ensure the eligibility of individuals to handle controlled substances, we conducted site visits to five states—Arizona, Connecticut, New Mexico, Texas, and Vermont. We developed site visit selection criteria and selected states to ensure a mix of states with state-level controlled substance registrations and those without; states with a high number of DEA adverse actions per 1,000 registrants; states with a low and high incidence rate of accidental deaths from prescription opioid and benzodiazepine drugs in 2012 (the most recently available data at the time of our review), per 100,000 people; and states with large increases and large decreases in the rate of change in accidental opioid and benzodiazepine drug overdose per 100,000 people. We also prioritized states that were located near a DEA field division office. Because each state determines the internal controls used to ensure the eligibility of individuals to handle controlled substances, the internal controls may vary by state. Our selection of states is not a generalizable sample. Therefore, our findings are only applicable to these five states and cannot be used to make inferences about other states. Prior to making our state selections, we convened several discussion groups at the National Association of State Controlled Substances Authorities Conference held in October 2014 in order to gain an overall understanding of how state agencies and health-care industry companies interact with DEA to prevent controlled substance diversion and abuse, and communicate and share information with DEA regarding registrants. We also obtained the state agency and industry representatives’ views about DEA’s controlled substances screening, registration, and enforcement processes for individuals and entities. Because each state determines which health-care occupations may prescribe or dispense controlled substances, as well as an occupation’s licensure requirements, the number of state licensing boards and the individuals they license varies by state. For consistency in the types of state licensing boards we met with and as a means for comparison, we visited medical and pharmacy boards, or their equivalents, in the five states because physicians are the largest category of individual practitioners that DEA registers and pharmacies are the largest category of registered entities. We also reviewed applicable state statutes and administrative rules, agency and board websites, as well as forms and application instructions for new and renewing licensees for each of the five states. For each of the selected states, we interviewed state officials about validating information submitted on physician licensure applications initially and at renewal, information sharing with other state or federal agencies, and procedures for handling complaints and for matching licensure data with other state or federal databases. We also met with officials in three of our five states (Connecticut, New Mexico, and Texas) who were responsible for administering their respective programs for state-level controlled substance registration. To identify and describe the internal controls that DEA uses to help ensure the eligibility of individuals to handle controlled substances, we reviewed federal statutes and DEA regulations and interviewed DEA officials from headquarters and four field division offices about their interactions with other federal, state, and local agencies, as well as their interactions with registrants. We focused on how DEA officials carry out registration activities, validate information submitted on the registration applications, share information with state agencies, and follow their processes for receiving and investigating complaints. Additionally, our review focuses on individuals who were practitioners, such as physicians, dentists, and veterinarians, and mid-level practitioners, such as nurse practitioners, physician assistants, and pharmacists. These groups represent about 1.4 million (93 percent) of the 1.5 million DEA registrations. To identify and describe DEA’s requirements and processes for registration, renewal, and monitoring of individual handlers of controlled substances, we reviewed applicable statutes, regulations and federal guidance, DEA’s annual budget submissions, DEA’s website, the controlled substances registrant database user manual, and forms and instructions for new and renewing applicants. We also interviewed relevant DEA officials to identify DEA’s processes for registrants’ initial registration, renewal, and monitoring. To assess the extent to which DEA’s internal controls help ensure that individuals listed in the controlled substances database (CSA2) are and remain eligible and do not present issues that may increase the risk of illicit diversion of controlled substances, we identified vulnerabilities for potential fraud and then identified the associated internal control weaknesses that led to the vulnerability. To accomplish this, we reviewed federal statutes and regulations, decisions from DEA administrative hearings and federal courts, and DEA policies and guidance, and interviewed DEA officials responsible for controlled substance registration functions. We used federal standards for internal control, GAO’s Fraud Risk Management Framework, federal statutes, and DEA policies to evaluate these functions. To identify vulnerabilities for potential fraud in DEA’s internal controls, we analyzed registrants’ identifying information contained in CSA2 as of March 6, 2014 (the most-current CSA2 data available at the time of our review) and matched CSA2 data to the following five databases (1) the Social Security Administration’s (SSA) full death file, as of February 2014; (2) Federation of State Medical Boards (FSMB) physician-licensure data, as of the 2014 census, and disciplinary- action data, as of April 2015; (3) Federal Bureau of Prisons’ (BOP) SENTRY data, as of March 2014; (4) U.S. Marshals Service (USMS) warrant data, as of February 2014; and (5) the Federal Bureau of Investigation’s (FBI) National Sex Offender Registry (NSOR), as of February 2014. We also compared DEA registrants’ identity information to the identity information from SSA’s official records using the Enumeration Verification System (EVS). We then identified the related internal control weaknesses that led to these vulnerabilities to help us assess the extent to which DEA’s internal controls help ensure that individuals are and remain eligible and do not present issues that may increase the risk of illicit diversion of controlled substances. For the purposes of our review, we selected only individuals who were practitioners, such as physicians, dentists, and veterinarians, and mid- level practitioners, such as nurse practitioners, physician assistants, and pharmacists. These groups represent about 1.4 million (93 percent) of the 1.5 million DEA registrations. We excluded businesses, such as pharmacies, hospitals, and manufacturers, from our analysis. To identify individuals with missing, duplicative, or potentially inaccurate or invalid Social Security numbers (SSN), we analyzed registrants’ identifying information contained in CSA2 and compared this information to SSA’s records. Specifically, we identified instances where individuals were registered using employer identification numbers (EIN) instead of SSNs. We reviewed these results and identified instances where records contained text suggesting they were registered under official government capacity (e.g., “Limited to Official Federal Duties Only”) and, therefore, not required to provide either an EIN or SSN. We then reviewed a nongeneralizable sample of 20 records, matching the registrant’s name and address to the registrant’s website to confirm that the individual’s registration appeared to be associated with a private employer and not a government entity. We also identified instances where the SSN matched multiple registrations, but the names associated with those registrations did not match each other. We reviewed the results to determine the extent to which the names did not match. For example, we identified instances where the names reasonably appeared to be the same person, but whose names did not match due to possible typos (e.g., “Sally Simpson” and “Sally Simpsen”), name cognates (e.g., “Jonathan Smith” and “Jon Smith”), name inversions (e.g., “Jon Smith” and “Smith Jon”), or additional first or last names (e.g., “Mary Lynn Smith” and “Mary Smith,” or “Jane Smith Johnson” and “Jane Johnson”). We also identified instances where the SSNs were associated with first or last names (or both) that reasonably appeared to be distinctly different. We provided a list of all of these individuals to DEA to determine the reason this occurred. To identify whether any registrants had potentially inaccurate or invalid SSNs or dates of birth, we submitted this information for individuals for verification to SSA’s EVS. EVS provides information on invalid (never issued) SSNs and instances where there are mismatches between SSN, name, and date of birth. EVS flags SSNs in which the name or date of birth (or both) do not match its records for the SSN, as well as SSNs that have never been issued by SSA. To identify whether any registrants were potentially ineligible or presented issues that may increase the risk of illicit diversion of controlled substances, we matched DEA’s CSA2 data of approximately 1.5 million registrants, as of March 6, 2014 (the most-current CSA2 data available at the time of our review), to the five databases listed below. 1. SSA’s full death file. To identify registrants who were reported deceased by SSA, we matched the CSA2 data to SSA’s full death file by SSN, name, and date of birth, as of February 28, 2014. The full death file contains all of SSA’s death records, including state-reported death information. We included only those individuals who had dates of death prior to March 1, 2014. 2. FSMB licensure and disciplinary action data. To identify registrants who did not possess active state-level controlled substance authority, we matched CSA2 to FSMB licensure and disciplinary action data based on the FSMB’s 2014 physician census and disciplinary action data dated through April 20, 2015. We matched the CSA2 data to FSMB data by SSN and name to identify physicians with disciplinary actions related to the suspension, revocation, or surrender of their medical license or controlled substance privileges. To better identify suspensions, revocations, or surrenders occurring without reinstatement prior to March 6, 2014, we limited our review of FSMB data to the most-recent disciplinary action taken against the registrant prior to March 6, 2014. Therefore, the number we identified may not include all suspended, revoked, or surrendered licenses and represents a minimum number. For each of the disciplinary actions identified in the FSMB data, we reviewed supporting documentation, such as medical board actions, using the applicable state medical board website. We provided a list of potentially ineligible registrants based on our review of state disciplinary actions to DEA to determine whether DEA was aware of these disciplinary actions and what action, if any, DEA took against their respective registrations. 3. BOP SENTRY data. To identify registrants incarcerated while actively registered with DEA, we matched CSA2 data to federal prisoner data provided by BOP as of March 2014 by SSN, name, and date of birth. We conducted a second match using name and date of birth to identify any additional matches where the SSN field may have been missing or inaccurate. We identified two individuals who matched by name and date of birth, but whose SSNs were missing in at least one of the data files. For these two individuals, we reviewed state licensing board action documentation to determine whether the offenses in the board actions matched the offenses identified in the BOP data and to confirm that they were likely matches. We provided a list of the DEA registrants that matched by SSN or name and date of birth to BOP to obtain the incarceration dates for these registrants to determine whether they were incarcerated as of March 6, 2014. We then categorized offenses that were related to controlled substances, health-care fraud, or contained other attributes, such as bank fraud or sexual abuse. We provided a list of registrants who matched this database to DEA to determine whether DEA was aware of the criminal offenses and what action, if any, DEA took against their respective registrations. 4. USMS warrant data. To identify registrants with active or recent warrants, we matched the CSA2 data to warrant data provided by USMS as of February 2014. We identified records for which the registrant’s SSN and name matched that of an individual (or an individual’s alias) who was listed in the warrant data. We provided a list of DEA registrants who matched USMS warrant data to USMS to obtain the warrant issued and warrant closed dates, among other information, to determine whether these registrants had active or recent warrants as of March 6, 2014. We then determined which matches had open or recently closed warrants. We then categorized offenses that were related to controlled substances, health-care fraud, or contained certain other attributes. We provided a list of registrants who matched this database to DEA to determine whether DEA was aware of the criminal offenses and what action, if any, DEA took against their respective registrations. 5. FBI NSOR data. To identify registrants who were listed as registered sex offenders, we matched the CSA2 data to the FBI’s NSOR data, as of February 2014. We identified records for which the registrant’s SSN, name, and date of birth matched that of an actively registered sex offender (or an associated alias). We provided a list of DEA registrants who matched NSOR to the FBI to obtain the NSOR registration start and end dates, among other information, to determine whether these individuals were registered in the NSOR as of March 6, 2014. We then provided a list of registrants who matched this database to DEA to determine whether DEA was aware of the criminal offenses and what action, if any, DEA took against their respective registrations. Because we matched CSA2 data to these datasets using two or more identifiers—SSN, name, date of birth—we are generally confident in the accuracy of our results. However, in some cases, our matches may include registrants who were not deceased, sanctioned by their respective states, incarcerated, the subject of an active or recent warrant, or registered sex offenders. This can occur when a DEA registrant has an SSN, name, and date of birth that are identical to an individual listed in one of the other databases or when the registrant is listed in the other database erroneously. In addition, our matches may be understated because we may not have detected registrants whose identifying information in the CSA2 data differed from the identifying information in other databases, or was missing. We assessed the reliability of DEA’s CSA2 data, SSA’s full death file, FSMB physician licensure and disciplinary action data, BOP SENTRY data, USMS warrant data, and the FBI NSOR data by reviewing relevant documentation, interviewing knowledgeable agency officials, and performing electronic testing for duplicate records and valid or missing values to determine the completeness and accuracy of specific data elements in the databases. We assessed the reliability of SSA’s EVS by reviewing relevant documentation. We determined that the data elements we used from these databases were sufficiently reliable for the purposes of matching DEA registrants to these datasets to identify potentially ineligible registrants. We conducted this performance audit from November 2014 through May 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, the following staff members made significant contributions to this report: Gabrielle M. Fagan and Joah G. Iannotta, Assistant Directors; Tracy Abdo; Melinda Cordero; Carrie J. Davidson; Colin J. Fallon; Dennis Fauber; Maria McMullen; James Murphy; Joy Myers; and Shana Wallace. | DEA registers individuals and entities authorized to manufacture, distribute, or dispense controlled substances in accordance with the Controlled Substances Act, which seeks to ensure that only authorized individuals handle controlled substances. States also have a role in the registration process as they determine general licensing requirements for health-care professionals who are permitted to handle or prescribe controlled substances. Controlled substances include prescription pain relievers, such as OxyContin, stimulants, and sedatives. GAO was asked to review DEA's processes for registering applicants, monitoring the eligibility of registrants, and managing CSA2 data. This report assesses the extent to which DEA's internal controls help ensure that individual registrants are and remain eligible and do not present issues that may increase the risk of illicit diversion, among other objectives. GAO reviewed relevant documents and interviewed DEA and state officials. GAO matched CSA2 data to several databases to identify potentially ineligible registrants. The Drug Enforcement Administration (DEA) has established controls for determining registrant eligibility to handle and prescribe controlled substances. However, GAO found limitations in DEA's controls to help ensure that individual registrants are and remain eligible and do not present issues that may increase the risk of illicit diversion. GAO's examination of DEA's controlled substances database (CSA2) as of March 2014 (the most-current data available) revealed gaps and other issues pertaining to registrants' identifying information. For example, GAO's analysis identified 40,785 of about 1.4 million individual registrations that were registered using a business tax identification number instead of a Social Security number (SSN). According to DEA officials, DEA does not have legal authority to require SSNs for individuals applying as a business. For individuals registered with an SSN, GAO found 11,740 SSNs that could not be validated by the Social Security Administration (SSA) and 688 SSNs that were registered to multiple names or variations of names, which can be a risk indicator of potential fraud. SSNs are needed to identify and remove deceased registrants as well as identify any past adverse history that may affect registrant eligibility. Given that SSNs are critical to validating identities, implementing DEA's controls, and identifying registrants' past adverse history, obtaining legal authority to require SSNs for all individuals and developing policies and procedures to validate them would help ensure that registrants are and remain eligible. GAO also found limitations in DEA's processes for verifying continued eligibility of its registrants. Of the approximately 1.4 million individual registrations in CSA2 as of March 2014, GAO found 764 registrants who were potentially ineligible because they were reported deceased by SSA, did not possess state-level controlled substance authority, or were incarcerated for felony offenses related to controlled substances. GAO also found 100 registrants who presented issues that may increase the risk of illicit diversion, such as registrants incarcerated for offenses unrelated to controlled substances, registrants with active or recent warrants, and registrants listed as sex offenders. DEA does not have processes in place to verify its registrants' state licenses or criminal background after initial registration, unless the registrant self-reports or the state notifies DEA of actions taken against its registrants. Developing processes to monitor registrant state licensure and disciplinary actions, such as verifying that registrants maintain appropriate state authority and assessing the cost and feasibility of monitoring registrants' criminal backgrounds, would help ensure that registrants maintain eligibility to handle and prescribe controlled substances and do not present issues that may increase the risk of illicit diversion. GAO is making five recommendations to DEA to help ensure practitioners are and remain eligible and that those who pose an increased risk of illicit diversion are identified. DEA stated it appreciated the intent of GAO's recommendations, but raised concerns about its legal authority to take some of the actions. GAO's recommendations include having DEA seek legal authority as needed, and remain valid. |
The Rail Passenger Service Act of 1970 created Amtrak to operate and revitalize intercity passenger rail service. Amtrak is required to operate a national passenger rail system that ties together existing and emerging regional passenger rail service and other intermodal passenger services. Amtrak currently provides passenger service along 40 routes that cover about 22,800 miles in 44 states and Washington, D.C. (See fig. 1 and app. I.) Like all major national intercity rail services in the world, Amtrak receives substantial government support. The administration’s fiscal year 1999 budget proposal would provide Amtrak with $621.5 million for capital expenses and no separate funding for operating expenses. At the direction of the administration, Amtrak established the goal in December 1994 of eliminating its need for federal operating subsidies by fiscal year 2002, except for federal contributions to retirement payments for railroad employees, and established a “glidepath” of decreasing federal operating subsidies for each intervening year. To implement this goal, Amtrak’s strategic business plans have targeted opportunities for reducing expenses by closing some routes and reducing the frequency of service on others. These plans have had varying degrees of success. In addition, Amtrak projects substantial revenue growth from the introduction of high-speed rail service between Washington, D.C., and Boston, Massachusetts, in fiscal year 2000 and from the expansion of mail service and express service for transporting higher-value, time-sensitive merchandise. The Surface Transportation Board currently is considering the terms and conditions under which the Union Pacific Railroad and other freight railroads must make their track and facilities available to Amtrak for its express merchandise service. The Taxpayer Relief Act of 1997, enacted in August 1997, makes a total of $2.2 billion available to Amtrak in fiscal years 1998 and 1999 to acquire capital improvements and to pay certain equipment maintenance expenses, among other things. Enacted in December 1997, the Amtrak Reform and Accountability Act of 1997 authorized federal funding for Amtrak’s capital and operating expenses through fiscal year 2002 and repealed several provisions of federal law that limited Amtrak’s ability to manage costs and maximize revenues. Among other things, the act also established an Amtrak Reform Council to evaluate Amtrak’s performance and make recommendations to Amtrak for financial reforms and further cost containment and productivity improvements. In passing the act, the Congress found that intercity passenger rail service is an essential component of a national intermodal passenger transportation system. As shown in table 1, Amtrak’s expenses were at least 2 times greater than its revenues for 28 of its 40 routes in fiscal year 1997. In addition, 14 routes lost more than $100 per passenger carried. Amtrak’s financial system allocates all expenses of operating intercity passenger trains to routes, including the depreciation of its equipment and infrastructure, interest, and corporate and strategic business unit (SBU) overhead costs. Because the measures of financial performance used in this report follow Amtrak’s fully allocated cost approach, they do not represent potential cost savings to Amtrak if it discontinued a route: Depreciation (a noncash expense) and overhead and other shared expenses would not be eliminated by closing a route. If Amtrak’s financial performance data excluded depreciation, losses per passenger would be reduced by at most $10 on 16 routes and by at least $30 on 8 other routes. (See table II.1 in app. II for a comparison of losses per passenger when depreciation is excluded.) Since 1994, Amtrak has completed two extensive assessments of its routes that identified options for closing routes, truncating routes by discontinuing service on segments of the routes, or adjusting the frequency of service on routes in an effort to reduce Amtrak’s financial losses by cutting costs while minimizing revenue losses. In response to its first assessment, Amtrak closed 4 routes, truncated 6 routes, and reduced the frequency of service on 11 routes, typically from daily to three or four times per week. Amtrak achieved $54 million in cost savings in fiscal year 1995; however, it subsequently restored much of this service because the ridership and financial performance of routes with less than daily service were worse than anticipated. While Amtrak currently has no plans to close additional routes, it recently initiated a market-based analysis of its route system to clarify the policy for and direction of its national route system. This analysis will shape Amtrak’s long-term investment and development program for passenger rail service. Amtrak’s primary financial performance measure is the operating ratio of each route’s expenses divided by its revenues. The overall operating ratio for Amtrak’s core intercity passenger services was 1.86 in fiscal year 1997. This ratio indicates that expenses were almost twice as great as revenues for Amtrak’s core intercity passenger services, which include mail and express merchandise services but exclude revenues and expenses from Amtrak’s commuter operations, other reimbursable activities, and commercial development. (See table II.2 in app. II for each route’s operating ratio for fiscal years 1994 through 1997.) Figure 2 shows the three routes that had operating ratios greater than 3.0, indicating that expenses were more than 3 times greater than revenues. Eight routes had operating ratios between 2.5 and 3.0 in fiscal year 1997. A related performance measure is the total operating profit or loss of each route. (See table II.3 in app. II for each route’s operating profit or loss for fiscal years 1994 through 1997.) While the Metroliners route was Amtrak’s only profitable route, 7 routes each lost at least $40 million and 10 additional routes each lost between $20 million and $40 million in fiscal year 1997. The Northeast Direct route between Washington, D.C., and Boston had the largest loss—$160 million—because it loses $29 per passenger, while it transports 28 percent of all Amtrak passengers. However, its operating ratio of 1.65 was among the best of Amtrak’s routes. The other routes that lost the most money during fiscal year 1997 were primarily long-distance routes. Only five Amtrak routes had revenues that exceeded their train expenses, which include the train crew’s wages, fuel, and the depreciation of the train’s locomotive and cars, in fiscal year 1997. (See table II.4 in app. II for each route’s train, route, and system expenses in fiscal year 1997.) Ridership is another key performance measure. During fiscal year 1997, five Amtrak routes each carried more than 1 million passengers, accounting for nearly 60 percent of the railroad’s ridership. In contrast, 17 Amtrak routes carried only about 10 percent of Amtrak’s total ridership—9 routes each carried fewer than 100,000 passengers, and 8 routes each carried between 100,000 and 200,000 passengers. (See table II.5 in app. II for each route’s ridership for fiscal years 1994 through 1997.) Many of these routes connected a small city with Chicago, New York City, or Philadelphia. In addition, while Amtrak routes generally provided at least daily service, three routes—the Cardinal, Sunset Limited, and Texas Eagle—provided service only three times per week during fiscal year 1997. Overall, Amtrak lost $47 per passenger during fiscal year 1997. (See table II.6 in app. II for each route’s profit or loss per passenger for fiscal years 1994 through 1997.) As shown in figure 3, 14 of Amtrak’s current routes lost more than $100 per passenger during fiscal year 1997. The Sunset Limited route (between Los Angeles and Orlando) lost $284 per passenger, the most among Amtrak’s routes, followed by the Texas Eagle route (between Chicago and San Antonio), which lost $201 per passenger, and the Southwest Chief route (between Chicago and Los Angeles), which lost $180 per passenger. Amtrak anticipates that each of these three routes could earn substantial new revenues if the Surface Transportation Board permits Amtrak to expand its express merchandise service for transporting higher-value, time-sensitive goods. Amtrak’s loss per passenger would have been greater in fiscal year 1997 if 12 states had not provided a total of $70.1 million to subsidize service on 17 routes that particularly benefited their residents. (See table II.7 in app. II.) For example, California’s contribution of $16.8 million for the San Joaquins route, which carried 688,000 passengers between Oakland and Bakersfield, reduced this route’s loss from $35 to only $11 per passenger in fiscal year 1997 and improved its financial performance to second best among the 40 routes (behind the profitable Metroliners). Similarly, North Carolina’s payment of $3.2 million for the Piedmont route, which carried 43,000 passengers between Raleigh and Charlotte, reduced this route’s loss from $116 per passenger to $42 per passenger. Amtrak has sought state support primarily for shorter routes whose service benefits residents in one or two states. Amtrak uses a load factor to assess each route’s efficiency in providing service. (See table II.8 in app. II.) Amtrak’s overall load factor of 46.6 percent during fiscal year 1997 means that, on average, 46.6 percent of Amtrak’s seats were filled. Amtrak’s long-distance trains generally had higher load factors than its short-distance trains. The International route (between Chicago and Toronto, Canada), the Pennsylvanian route (between New York City and Pittsburgh), and the New York-Harrisburg route had load factors under 30 percent. Twelve additional routes had load factors between 30 and 40 percent. Since 1994, Amtrak has conducted two extensive assessments of its route system that provided the basis for its decision to close 8 routes, truncate 7 routes, and, in 1995, reduce the frequency of service on 11 routes. (See tables II.9 and II.10 in app. II.) In making its decisions on route closures and service reductions, Amtrak examined such factors as the financial performance of each route; the effect of a route’s closure on connecting routes and the overall network; the efficient use of equipment; marketing concerns; states’ willingness to subsidize service; Amtrak’s mandate to provide national passenger rail service; and a route’s potential for improved profitability through, for example, the growth of mail and express merchandise services. Faced with a major financial crisis in 1994, Amtrak contracted with Mercer Management Consulting to develop recommendations for reducing its route network to reduce its financial losses while maintaining its national coverage. Mercer analyzed Amtrak’s route network by determining the effects on the route system’s bottom line of either closing or reducing the frequency of service on the worst-performing routes. This analysis split Amtrak’s operating expenses into train, route, and system expenses to better determine the effect of terminating a train or route. It also considered the (1) interconnectivity among routes by analyzing the extent to which travel on one route affects the ridership and revenues of other routes and (2) effect of cutbacks to less-than-daily service on ridership and revenues by estimating the extent to which passengers would adjust their travel plans to fit the schedules of the remaining trains. However, the study noted that its estimates of this “revenue retention” were based on limited Amtrak experience and actual results could vary. Mercer recommended substantial eliminations of routes and segments and reductions in the frequency of service designed to maximize operating savings while limiting the loss of services and coverage. In response to Mercer’s recommendations, Amtrak closed 4 routes, truncated 6 routes, and reduced the frequency of service on 11 additional routes, primarily from daily to three to four times per week, during fiscal year 1995. Amtrak also introduced the Piedmont route (between Raleigh and Charlotte), supported by North Carolina, and the Mount Baker International train (between Seattle and Vancouver, Canada), supported by Washington State. These route and service changes resulted in a 13-percent reduction in the total miles that Amtrak trains traveled from fiscal year 1994 to fiscal year 1996 and $54 million in cost savings in fiscal year 1995. However, during fiscal year 1996, Amtrak’s overall ridership dropped by 1.1 million passengers, or 5 percent, and anticipated reductions in operating costs were not realized on routes with reduced frequency of service. Amtrak officials told us that these problems occurred because (1) while passengers affected by frequency reductions generally adjusted their travel plans to conform with Amtrak’s more limited service in 1995, this rider behavior did not continue into 1996; (2) management did not cut costs as much as planned; and (3) less-than-daily service caused less efficient usage of equipment and other unforeseen problems. During fiscal year 1995, Amtrak also decentralized its organizational structure by creating the Northeast Corridor SBU to manage passenger service between Virginia and New England; the Amtrak West SBU to manage passenger service along the West Coast; and the Intercity SBU to manage all remaining passenger service. In April 1996, the Northeast Corridor SBU reduced the frequency of service on its Metroliner and Northeast Direct routes, in response to an ongoing analysis of how to improve the SBU’s financial performance. These changes, along with some ticket pricing changes, helped the Northeast Corridor SBU to reduce its net loss by 19 percent between fiscal years 1996 and 1997, according to Amtrak officials. In mid-1996, Amtrak’s Intercity SBU analyzed its route structure to identify opportunities to improve its financial performance, primarily by more effectively using its locomotives and passenger cars to raise revenues. Intercity SBU’s routes were responsible for 61 percent of Amtrak’s passenger service losses, and its long-distance routes were affected the most by the 1995 service reductions. Intercity SBU concluded from its analysis that it could restore daily service on three routes with higher market potential by closing two poorly performing routes and making certain other adjustments to maximize equipment utilization. In deciding which routes to eliminate, Intercity SBU considered financial performance, the costs saved by elimination, route interconnectivity, marketing concerns, and long-term growth and profit opportunities, including the expansion of mail and express merchandise services. In response to this analysis, Amtrak’s Intercity SBU (1) truncated the Sunset Limited route from Miami to Sanford, Florida, in November 1996 and (2) closed the Desert Wind and Pioneer routes and reinstituted daily service on the California Zephyr, Empire Builder, and City of New Orleans routes in May 1997. Amtrak did not discontinue service on two other route segments targeted for elimination because the affected states offered to provide financial support. The impact of these route and service actions on the financial performance of Intercity SBU’s routes is not yet clear—the overall operating ratio of Intercity SBU’s routes has not shown any consistent trends since these changes were implemented. However, net losses for Intercity SBU’s routes were 12 percent greater in fiscal year 1997 than in fiscal year 1996. About half of this increase reflected higher depreciation costs for new equipment, the allocation of a portion of the depreciation costs for the Northeast Corridor’s track, and about $13 million more in expenses than the funding made available for extending service by 6 months for routes scheduled for closure. Since 1996, Amtrak has focused on improving its financial performance by identifying growth opportunities rather than by reducing service. Amtrak’s September 1997 strategic business plan projected that net revenues would substantially increase with the rapid growth of Amtrak’s express merchandise service, which would primarily transport goods from the West Coast to the Midwest, and with the introduction of high-speed rail between Washington, D.C., and Boston, which would benefit all of the Northeast Corridor’s routes. Amtrak also has fine-tuned the performance of specific routes. For example, in recent months, it (1) redesigned the Night Owl train (renamed the Twilight Shoreliner) between Boston and Washington, D.C., by modifying its departure times and extending service to Newport News, Virginia; (2) extended the Sunset Limited route from Sanford to Orlando, Florida, to increase ridership in the vacation market; and (3) added a fourth train per week to the Texas Eagle route that runs from Chicago through San Antonio to Los Angeles to support the expected growth of its express merchandise business. Amtrak also plans to begin daily service between Los Angeles and Las Vegas by January 1999. In explaining the rationale for not cutting Amtrak’s route system further at this time, officials of Amtrak and the Department of Transportation’s Federal Railroad Administration (FRA) pointed to Amtrak’s mission of maintaining a national route system, noting that such a system will consist of routes with a range of profitability, including lower-performing routes that may provide connecting service with other routes or public benefits, such as serving small cities and rural areas. The officials stressed that cutting the worst-performing routes could damage the national network by reducing or eliminating potential passengers’ access to connecting routes. In addition, Amtrak Intercity SBU officials noted that (1) their routes generally are profitable if revenues are compared with only the variable costs that would be eliminated if a route were closed and (2) fixed costs, which generally are not eliminated when routes are closed, would be spread over a smaller revenue base of remaining routes, further worsening the financial performance of these routes. Finally, the officials cited the importance of assessing whether growth options work before deciding on further cuts, pointing to the recent 25- to 30-percent increase in ridership compared with that of a year ago on the Coast Starlight route between Seattle and Los Angeles, and the Pacific Northwest Corridor route between Seattle and Eugene. In March 1998, Amtrak announced plans to initiate a year-long market analysis of the role and growth potential of the national passenger rail system. The analysis will assess the service, demand, revenues, and net contribution of Amtrak’s current and alternative route systems to identify service amenities, price changes, and changes to the existing route system that may improve the ridership and revenue potential of Amtrak’s network in the short and long terms. In addition, the Amtrak Reform and Accountability Act directed the newly created Amtrak Reform Council to assess Amtrak’s financial performance. If the council determines, at any time after December 1999, that Amtrak is not achieving its financial goals or that Amtrak will require operating grant funds after December 2002, the council is required to develop an action plan for a “restructured and rationalized national intercity rail passenger system.” A restructured passenger rail system could range from a system similar to Amtrak’s current national route system to limited passenger service between key pairs of cities. Amtrak officials stated that the design of an optimal route system requires a vision of how intercity passenger rail service fits within the national transportation system and the public benefits it should offer. They also noted that potentially profitable passenger services could be identified by using market research and demographic analyses to determine customer demand for services and potential revenues and by then comparing these revenues with the expense of providing such services, including the infrastructure and equipment needed. FRA officials stated that the design of an optimal route system should involve an examination of key pairs of cities that could generate substantial ridership and the linkages needed to make them into a national system, assuming that Amtrak’s mission of operating a national passenger rail system would remain unchanged. They also stated that this type of analysis should incorporate the (1) transportation policies of states and localities and their willingness to fund passenger rail, (2) needs of small towns and rural areas, and (3) relative benefits of passenger rail service compared with other modes of transportation. FRA officials acknowledged that no clear public policy currently defines the role of passenger rail in the national transportation system. Since 1971, Amtrak has received about $21 billion in federal operating and capital funding to help cover the costs of providing intercity passenger rail service. Amtrak’s glidepath for eliminating federal operating support by fiscal year 2002 established an aggressive schedule for reducing net losses and overall losses. While Amtrak has made progress in increasing revenues and reducing losses, it has not achieved its annual budget goals. Furthermore, in March 1998, Amtrak’s Board of Directors approved a revised strategic business plan for fiscal years 1998 through 2003 that projects a net loss of $845 million for fiscal year 1998—$83 million more than the $762 million net loss that occurred in fiscal year 1997. Although Amtrak stands to receive historic levels of federal capital support in the next few years, it is unlikely that sufficient funding will be available to implement Amtrak’s identified capital investment projects. Amtrak’s management, in the September 1997 strategic business plan, identified about $5.5 billion in capital improvement projects between fiscal years 1998 and 2003. However, the plan identified only about $5.0 billion, or about $500 million short of Amtrak’s target for capital funding, that would be provided through federal, state, and local support and commercial financing. Furthermore, Amtrak plans to use about $800 million of the federal funding it receives between fiscal years 1998 and 2003 for maintenance expenses, rather than for capital investment, because of expected cash shortfalls during the next 3 years. The administration’s proposed budget for fiscal year 1999 would provide Amtrak with the flexibility to use capital funds to pay expenses for equipment, facilities, and infrastructure maintenance, which have traditionally been treated as operating expenses. Amtrak has established a schedule for gradually reducing its federal operating subsidy each year, beginning in fiscal year 1996, until the subsidy is eliminated in fiscal year 2002. (See table III.1 in app. III.) Federal appropriations for Amtrak’s operations and the federal retirement payments for railroad employees have dropped by almost $200 million—from $542 million in fiscal year 1995 to $344 million in fiscal year 1998. However, Amtrak has struggled to reach its annual targets for reducing its net loss, which provide the basis for Amtrak’s continued viability as federal operating subsidies are eliminated. For fiscal years 1995 and 1996, Amtrak’s plans included actions to reduce its net loss by $195 million—from about $834 million in fiscal year 1994 to $639 million in fiscal year 1996. By the end of fiscal year 1996, however, Amtrak’s net loss had declined by only $70 million to $764 million. (See table III.2 in app. III.) In addition, Amtrak’s net loss of $762 million in fiscal year 1997 would have been $69 million higher except for the one-time sales of real estate and telecommunications rights-of-way in the Northeast Corridor. As a result of Amtrak’s reduced federal operating subsidy and slow progress in reducing its net losses, Amtrak’s overall loss—its loss after federal operating subsidies are included—increased from $12 million in fiscal year 1995 to $70 million in fiscal year 1997. (See table III.3 in app. III.) In March 1998, Amtrak’s Board of Directors approved a revised strategic business plan that projected a net loss of $845 million and an overall loss of $98.5 million for fiscal year 1998. The revised plan reflects a serious cash-flow problem and Amtrak’s need to borrow substantially more money than originally planned to pay operating expenses. While Amtrak borrowed $75 million to meet its operating expenses in fiscal year 1997 and initially planned to borrow $100 million in fiscal year 1998, the revised plan projects a cash-flow deficit of $200 million in this fiscal year. The change in Amtrak’s cash flow for fiscal year 1998 results from (1) a reduction of $47 million in the projected profits from its express merchandise service for the delivery of higher-value, time-sensitive goods; (2) an increase of $35 million in expenses to cover wage increases for all of its union employees, which reflects its settlement with the Brotherhood of Maintenance of Way Employees in November 1997; and (3) an increase of $16 million in its accounts payable because payment was deferred from fiscal year 1997. As discussed previously, Amtrak planned to reduce its net loss and eliminate its need for federal operating subsidies primarily by increasing revenues while controlling costs. During fiscal year 1997, Amtrak increased its ridership by about 3 percent to 20.2 million passengers—the Amtrak West SBU increased its ridership by 11 percent, and the Intercity and Northeast Corridor SBUs both increased their ridership by 1 percent.Revenues from Amtrak’s core intercity passenger services grew by about 4 percent in fiscal year 1997, including a 7-percent increase in passenger revenues. However, expenses for the core intercity passenger services also grew by about 7 percent. In addition, Amtrak’s revised strategic business plan sharply reduced projected 6-year profits from its express merchandise service—from $436 million to $140 million between fiscal years 1998 and 2003. This reduction reflects, in part, uncertainties pending the Surface Transportation Board’s determination of the terms and conditions under which Union Pacific and other freight railroads must make their track and facilities available to Amtrak for express merchandise service. (Freight railroads own about 97 percent of the route miles over which Amtrak operates.) As a result, Amtrak postponed plans to order 367 refrigerated express cars and will expand this component of its express merchandise service more gradually if the Surface Transportation Board issues a favorable ruling. The reduction in express merchandise service revenues weakens Amtrak’s ability to improve the financial performance of certain of its long-distance routes. Amtrak plans to begin high-speed rail service between New York City and Boston in October 1999, designed to reduce travel time from 4-3/4 hours to 3 hours by enabling passenger trains to travel at speeds of up to 150 miles per hour. Amtrak also is upgrading its track between Washington, D.C., and New York City to further reduce travel time by 15 minutes to 2-3/4 hours by enabling trains to travel at speeds up to 135 miles per hour. Amtrak projects that high-speed rail service between Washington, D.C., and Boston will be fully implemented in October 2000 and will provide net returns of $190 million in fiscal year 2001 and $219 million in fiscal year 2003, eliminating almost all of the Northeast Corridor SBU’s operating loss. Capital investments play a critical role in supporting Amtrak’s business plans and ultimately in maintaining Amtrak’s viability. Such investments will help Amtrak to retain revenues by improving its quality of service and achieve future goals for revenue growth and cost containment. In the September 1997 strategic business plan, Amtrak’s management identified about $5.5 billion in capital improvement projects from fiscal year 1998 through fiscal year 2003. (See table III.4 in app. III.) This amount includes about (1) $1.7 billion for completing the high-speed rail program between Washington, D.C., and Boston; (2) $900 million for other infrastructure-related improvements along the Northeast Corridor; and (3) $500 million for overhauling existing equipment. However, Amtrak anticipates that it will receive about $500 million less than its target for capital funding through fiscal year 2003: about $4.2 billion in federal funding and about $800 million from commercial financing and state and local funding. Amtrak’s Board of Directors has approved capital spending only for fiscal year 1998; Amtrak’s management currently is developing a 5-year capital plan for fiscal years 1999 through 2003 that it plans to present to the Board in September 1998. Amtrak has stated that it will use Taxpayer Relief Act funds for those high rate-of-return capital investments that over time would strengthen its long-term viability, improve productivity and efficiency, and reduce its reliance on federal operating support. However, Amtrak plans to temporarily use $100 million in Taxpayer Relief Act funds in fiscal year 1998, $317 million in fiscal year 1999, and $200 million in fiscal year 2000 for equipment maintenance expenses to reduce its cash-flow deficit in each of these years. Amtrak projects that its net losses and cash-flow deficits will be reduced in fiscal year 2001, when high-speed rail is implemented between Washington, D.C., and Boston, enabling it to use Taxpayer Relief Act funds for high rate-of-return capital investment projects. The administration’s fiscal year 1999 budget proposes $621.5 million for Amtrak’s capital investments, including at least $200 million for the Northeast Corridor program, and no funding for operating expenses. The Department of Transportation’s budget justification, submitted in March 1998, proposes that Amtrak be allowed to use its annual capital appropriation to pay for the preventive maintenance of equipment, facilities, and infrastructure, as currently allowed for Federal Transit Administration (FTA) grantees. This flexibility would enable Amtrak to use appropriated capital funds as it uses federal operating support that reduces its annual net losses. Amtrak estimates that, if approved, its capital appropriation could be used for up to $542 million in maintenance expenses in fiscal year 1999 and $487 million in each subsequent fiscal year. (Amtrak currently does not plan to fully exercise this authority.) Amtrak’s March 1998 strategic business plan proposes to use substantial amounts of federal capital funds appropriated from fiscal year 1999 through fiscal year 2003 for maintenance expenses to address the net losses and cash-flow deficits that Amtrak identified. Table 2 compares how Amtrak would spend federal funds under its glidepath with how Amtrak proposes to spend its federal capital appropriation under FTA’s approach to maintenance expenses. (See table III.5 in app. III for annual funding amounts under each approach.) For the 5-year period, Amtrak would spend almost two-thirds of the anticipated $2.8 billion in appropriated funds for allowable maintenance—$800 million more than the glidepath would allow for operating expenses. The use of these federal funds for maintenance expenses would correspondingly reduce the federal funding available for capital improvements by $800 million through fiscal year 2003. Amtrak officials told us that using a portion of the federal capital appropriation for maintenance will provide stability for Amtrak over the next several years, thus averting a possible bankruptcy. They added that this stability will enable Amtrak to complete the market analysis discussed earlier. The Amtrak Reform and Accountability Act repealed several provisions of federal law applicable to Amtrak’s operations that limited its ability to manage costs and maximize revenues. In particular, the act (1) repealed a statutory ban on contracting out work that would result in employee layoffs, except for food and beverage service, and (2) eliminated statutory and contractual labor protection arrangements, effective May 31, 1998, that provided up to 6 years compensation and benefits for employees who lose their jobs because of the discontinuance of service on a route or such other covered actions as the closure of a maintenance facility. In addition, the reform act established a $200 million cap on the amount of liability claims, including punitive damages, that can be paid as a result of an accident involving an Amtrak train. Amtrak and FRA officials stated that these reforms will provide few, if any, immediate financial benefits and their longer-term benefits are unclear. Amtrak and FRA officials told us that the repeal of the statutory ban on contracting out work that would result in layoffs will have little, if any, immediate effect on Amtrak’s financial performance. The act incorporated the statutory language on contracting out into Amtrak’s existing collective bargaining agreements and made contracting-out issues subject to negotiation no later than November 1, 1999. In the longer term, the repeal of this ban may provide Amtrak with important flexibility in labor negotiations and in controlling costs. However, it will remain unclear how this reform will affect Amtrak’s financial performance until negotiations are completed. Amtrak and FRA officials believe that the elimination of labor protection arrangements is likely to have little, if any, immediate effect on Amtrak’s financial position. Amtrak officials told us that Amtrak paid $1.2 million in fiscal year 1997 in compensation to employees affected by route discontinuances or certain other covered actions. They noted that the arrangements have resulted primarily in wage differential payments for up to 6 years to employees who take lower-paying jobs when their jobs are terminated and income maintenance payments for up to 6 years to employees who lose their positions entirely. As of February 1998, 115 Amtrak employees were receiving wage differential payments, and 21 employees were receiving income maintenance payments. Amtrak and FRA officials stated that the long-term effect of eliminating existing labor protection arrangements is unclear. Amtrak and its unions are addressing this issue in collective bargaining negotiations. While Amtrak currently does not have plans to close any of its 40 routes, the elimination of these arrangements could become important if, for example, Amtrak’s market analysis of its route system results in a decision to substantially reorganize the system. According to Amtrak and FRA officials, the $200 million cap on liability claims is likely to have little financial effect on Amtrak because this limit is significantly higher than the amounts Amtrak has historically paid on liability claims—Amtrak’s largest payment was $35.5 million as a result of a 1987 accident in Chase, Maryland. (This accident also is the only Amtrak accident in which the total payments for claims, including those of a freight railroad, exceeded $100 million.) Amtrak officials noted that Amtrak has never purchased insurance to cover claims of more than $200 million per accident. They added, however, that the liability cap probably will improve Amtrak’s relationship with the freight railroads whose track Amtrak uses for its passenger service because the cap is a single cap for all parties found liable for an accident, including freight railroads. We provided Amtrak and the Department of Transportation with a draft of this report for review and comment. We met with Amtrak officials, including the Vice President for Finance and Administration and Chief Financial Officer. Amtrak stated that the report was accurate, but it was concerned that the losses-per-passenger data presented in table 1, which reflects fully allocated expenses including depreciation and overhead, could lead policymakers to incorrect inferences about dollar savings that might result from the closure of a route. Amtrak asked that we replace table 1 with table II.1, which compares overall profits or losses per passenger with the results when depreciation and system and route overhead expenses are excluded. We did not make this change primarily because the Conference Report to the Department of Transportation and Related Agencies Appropriations Act for Fiscal Year 1998 directed us to consider all income and all costs in developing systemwide performance rankings of all routes currently in service. Nevertheless, we clarified the report to note that the fully allocated expenses do not represent potential cost savings to Amtrak if a route is discontinued. We also met with Department of Transportation officials, including the Federal Railroad Administration’s Chief, Passenger Programs. The Department stated that the report fairly and accurately presented the issues. Both Amtrak and the Department provided clarifying information to improve the report’s technical accuracy that we incorporated as appropriate. To obtain the information in this report, we reviewed Amtrak’s revised strategic business plan for fiscal years 1998 through 2003, approved by its Board of Directors in March 1998; its original strategic business plan for fiscal years 1998 through 2000; its annual report for 1997; its federal grant request for fiscal year 1999; and other related documents. We also obtained financial and other performance data for Amtrak as a whole and for each of its routes for fiscal year 1994 through the first quarter of fiscal year 1998, and we examined Amtrak’s financial performance report for the first quarter of fiscal year 1998. In addition, we interviewed Amtrak officials at Amtrak’s headquarters and its Intercity, Northeast Corridor, and Amtrak West SBUs; Amtrak’s former chief financial officer; and FRA officials. While we did not verify the accuracy of Amtrak’s financial data and how Amtrak’s route profitability system allocates costs to different routes, we interviewed FRA officials and current and former Amtrak financial officials, including SBU managers, about the reliability of the data and the cost allocation procedures. These officials told us that Amtrak historically had problems with allocating its expenses to specific routes and trains. However, these officials added that since Amtrak redesigned its route profitability system in fiscal year 1995, its cost allocation methodology has progressively improved, enabling Amtrak’s managers to use these data more effectively in managing the route system. We conducted our review from October 1997 through April 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees; the acting President of Amtrak; members of the Amtrak Reform Council; the Secretary of Transportation; the Administrator of FRA; and the Director, Office of Management and Budget. We will also make copies available to others upon request. If you or your staff have any questions about this report, please contact me at (202) 512-3650. Major contributors to this report are Richard Cheston, Judy Guilliams-Tapia, Paul Lacey, and James Ratzenberger. Lorton, VA-Sanford, FL Chicago, IL-Salt Lake City, UT-Emeryville (San Francisco), CA Chicago, IL-Cleveland, OH-Pittsburgh, PA-Washington, DC Chicago, IL-Cincinnati, OH-Charleston, WV-Washington, DC New York, NY-Raleigh, NC-Charlotte, NC Chicago, IL-Detroit, MI, or Pontiac, MI Chicago, IL-St. Louis, MO Chicago, IL-Memphis, TN-New Orleans, LA New York, NY-Atlanta, GA-New Orleans, LA Chicago, IL-St. Paul, MN-Spokane, WA,-Seattle, WA, or Portland, OR Chicago, IL-Milwaukee, WI Chicago, IL-Carbondale, IL Chicago, IL-Quincy, IL Chicago, IL-Port Huron, MI-Toronto, Canada Kansas City, MO-St. Louis, MO Chicago, IL-Cleveland, OH-Albany, NY-Boston, MA, or New York, NY New York, NY-Philadelphia, PA-Pittsburgh, PA Chicago, IL-Grand Rapids, MI Raleigh, NC-Charlotte, NC New York, NY-Charleston, SC-Jacksonville, FL-Orlando, FL-Miami, FL New York, NY-Charleston, SC-Jacksonville, FL-Tampa, FL-Miami, FL New York, NY-Columbia, SC-Jacksonville, FL-Orlando, FL-Miami, FL Chicago, IL-Albuquerque, NM-Los Angeles, CA Los Angeles, CA-San Antonio, TX-New Orleans, LA-Orlando, FL Chicago, IL-Dallas, TX-San Antonio, TX Chicago, IL-Dallas, TX-San Antonio, TX-Los Angeles, CA Chicago, IL-Youngstown, OH-Pittsburgh, PA-Philadelphia, PA-New York, NY New York, NY-Albany, NY-Montreal, Canada New York, NY-Philadelphia, PA New York, NY-Albany, NY New York, NY-Albany, NY-Syracuse, NY-Niagara Falls, NY New York, NY-Albany, NY-Rutland, VT New York, NY-Washington, DC New York, NY-Philadelphia, PA-Harrisburg, PA Boston, MA, or Springfield, MA-New York, NY-Washington, DC, or Newport News, VA Philadelphia, PA-Harrisburg, PA (continued) Washington, DC-New York, NY-St. Albans, VT Colfax, CA-Sacramento, CA-Oakland, CA-San Jose, CA Seattle, WA-Emeryville (San Francisco), CA-Los Angeles, CA Eugene, OR-Seattle, WA, or Vancouver, Canada San Diego, CA-Los Angeles, CA, or Santa Barbara, CA, or San Luis Obispo, CA Oakland, CA-Bakersfield, CA Began service in November 1996. Replaced the Broadway Limited by initially providing service between New York and Pittsburgh, which was subsequently extended to Chicago. Replaced the Montrealer between Washington, D.C., and St. Albans, Vermont, with connecting Amtrak thruway bus service to Montreal. This appendix presents information on (1) the effect of excluding depreciation in calculating profit and loss per passenger for each Amtrak route, fiscal year 1997; (2) the operating ratio of each Amtrak route, fiscal years 1994 through 1997; (3) the profit or loss of each Amtrak route, fiscal years 1994 through 1997; (4) revenues, expenses, and profit or loss of each Amtrak route, fiscal year 1997; (5) the ridership on each Amtrak route, fiscal years 1994 through 1997; (6) the profit or loss per passenger for each Amtrak route, fiscal years 1994 through 1997; (7) the improved financial performance of certain Amtrak routes as a result of state payments, fiscal year 1997; (8) the load factor for each Amtrak route, fiscal year 1997; (9) Amtrak routes discontinued since fiscal year 1994; and (10) the segments of Amtrak routes discontinued since fiscal year 1994. Train (excluding depreciation) Train and route (excluding depreciation) Train, route, and system (excluding depreciation) Train, route, and system (including depreciation) (3) (9) (11) (9) (16) (27) (19) (42) (7) (15) (15) (27) (62) (81) (118) (10) (15) (29) (3) (14) (24) (26) (8) (28) (40) (47) (16) (29) (39) (45) (73) (132) (151) (180) (4) (13) (19) (23) (12) (35) (41) (58) (30) (61) (73) (90) (15) (28) (34) (38) (35) (48) (52) (57) (9) (15) (22) (25) (85) (105) (138) (40) (76) (88) (120) (66) (104) (118) (136) (21) (38) (51) (61) (continued) Train (excluding depreciation) Train and route (excluding depreciation) Train, route, and system (excluding depreciation) Train, route, and system (including depreciation) (13) (32) (42) (47) (83) (117) (130) (149) (58) (93) (106) (133) (2) (15) (21) (37) (11) (30) (45) (51) (56) (73) (81) (92) (54) (94) (107) (143) (57) (111) (128) (163) (71) (117) (133) (163) (3) (7) (8) (11) (10) (29) (38) (53) (26) (47) (58) (64) (30) (48) (57) (79) (70) (100) (113) (130) (12) (30) (45) (50) (116) (161) (176) (201) (164) (213) (233) (284) (68) (96) (106) (136) (25) (49) (59) (66) ($8) ($27) ($35) ($47) Table II.2: Operating Ratio of Each Amtrak Route, Fiscal Years 1994 Through 1997 (continued) Service was introduced in May 1995. Service was introduced in Nov. 1996. Service was introduced in Dec. 1996. ($17.6) ($2.4) (16.7) (13.0) (9.9) (7.2) (8.2) (9.5) (5.3) (6.2) (1.8) (1.8) (4.8) (8.0) (13.7) (7.4) (7.2) (8.2) (13.0) (28.4) (189.7) (159.0) (142.0) (160.4) (4.5) (8.7) (13.6) (8.9) (4.8) (5.2) (3.3) (4.1) (7.1) (6.4) (6.0) (7.0) (36.6) (38.2) (37.8) (46.2) (37.7) (33.7) (36.8) (37.7) (16.4) (13.0) (7.1) (4.9) (25.5) (27.9) (30.6) (31.8) (35.1) (36.6) (47.8) (40.6) (continued) (3.6) (4.4) (5.8) (5.6) (8.4) (8.6) (3.8) (4.6) (24.4) (19.0) (7.4) (19.4) (43.5) (28.1) (32.8) (30.6) (51.4) (37.8) (41.1) (47.0) (3.7) (3.7) (3.6) (5.0) (6.0) (6.8) (8.1) (5.8) (41.3) (42.5) (34.2) (43.6) (17.0) (21.8) (27.6) (23.8) (10.0) (8.6) (9.3) (16.1) (2.5) (1.7) (2.9) (3.3) (36.4) (39.9) (44.6) (46.0) (41.8) (33.4) (39.3) (38.7) (30.6) (41.9) (32.1) (30.8) (40.3) (12.0) (9.6) (12.2) (17.1) (20.6) (14.6) (23.2) (13.9) (6.2) (7.8) (6.6) (8.5) (16.6) (17.8) (16.2) (16.4) (2.3) (16.0) (17.0) (20.2) (22.6) (16.3) (14.5) (15.6) (17.9) (19.1) (18.7) (22.3) (19.2) (16.3) (14.6) (19.0) (11.8) (28.4) (31.8) (39.8) (35.3) (12.9) (12.8) (9.8) (10.8) (18.7) (19.9) (24.1) (27.5) (0.6) (2.5) (31.4) (18.6) ($958.3) ($855.4) ($855.3) ($949.5) (Table notes on next page) Service was introduced in May 1995. Service was introduced in Nov. 1996. Service was discontinued in May 1997. Service was introduced in Dec. 1996. Experimental service was introduced in June 1996 and discontinued in Mar. 1997. Includes losses of the Atlantic City Express, Palmetto, and Hoosier routes, which were closed during fiscal year 1995. Profit (loss) (7.2) (6.2) (1.8) (7.4) (28.4) (160.4) (8.9) (4.1) (7.0) (46.2) (37.7) (4.9) (31.8) (40.6) (5.6) (4.6) (19.4) (30.6) (47.0) (5.0) (5.8) (continued) Profit (loss) (43.6) (23.8) (16.1) (3.3) (46.0) (38.7) (30.6) (40.3) (17.1) (13.9) (8.5) (16.4) (2.3) (22.6) (17.9) (19.2) (11.8) (35.3) (10.8) (27.5) (2.5) ($949.5) Amtrak discontinued service on the Desert Wind, Pioneer, and Gulf Coast Limited during fiscal year 1997. (continued) Includes ridership on the Atlantic City Express, Palmetto, and Hoosier routes, which were closed during fiscal year 1995. Specially contracted trains that are not part of Amtrak’s regular intercity or commuter passenger service. ($9) ($1) (30) (25) (17) (11) (40) (21) (23) (27) (62) (42) (13) (23) (30) (15) (35) (33) (56) (118) (32) (27) (25) (29) (35) (32) (45) (26) (44) (51) (39) (47) (44) (45) (46) (45) (continued) (140) (150) (160) (180) (23) (23) (23) (23) (131) (135) (95) (58) (78) (78) (87) (90) (33) (35) (49) (38) (42) (46) (61) (57) (39) (43) (21) (22) (133) (117) (30) (138) (103) (75) (95) (120) (113) (102) (133) (136) (45) (45) (47) (61) (52) (59) (74) (47) (109) (132) (153) (149) (97) (117) (146) (133) (30) (20) (27) (37) (36) (33) (54) (51) (81) (92) (111) (92) (106) (84) (111) (143) (163) (133) (119) (140) (163) (7) (5) (8) (11) (140) (122) (162) (174) (35) (33) (33) (53) (57) (62) (64) (64) (79) (74) (87) (125) (130) (36) (38) (49) (50) (128) (152) (228) (201) (144) (166) (200) (231) (162) (198) (276) (284) (120) (119) (123) (136) (47) (53) (64) (66) (46) (119) ($46) ($41) ($44) ($47) (Table notes on next page) Service was introduced in Nov. 1996. Service was discontinued in May 1997. Service was introduced in Dec. 1996. Fiscal year 1997 payment (dollars in millions) Loss per passenger including state payments ($35) ($11) (35) (27) (116) (42) (32) (15) (41) (26) (70) (47) (69) (45) (33) (23) (64) (58) (67) (57) (83) (61) (57) (47) (63) (51) (41) (22) (73) (64) (83) (79) (59) (50) Passenger miles and seat miles in thousands (continued) Net profit/(loss) ($808.2) ($763.6) ($761.9) Amtrak’s fiscal year 1995 data did not separately identify overhaul expenses. Net profit/(loss) (808.2) (763.6) (761.9) Federal capital - equipment overhauls and maintenance Federal funding for excess railroad retirement taxesProfit/(loss) after federal subsidies (266.2) (322.2) (318.0) ($12.2) ($82.2) ($70.4) Heavy and progressive overhauls of equipment designed to reduce maintenance costs. Replacement of old locomotives and passenger cars with new or remanufactured equipment. Primarily improvements or repairs to aging or damaged infrastructure and equipment. Primarily state-of-good-repair maintenance of the Northeast Corridor. Primarily debt service. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the financial: (1) performance of Amtrak's current routes; (2) implications for Amtrak of multiyear capital requirements and declining federal operating subsidies; and (3) effect on Amtrak of reforms contained in the Amtrak Reform and Accountability Act of 1997. GAO noted that: (1) Amtrak spends almost $2 for every dollar of revenue it earns in providing intercity passenger service; (2) only the Metroliner's high-speed service between Washington, D.C., and New York City is profitable; all of Amtrak's other 39 routes operate at a loss; (3) financial performance measures highlight the problems that Amtrak routes generally are experiencing; (4) for example, 3 Amtrak routes spent more than $3 for every dollar of revenue, and 14 routes lost more than $100 per passenger in fiscal year (FY) 1997; (5) at the same time, Amtrak has improved the financial performance of several routes by negotiating support payments with affected states; (6) for example, California supplemented the revenues of two routes by about $16.5 million each in FY 1997 because these routes particularly benefited its residents; (7) any decisions about restructuring Amtrak's route system need to consider whether and how Amtrak will continue to provide national passenger service; (8) an analysis also needs to assess each route's customer demand and financial performance, the willingness of state and local governments to subsidize service, and the route's broader benefits; (9) these benefits could include providing connecting service to other routes, providing public transportation that links smaller communities with major cities, and helping to alleviate highway congestion and pollution; (10) Amtrak is in a very precarious financial position and remains heavily dependent on federal funding to pay its operating and capital expenses; (11) while Amtrak's goal is to eliminate the need for federal operating subsidies by 2002, its Board of Directors approved a revised strategic business plan in March 1998 that projected substantially higher net losses in FY 1998 and FY 1999 than were included in the previous plan; (12) to reduce these net losses, Amtrak's revised plan would use federal capital appropriations to pay for maintenance expenses that traditionally have been treated as operating expenses; (13) as a result, Amtrak would spend $800 million, or 15 percent, less for capital improvements over the next 5 years than previously planned; (14) as currently structured, Amtrak will continue to require federal capital and operating support in 2002 and well into the future; (15) the reforms included in the Amtrak Reform and Accountability Act of 1997 will have little, if any, immediate effect on Amtrak's financial performance, according to Amtrak and Federal Railroad Administration officials; and (16) the officials added that the longer-term benefits of these reforms are unclear. |
In late 2001, as the United States focused on toppling the Taliban regime and fighting al Qaeda in Afghanistan, Pakistan’s importance as an ally in the global war on terror increased. According to Defense, Pakistan’s military operations and other contributions to Operation Enduring Freedom in Afghanistan quickly threatened to become unsustainable on its $2.5 billion defense budget. As a result, Defense requested supplemental funding from Congress to provide payments to Pakistan for logistical and military support in connection with Operation Enduring Freedom. In response, Congress passed the Defense Appropriations Act for Fiscal Year 2002, stipulating that the “Defense Emergency Response Fund” could be used by the Secretary of Defense to reimburse coalition partners for logistical and military support to U.S. military operations. This funding became known as Coalition Support Funds. To provide Defense with maximum flexibility, Congress passed the Defense Appropriations Act for Fiscal Year 2002, which granted the Secretary of Defense the authority to make CSF payments notwithstanding any other provision of law in such amounts as the Secretary may determine in his discretion, based on documentation determined by the Secretary to adequately account for the logistical and military support provided by partner nations. Any such determination by the Secretary shall be final and conclusive. The act did, however, require Defense to provide a 15-day notification of upcoming CSF reimbursements. Congress continued to provide funding for Pakistan through Defense without requiring specific accountability controls until 2008. Subsequent legislation required Defense to provide quarterly reports to the House and Senate Committees on Appropriations and the House and Senate Armed Services Committees on the use of funds made available for payments to Pakistan and other CSF recipients. Despite these revisions to the reporting requirements, Congress has consistently left decision-making on the suitability of documentation to the discretion of the Secretary of Defense. Defense, on its own, has instituted guidance that goes beyond what is mandated in law. According to Defense, CSF is critical to ensure Pakistan’s continued support of U.S. efforts to combat terrorism. Defense officials stated that without CSF or a similar mechanism to reimburse Pakistan for support in Operation Enduring Freedom, Pakistan could not afford to deploy military forces along the Pakistan-Afghanistan border to support U.S. military operations in Afghanistan. Defense also indicates that 84 percent of all containerized cargo and approximately 40 percent of all fuel for U.S. and coalition forces operating in Afghanistan passes through Pakistan. According to Defense officials, CSF has been a major factor in Pakistan’s ongoing cooperation in support of U.S. goals in Pakistan and Afghanistan. Defense has used CSF to reimburse Pakistan for Operation Al Mizan, a major deployment of the Pakistan army in the North West Frontier Province and the Federally Administered Tribal Areas (FATA) that border Afghanistan that began in 2001 and has continued in various phases to this date. Defense also states that CSF payments to Pakistan have played a key role in supporting U.S. national security goals in Pakistan to combat terrorists that threaten U.S. interests in America, Pakistan, Afghanistan, and Western Europe. The CSF reimbursements to Pakistan from October 2001 through June 2007 (the latest period of support reimbursed by Defense) are shown in figure 1. In a February 2002 internal memo, the Comptroller expressed dissatisfaction with Defense’s ability to verify the costs claimed in Pakistan’s December 2001 reimbursement claim. The Comptroller noted that the reimbursement claim contained total costs but no supporting details. For example, the claim reported a total cost for army airlift without providing information on number of sorties flown, the dates, costs, time frames, purpose, number or types of aircraft flown, or number of man-hours involved. According to the February 2002 memo, the government of Pakistan was unprepared or unable to reconstruct these costs in a verifiable manner in line with standard U.S. government accounting practices and expectations. Staff at CENTCOM in Tampa, Florida, and at ODRP in the embassy were unable to fill in such details. Despite this concern, the Defense Office of General Counsel concluded, based on the statutory authority provided to the Secretary of Defense, that the Secretary of Defense could legally reimburse all of the cost categories identified by the Comptroller as legally defensible. The United States eventually reimbursed Pakistan $300 million. In 2003, at the request of the Comptroller, the Defense Inspector General performed an audit of the CSF oversight process for all countries seeking CSF reimbursements. The report found deficiencies in both Defense’s CSF guidance, as well as the supporting documentation CSF recipients provided to support their claims. It recommended improvements in Defense’s analysis of CSF reimbursement requests and greater documentation requirements for countries seeking reimbursement. In response, the Comptroller published guidance in December 2003 to clarify the roles and responsibilities of CENTCOM and other regional combatant commanders and of the Comptroller in the CSF oversight process. The 2003 guidance notes that Congress provided the Secretary of Defense with the authority to determine how much to reimburse partner countries, and how much documentation was required to adequately account for the support provided. However, the guidance also stated that CENTCOM and the Comptroller are to obtain sufficient documentation to validate that Pakistani military support had been provided and that costs were incurred, reasonable, and appropriate under the CSF program. Table 1 summarizes the review criteria in the December 2003 Comptroller guidance. We address the implementation of these and other criteria in greater detail later in this report. Under the December 2003 guidance and oversight process, Pakistan would first submit its claim for reimbursement to ODRP at the U.S. Embassy in Islamabad. According to Comptroller guidance, ODRP would assist the Pakistani military in formulating the reimbursement claim before sending the claim to CENTCOM in Tampa, Florida. CENTCOM would then conduct its own review in an attempt to link claimed expenses to U.S. military operations before forwarding the claim package to the Comptroller. Under this process, ODRP and CENTCOM staff can make recommendations to defer or disallow costs based on their analysis of the Pakistan submission; however, the Comptroller makes the final recommendation to the Secretary of Defense on which costs should be paid, deferred, or disallowed. The Department of State, the Office of Management and Budget, and Congress also have a role in the CSF oversight process after the Comptroller has finished its review. The Department of State and the Under Secretary of Defense for Policy must each verify that the CSF reimbursement is consistent with the U.S. government’s national security policy and does not adversely affect the balance of power in the region. In addition, Defense is required to consult with the Director of the Office of Management and Budget during the CSF process. Defense is also required to provide a 15-day notification of the upcoming reimbursement, as well as quarterly reports to the House and Senate Committees on Appropriations and the House and Senate Armed Services Committees on the use of funds made available for payments to Pakistan and other CSF recipients. Congress passed the National Defense Authorization Act for Fiscal Year 2008, which now requires Defense to submit an itemized description of logistic support, supplies, and services “provided by Pakistan to the United States for which the United States provided reimbursement” during the period beginning February 1, 2008 and ending September 30, 2009. The CSF process is detailed in figure 2. In July 2006, the Comptroller provided the Pakistani government with a cost template and information intended to clarify the types of costs that were reimbursable under CSF and the information the Comptroller required to support Pakistan’s reimbursement claims. Furthermore, according to Defense, the Office of the Under Secretary of Defense for Policy emphasized the importance of enhancing transparency within Pakistan’s CSF claims in a June 2007 letter to the Pakistan Ministry of Defense. We found that Defense did not consistently apply existing CSF guidance and that certain deficiencies existed in their oversight procedures. We reviewed the Pakistani claims for January 2004 through June 2007, as well as related CENTCOM and Comptroller memos, to determine if DOD had consistently applied the Comptroller criteria issued in December 2003. The memos prepared by the Comptroller generally included the four macro- level analytical reviews outlined in the criteria; however, implementation of these criteria was not sufficient to validate claimed costs. For example, the Comptroller generally performed a comparison of total claimed costs to the estimated U.S. cost to provide the same services; however, there was not enough information in the Pakistani claims to determine that the claimed amount and the estimated U.S. cost included the same expenses or that the claimed costs were valid. Defense guidance developed by the Comptroller calls for obtaining sufficient information to validate Pakistani claims to determine that costs were incurred, reasonable, and appropriate. However, Defense did not fully implement this criteria. For example, Defense reimbursed Pakistan over $2 billion for claims from January 2004 through June 2007 without obtaining detailed documentation that would allow a third party to recalculate the costs. In addition, Defense often did not adequately document the basis for their decisions to allow or disallow claims, and we found inconsistencies in Defense payments that were not explained. As a result, Defense may have paid costs that were (1) not incremental, (2) not based on actual activity, or (3) potentially duplicative. We also found that additional oversight controls were needed. Specifically, while Comptroller guidance calls for a historical comparison of claimed costs, the guidance does not indicate why or how the comparison should be performed. Additionally, Defense did not verify the currency conversion rates used by Pakistan from January 2004 through June 2007 and, as a result, may have overpaid Pakistani claims due to the devaluation of the Pakistan rupee. The Comptroller’s CSF guidance states that Pakistani claims should include associated invoices. In the absence of such support, CENTCOM officials should obtain from Pakistan a detailed description of how these costs were computed. For example, claims for fuel should include information such as total fuel consumed, the number and types of vehicles supported, and best available assessments of the number of miles driven or hours employed. However, we found that few of the Pakistani claims we reviewed met the criteria contained in the Comptroller’s guidance. For example, 76 percent of the army’s costs from January 2004 through June 2007 lacked sufficient information to allow Defense to perform basic recalculations needed to verify the claims, such as quantity times price. Despite the lack of documentation, Defense reimbursed Pakistan more than $2.2 billion. An official at ODRP with a role in reviewing CSF reimbursement claims stated that, based on the scarce details provided in the CSF claims, it was nearly impossible to know the actual cost of claimed items. When we discussed this issue with the Comptroller’s office, they indicated that the Pakistani claims do not provide enough detail to explain the context of the costs, which makes it difficult to determine whether the costs are incremental (i.e., that claimed costs are above and beyond the partner country’s normal operating costs) and, therefore, whether under the Comptroller’s guidance the costs should be reimbursed. We found other examples where Defense officials did not obtain sufficient information necessary to validate the claims and did not adequately document the basis for their decisions to allow or disallow claims. As a result, there were inconsistencies in Defense’s reimbursement of certain costs. For example, as illustrated in figure 3, Defense paid Pakistani navy claimed costs for boats for about half of the months and disallowed them the other half, despite no discernable differences in the level of support the Pakistani government provided for the claims. We identified additional inconsistently reimbursed costs that contained no discernable differences in the level of support. For example, the Comptroller generally disallowed Pakistani army claims for bulletproof jackets but occasionally paid them. Conversely, the Comptroller generally paid for army telephone cables but occasionally disallowed these costs. Without better support for the rationale behind disallowed costs, we could not determine if these costs were reimbursed consistent with the Comptroller’s guidance. According to Defense officials, payments were made based on informed judgment, however they could not provide documentation to support each instance. Comptroller guidance states that reimbursement claims must clearly indicate the incremental nature of the logistical and military support provided—i.e., that claimed costs are above and beyond the partner country’s normal operating costs. However, we found that the Pakistani claims did not provide such information, which led to differences among Defense officials as to whether the claims should be disallowed or deferred until Pakistan could provide additional support. Defense paid Pakistan $200 million in radar expenses from January 2004 through February 2007. For the March through June 2007 claims, ODRP recommended the Comptroller disallow the costs, reasoning that this was not an incremental expense, as terrorists in the FATA did not have air attack capability. However, the Comptroller took the position that Pakistan likely incurred some increased costs by using the radars to police the airspace over the Northwest Frontier Province (i.e., to patrol, monitor, and provide air traffic control) and provide air traffic control for U.S. military support flights into Afghanistan. The Comptroller nonetheless agreed that the claims lacked sufficient detail to determine whether these charges were definitively incremental. In the March through June 2007 claim package, the Comptroller chose to defer the air defense radar costs until Pakistan could provide better justification for the charges. According to the Comptroller’s criteria, both the Comptroller and CENTCOM are responsible for validating that claimed costs are associated with actual activities and are based on documentation that adequately accounts for the support provided. However, the documentation we reviewed as part of our audit did not provide sufficient support that all claimed costs were based on actual activity or expenses. For example, Defense paid more than $30 million for army road construction and over $15 million for army bunker construction without adequate support. Defense paid these costs despite a CENTCOM recommendation to disallow the claims for road construction in September and October 2006 due to insufficient documentation. For the most recent claims processed in February 2008, covering the months March 2007 through June 2007, concerns about the validity of these charges led ODRP to request that the Pakistani military provide the coordinates of the roads and bunkers built. As of June 2008, Pakistan had not provided this additional information, and Defense has not paid these costs. We also found large unexplained differences between the average costs of food per person for each force, as shown in figure 4. As figure 4 shows, navy monthly food costs per person were generally higher than monthly air force and army food costs per person. Navy claims for food rapidly increased from approximately $445 per sailor in June 2005 to $800 per sailor in December 2005, while air force and army food costs per person remained stable. Despite these anomalies, the Comptroller continued to pay the navy $800 per sailor for food until September 2006, when the Comptroller partially disallowed these costs, reducing the cost of navy food to the same amount as that paid for the army (approximately $200 per person). In November 2006, Defense approved navy food cost at approximately the same level as that paid for the air force (approximately $400 per person). However, the Comptroller deferred all navy food costs for the March through June 2007 claim period (processed in February 2008), pending receipt of additional justification from Pakistan. In addition, we found that Defense paid the Pakistani navy more than $1.5 million in possibly inflated costs for damage to navy vehicles. On average, Defense paid the Pakistani navy more than $5,700 per vehicle per month in damages, in comparison with the army’s average claim of less than $100 per vehicle per month. According to the most recent navy claims, these vehicles generally consisted of passenger cars and SUVs that were not involved in combat. By contrast, the army vehicles were used to conduct military operations in the FATA and border region. Comptroller guidance calls for CENTCOM to ensure that costs are not counted twice; however, none of the CENTCOM memos we reviewed provided any indication that a review for duplicate costs had been performed. As a result, Defense paid more than $8.9 million in potentially duplicative costs. For example, the most recent Pakistani navy claim (June 2007) includes cost categories titled “vehicle damage” and “cost of vehicles repaired,” but there is no detail provided to explain the differences between these two categories, and there was insufficient detail to determine whether some or all of the claimed costs were unique or duplicative. This claim also included the categories “cost of fuel for vehicles” and “average cost of running of vehicle deployment on operation,” which could also contain duplicate charges. The detail provided within these categories was insufficient to determine the difference between these costs, and therefore they could contain duplicate charges. Despite this lack of detail, we found that Defense paid the Pakistani navy an average of over $19,000 per vehicle per month (more than $3.7 million per year) to operate, maintain, and repair a fleet of fewer than 20 passenger vehicles without sufficient information to determine that these costs were not duplicative. We found deficiencies in the Comptroller’s guidance concerning historical comparison of claimed costs and verification of currency conversions. Specifically, we found that while Comptroller guidance calls for a historical comparison of claimed costs, it does not indicate how this comparison should be performed. In addition, we found that CSF guidance does not require Defense to identify or evaluate the exchange rates used to convert claimed costs from Pakistani rupees into U.S. dollars, and, as a result, potential overbillings may have gone undetected. The Comptroller guidance calls for the Comptroller to perform a historical comparison of claimed costs to previous reimbursements made by the United States for similar support. Such an analysis could identify costs that do not reflect actual activity levels. However, we found that the Comptroller’s guidance does not describe how the comparison should be performed. In our audit, we found that some of Pakistan’s claimed costs experienced potentially significant unexplained fluctuations from month to month. Although the Comptroller noted some of these fluctuations, we found that it did not investigate the reasons behind them. For example, Defense paid the army’s largest cost claimed in April 2006, which experienced a 12 percent ($2.8 million) increase from March, without investigating this fluctuation. As a result, Defense may be paying for costs based on activities that did not occur. CSF guidance does not require Defense to identify or evaluate the exchange rates used for claims presented in U.S. dollars. Foreign currency exchange rates, such as those computed by the International Monetary Fund (IMF), fluctuate. As a result, transactions made in a foreign currency can result in transaction gains or losses. Since January 2004, the Pakistani rupee has declined over 6 percent against the U.S. dollar. Consequently, fewer dollars should have over time purchased more rupees, resulting in a lower cost to the CSF program. Pakistani reimbursement claims are presented in U.S. dollars; however, the Comptroller did not verify the currency conversions calculated by Pakistan. Although the Comptroller was not required to do so, lack of such verification may have resulted in overpayment of Pakistan claims. For example, on one cost category we reviewed, Defense may have overpaid more than $1.25 million over 12 months because it did not consider the currency conversion used to calculate the cost. In performing our review, we used the claimed amounts and exchange rates that were stated in Pakistan’s September and October 2004 claims, and we converted the claimed cost into rupees. We then converted the claimed cost back into U.S. dollars using the applicable IMF exchange rates and compared the resulting figure with the amount paid by Defense. Figure 5 illustrates the results of our analysis and shows that CSF would have been billed fewer dollars had IMF exchange rates been used. Most of the Pakistani claims do not provide enough information to determine if the costs were appropriately converted from rupees to dollars. Therefore, we were unable to calculate the potential overbilling for all claims for the entire period under review. However, if Pakistan has been using a fixed exchange rate, then Defense has likely overpaid its reimbursements. If the rupee continues to decline against the dollar, future Pakistani claims calculated using a fixed exchange rate will become more and more inflated over time. Defense’s 2003 guidance did not specifically task ODRP with attempting to verify Pakistani military support and expenses, despite recognition by Defense officials that such verification is best performed by U.S. officials in Pakistan, who have direct access to Pakistani officials and information. As such, ODRP did not try to verify Pakistani CSF claims until September 2006, when, without any formal guidance or directive to do so, ODRP began an effort to validate Pakistani military support and expenses. This increased verification effort contributed to an increase in the amount of disallowals and deferrals of the Pakistani government’s CSF claims from an average of a little over 2 percent from January 2004 through August 2006, an average of 6 percent from September 2006 through February 2007, and 22 percent for the most recent claims (March 2007 through June 2007) processed in February 2008. Despite this increased effort, there is no assurance that ODRP will continue this level of oversight because Defense has not issued formal guidance delineating ODRP verification responsibilities. According to the Standards for Internal Control in the Federal Government, clear delegation of authority and responsibility is important to establishing an effective internal control system. Defense officials in Washington, at CENTCOM, and at the U.S. Embassy in Islamabad stated that U.S. officials in Pakistan are best suited to perform primary verification that Pakistani military support was provided and that claimed costs were actually incurred. ODRP officers have access to a broad range of Pakistani military officials, including some involved in military operations, and can conduct limited field visits and onsite inspections if permitted by the Pakistani government. By contrast, Comptroller staff are located thousands of miles from Pakistan and lack the level of access available to ODRP officials. Despite this, Defense never explicitly tasked ODRP with performing such verification efforts. In Pakistan’s case, the Comptroller’s 2003 guidance did not specify whether this verification should take place in Pakistan or from CENTCOM in Florida. The guidance simply indicated that ODRP should assist Pakistan in formulating their claims. However, the guidance did not require or suggest that ODRP attempt to verify that Pakistan’s claimed military support had been provided or that its costs were actually incurred. For example, it did not recommend that ODRP conduct any oversight activities, such as onsite inspections of completed Pakistani construction or a comparison of flight hours to maintenance costs. In late 2006, without any formal guidance or directive to do so from CENTCOM or the Comptroller, ODRP began an effort to verify that Pakistani military support was provided and costs were actually incurred as claimed in the military’s requests for reimbursement. According to ODRP officials, this new effort stemmed from a concern that some of Pakistan’s reported costs may not have been valid or properly supported. They also stated that the Comptroller’s July 2006 presentation to Pakistani officials helped ODRP conduct more detailed verification because Pakistan began to provide greater detail in its reimbursement claims. ODRP officials who were in Pakistan from July 2005 through March 2008 stated they had received no training or guidance from Defense on whether, or how, to conduct verification of Pakistani reimbursement claims. These officials said that the 2006 presentation was the first time they had seen any guidance on what could or could not be reimbursed under the CSF program or what type of information was needed to support Pakistan’s reimbursement claims. As a result, ODRP recommended for the first time that Defense disallow or defer costs that it found questionable, beginning with Pakistan’s September through October 2006 claim. For example, ODRP recommended that the Comptroller disallow payments to Pakistan for procurement of bulletproof vests, radios, and road construction due to insufficient information necessary to verify the costs. Defense eventually disallowed approximately $13 million of the September through October 2006 reimbursement claim. ODRP’s increased verification efforts contributed to significantly larger disallowals and deferrals ($81.2 million) in the most recently processed (February 2008) Pakistan government reimbursement claims for the months of March through June 2007. ODRP recommended deferring payment on $38.1 million in claimed costs until the Pakistani government provided information necessary to verify its claims. For example, ODRP recommended deferring payment to Pakistan on its reimbursement request for $22.3 million in helicopter maintenance costs. ODRP found that even though the United States had paid Pakistan $55 million in CSF reimbursements for maintenance of helicopters in the border area, only a few of these helicopters were fully operational. According to ODRP officials, the Pakistani army was not maintaining the helicopters, causing essential systems to malfunction. Given the poor readiness rates, ODRP recommended that the Comptroller defer payment on Pakistan’s helicopter maintenance claims until a process could be implemented to ensure that Pakistan could maintain its helicopter fleet. ODRP also recommended disallowing payment on an additional $42.3 million to Pakistan for such things as air defense radars, procurement of tents and vests, and funding for Pakistan’s joint staff headquarters operations. After ODRP submitted its recommendations, CENTCOM and the Comptroller performed their own reviews of the reimbursement claim (see fig. 6). The Comptroller disagreed with some of ODRP’s recommendations. For example, ODRP recommended disallowing $26.4 million for the maintenance of air defense radars since terrorists in the border region possessed no air force. The Comptroller noted, however, that these radars could also provide air traffic control for Pakistani military aircraft operating in the area and for U.S. military flights to Afghanistan. As a result, the Comptroller modified ODRP’s recommendations to disallow certain costs and instead deferred payment on these costs until Pakistan could provide more information to support the reimbursement request. However, as of May 2008, Defense has not paid any of these deferred CSF costs because Pakistan has not provided evidence to indicate that these costs were valid. Figure 7 shows the increased CSF disallowals and deferrals during ODRP’s increased oversight activity in the September through October 2006 claims, and particularly in the latest claim period (March through June 2007), when Defense disallowed or deferred a total of $81.2 million over these four months. The amount disallowed or deferred for March through June 2007 represents a significant increase in CSF oversight by Defense. For example, from January 2004 through August 2006, Defense disallowed or deferred an average of a little more than 2 percent of each monthly Pakistani reimbursement claim, for a total of $59.4 million over a 32-month period. In comparison, the average percentage of Pakistani claims disallowed or deferred for September 2006 through February 2007 was 6 percent or $33.3 million over a 6-month period and for the most recent claims (March 2007 through June 2007) processed in February 2008, was approximately 22 percent, or $81.2 million in a four month period. This four month period accounts for approximately 53 percent of the total CSF funding disallowed or deferred by Defense since January 2004 ($173.92 million). Based on our assessment, it appears that ODRP began this increased oversight effort without any formal guidance or directive to do so. The Comptroller has provided no formal guidance that stipulates ODRP should verify that Pakistani military support has actually been performed and that expenses were actually incurred. Furthermore, officials at ODRP from 2005 to early 2008 said that the Comptroller had provided no guidance or training on the level of oversight they should provide. Despite this lack of guidance, in November 2007, officials at the Comptroller and the Office of the Under Secretary of Defense for Policy stated that ODRP was in fact responsible for performing this oversight. However, as of May 2008, Defense had not formalized any new guidance on ODRP’s verification responsibilities. Despite ODRP’s increased oversight activity, continuity of this oversight is not assured. According to Standards for Internal Control in the Federal Government, clear delegation of authority and responsibility is important to establishing an effective internal control system. However, as of May 2008, ODRP continued to lack formal guidance or training that explicitly described either its oversight responsibilities or the procedures for conducting such oversight. Staff at ODRP stated they had previously received little to no guidance or training on their specific role in analyzing Pakistani CSF reimbursement claims. Formal guidance is especially important in Pakistan, where U.S. officials are generally limited to 1-year tours due to the status of the U.S. mission in Islamabad as a high-risk post. Because of the constant turnover of Defense officials in Pakistan, clear guidance is needed to ensure the continuity of oversight efforts. In addition, the Comptroller has never provided guidance on how ODRP and Defense representatives in other sovereign countries should verify that the countries actually provided military support and that expenses were actually incurred. ODRP is largely dependent upon the quality of information supplied by the Pakistani military. According to Defense officials, Defense lacks the authority to audit the internal finances of the Pakistani military. Because of this, ODRP staff described their analysis as “macro-level verification,” whereby the reasonableness of high-level costs reported in the Pakistani claim is judged through a comparison with other information. For example, ODRP’s recommendation to defer helicopter maintenance costs in the March through June 2007 claims stemmed from their comparison of Pakistan’s reported maintenance costs against ODRP’s knowledge of the low readiness rates of Pakistan’s helicopters. Although such analyses can be supplanted by anecdotal information from discussions with Pakistani military officials or through occasional visits to the field, according to ODRP, the Pakistani government strictly controls foreigners’ access to the FATA, making spot-checks difficult. The Pakistani submissions are, therefore, the chief component of the ODRP analysis. ODRP officials said they doubted that ODRP would ever be able to fully verify actual costs in Pakistan. First, the Pakistani military reports costs to ODRP that are already aggregates of many smaller costs. For example, food cost would include costs for procurement, transport, storage, and field preparation that ODRP cannot directly monitor. Furthermore, according to ODRP, although the Pakistani government generally keeps detailed financial records, these records are usually in paper form and electronic record keeping is rare. Additionally, the Pakistani military does not possess automated systems to track logistics and supplies. Because of these factors, information retrieval from the field and collation at the Pakistani joint staff level can take a great deal of time and may entail a certain amount of approximation and averaging. Given Pakistan’s record- keeping systems, it is unclear to what level of precision ODRP should be expected to verify Pakistani support and incurred costs. Coalition Support Funds are critical components of America’s global war on terror and the primary support for Pakistani operations to destroy the terrorist threat and close the terrorist safe haven in Pakistan’s FATA. Following the attacks of September 11, 2001, Congress quickly authorized emergency funding to prevent another attack, and given the grave and immediate threat at the time, Congress recognized that ensuring accountability for these funds was secondary to protecting the nation from another attack. However, given the large amounts of funding provided to Pakistan since October 2001, and indications that Pakistan will continue to receive such payments in the future, we believe that Defense should ensure it follows its own guidance and consider what other guidance is needed. Our assessment found that while CSF played a key role in Pakistan’s support for our war on terror, Defense had not followed its existing guidance and provided little oversight of the effort at the embassy in Pakistan. Defense had concerns about the accuracy of Pakistan’s claims from the very first claim submitted in 2001. Based on the lack of supporting evidence in the Pakistani claims from January 2004 through June 2007 (the latest claims reimbursed by Defense), we found that neither Defense nor we could determine if Pakistan had actually incurred most of the costs in their claims. Prior to 2004, it appears that there was even less evidence to support Pakistan’s claims. As a result, we conclude that Defense cannot accurately determine how much of the $5.56 billion in costs reimbursed to Pakistan since 2001 were actually incurred. As a result of these and other findings, we believe that Defense should consistently implement its own CSF guidance to fully verify Pakistani claims and ensure the effective use of CSF in meeting key U.S. national security goals. While we recognize that CSF is used to support 27 countries in fighting terrorism, the fact that Pakistan receives 81 percent of these funds indicates that Defense should provide oversight procedures that reflect the role Pakistan plays as both the major recipient of CSF and its role in supporting U.S. national security objectives in Pakistan and Afghanistan. Additionally, we recognize that Defense may not be able to fully verify all Pakistani claims without having the ability to access the Pakistani government’s records and make site visits or conduct spot checks. ODRP’s recent increased efforts, however, show that greater oversight may be achieved through the use of U.S. representatives in Pakistan. To improve the impact and oversight of CSF payments to Pakistan, we make the following five recommendations to the Secretary of Defense: Consistently implement existing criteria to disallow or defer Pakistani claims that do not include the documentation needed to verify the claims. Define and formalize the roles and responsibilities of ODRP. Work with the government of Pakistan to develop procedures to allow ODRP or other U.S. representatives to conduct greater oversight of CSF use in Pakistan, including the potential use of onsite inspections. Clarify guidance for Comptroller analysis of cost fluctuations. Develop and apply criteria to evaluate currency exchange rates to ensure that the U.S. government is not overpaying for Pakistan operations. Defense provided written comments on the report, which are reproduced in appendix II. Defense generally concurred with our recommendations, and indicated they had updated their CSF guidance to incorporate our recommendations. We plan to review this guidance when it is made available to us. In addition, Defense’s comments noted that our report did not give sufficient weight to three areas. These include the Pakistan’s significant contributions to the global war on terror enabled by CSF; the fact that the Department has adhered to the law; and that Pakistan is a sovereign country that may not meet U.S. accounting and administration standards. However, our report does reflect Pakistan’s efforts in combating terrorism and the role of CSF. Furthermore, we note several times that Congress granted the Secretary of Defense the authority to make CSF payments in such amounts as the Secretary may determine in his discretion, based on documentation determined by the Secretary of Defense to adequately account for the support provided. Although we acknowledge that there are limitations in any arrangement with another sovereign nation, we believe that Defense should work more closely with Pakistan to improve their capacity to support these claims. We note that the information provided by Pakistan has improved over time, particularly when Defense has provided additional guidance to Pakistan. For example, following the Comptroller’s visit to Pakistan in 2006, Pakistan’s more detailed submissions allowed ODRP to conduct greater oversight of Pakistan’s claims, leading to the increases in deferrals and disallows in late 2006 and 2007. In addition, we did not assume that Pakistan could provide receipts for all items; we assessed whether Defense followed its guidelines. According to the Comptroller’s guidelines, a recipient country’s reimbursement claim must contain quantifiable information and supporting documentation on how costs were derived so Defense can validate the claim. Most of Pakistan’s claims that we reviewed lacked this information. We also received technical comments from Defense, which we have incorporated throughout the report, where appropriate. We are sending copies of this report to interested congressional committees, as well as the Secretaries of State and Defense. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7331 or johnsoncm@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Legislation governing the Coalition Support Funds (CSF) program states that the Secretary of Defense’s determination whether documentation adequately supports reimbursement to key cooperating nations is final and conclusive. Our review therefore focused on the extent to which Defense has applied its own guidance to validate reimbursements and on Office of the Defense Representative to Pakistan’s (ODRP) role in this process. To conduct our review, we obtained information on current procedures from relevant officials at the Office of the Under Secretary of Defense for Comptroller (Comptroller), the Office of the Under Secretary of Defense for Policy, U.S. Central Command (CENTCOM), ODRP, and the State Department’s Bureau of Political-Military Affairs. We also examined all CSF oversight documentation provided to us, including Pakistani government reimbursement claims, ODRP memos, CENTCOM validation memos, Comptroller evaluations, and other CSF documentation from February 2002 through June 2007 (the latest period of support reimbursed by Defense.) Additionally, we examined all Defense CSF guidance provided to us. To examine the extent to which Defense has applied its guidance to validate costs claimed by Pakistan, we first reviewed a December 2003 Defense Inspector General report that cited deficiencies in the CSF oversight process from October 2001 through May 2003. Because this report led to new CSF oversight guidance in December 2003, our assessment of Defense’s oversight controls focused on 42 monthly reimbursement claims submitted by the Pakistani government from January 2004 to June 2007. As part of our data reliability process, we confirmed that the data provided by the Comptroller were accurately recorded in the software we used to analyze the data. We did not verify the reliability of Comptroller’s data processing. As part of this review, we examined all available Comptroller criteria and guidance—including the December 2003 guidance, as well as the July 2006 presentation to the Pakistani government and the February 2008 flowchart. Using the Comptroller criteria, the internal control standards, and general cost accounting criteria for adequacy, eligibility, and reasonableness, we recalculated selected portions of Pakistani claims for mathematical accuracy; reviewed items included in claims and noted items that may be nonincremental under CSF, duplicative charges, and questionable dollar amounts for the charges; compared selected claims and payments over time to analyze consistency reviewed ODRP cables and memos, CENTCOM analyses, and Comptroller analyses for support for charges, disallowed amounts, and fluctuations in claimed amounts; compared supporting documentation to Comptroller-issued criteria to compared supporting documentation to internal control criteria to determine the sufficiency of Comptroller criteria and current oversight procedures. To assess the oversight role played by ODRP, we met with the officials noted above, as well as with other officials from the U.S. Embassy and Pakistan’s Ministries of Defense and Interior. We visited Peshawar, near the Federally Administered Tribal Areas, to conduct discussions with the U.S. consulate and Pakistan’s 11th Army Corps and Frontier Corps regarding operations being reimbursed with CSF funds. We also examined all of the previously mentioned CSF oversight documents and guidance. We conducted this performance audit from September 2007 to June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Prior to increased ODRP role Jan. 2004–Aug. 2006 avg. monthly disallow/defer Jan. 2004–Aug. 2006 total disallow/defer Sept. 2006–Feb. 2007 avg. monthly disallow/defer Sept. 2006–Feb. 2007 total disallow/defer Mar.–June 2007 avg. monthly disallow/defer 5,081,976. The disallow/defer percentage for June 2004 does not take into account this figure. In addition to the contact named above, Steve Sebastian, Director; Hynek Kalkus, Assistant Director; Roger Stoltz, Assistant Director; Edward J. George; David W. Hancock; Claude Adrien; Cara Bauer; Janice Friedeborn; Arthur James; Jeffrey S. Beelaert; Lynn Cothern; Mark Dowling; and Jena Sinkfield made key contributions to this report. | The United States has reimbursed Pakistan, a key ally in the global war on terror, about $5.56 billion in Coalition Support Funds (CSF) for its efforts to combat terrorism along its border with Afghanistan. The Department of Defense (Defense) provides CSF to 27 coalition partners for costs incurred in direct support of U.S. military operations. Pakistan is the largest recipient of CSF, receiving 81 percent of CSF reimbursements as of May 2008. This report focuses on (1) the extent to which Defense has consistently applied its guidance to validate the reimbursements claimed by Pakistan and (2) how the Office of the Defense Representative to Pakistan's (ODRP) role has changed over time. To address these objectives, GAO reviewed CSF oversight procedures, examined CSF documents, and interviewed Defense officials in Washington, D.C., U.S. Central Command in Florida, and Pakistan. Defense Comptroller issued new guidance in 2003 to enhance CSF oversight. The guidance calls for, among other things, CSF reimbursement claims to contain quantifiable information that indicates the incremental nature of support (i.e., above and beyond normal operations), validation that the support or service was provided, and copies of invoices or documentation supporting how the costs were calculated. While Defense generally conducted macro-level analytical reviews called for in its guidance, such as determining whether the cost is less than that which would be incurred by the United States for the same service, for a large number of reimbursement claims Defense did not obtain detailed documentation to verify that claimed costs were valid, actually incurred, or correctly calculated. GAO found that Defense did not consistently apply its existing CSF oversight guidance. For example, as of May 2008, Defense paid over $2 billion in Pakistani reimbursement claims for military activities covering January 2004 through June 2007 without obtaining sufficient information that would enable a third party to recalculate these costs. Furthermore, Defense may have reimbursed costs that (1) were not incremental, (2) were not based on actual activity, or (3) were potentially duplicative. GAO also found that additional oversight controls were needed. For example, there is no guidance for Defense to verify currency conversion rates used by Pakistan, which if performed would enhance Defense's ability to monitor for potential overbillings. Defense's guidance does not specifically task ODRP with attempting to verify Pakistani military support and expenses, despite recognition by Defense officials that such verification is best performed by U.S. officials in Pakistan, who have access to Pakistani officials and information. As such, ODRP did not try to verify Pakistan CSF claims from January 2004 through August 2006. Beginning in September 2006, without any formal guidance or directive to do so from U.S. Central Command or the Defense Comptroller, ODRP began an effort to validate Pakistani military support and expenses. This increased verification effort on the part of ODRP contributed to an increase in the amount of Pakistani government CSF claims disallowed and deferred. Prior to ODRP's increased verification efforts, the average percentage of Pakistani claims disallowed or deferred for January 2004 through August 2006 was a little over 2 percent. In comparison, the average percentage of Pakistani claims disallowed or deferred for September 2006 through February 2007 was 6 percent and for the most recent claims (March 2007 through June 2007) processed in February 2008, was approximately 22 percent. However, ODRP's continued oversight activity is not assured, as Defense had not developed formal guidance delineating how and to what degree ODRP should attempt to verify Pakistani claims for reimbursement. GAO recognizes that Defense may not be able to fully verify every Pakistani claim without the ability to access Pakistani records or do onsite monitoring. However, such ability would enhance CSF oversight. |
To avoid blackouts and other disruptions, the amount of electricity customers demand must be continually balanced with the amount of electricity power plants supply. This balance is essential because electricity cannot be economically stored. The operators of the electricity system, who oversee the complex network of thousands of power plants and power lines, collectively called the grid, coordinate this process. The continental United States is divided into three large regional electricity systems (East, West, and Texas). Changes in demand or supply within each of the three regions can affect the entire region, reinforcing the need for coordination. Preserving this balance is challenging because customers use sharply different amounts of electricity through the course of the day and year. Typically, demand rises through the day and reaches its highest point— called the peak—in late afternoon. In some parts of the country, average hourly demand can be up to twice as high during late afternoon as it is during the middle of the night, when it is the lowest. In addition to the daily variation in demand, electricity demand varies seasonally, mainly because air conditioning accounts for a large share of overall electricity usage in many parts of the country during the summer. In some cases, peak usage can be nearly twice as high during the summer as it is in the winter. Regardless of when electricity is used, the electricity network must have sufficient generating capacity to meet the highest levels of demand to avoid blackouts. A variety of power plants, ranging from “baseload” plants designed to operate nearly all the time to “peakers” that generally operate only a few hours per day in the summer, are used to meet demand through the day and year. Baseload plants are generally the most costly to build, but they generally have the lowest costs for generating electricity on an hourly basis. In contrast, peakers are much less costly to build but much more costly to operate. The use of costly power plants that are seldom used results in higher electricity prices. In general, grid operators maximize the amount supplied by the baseload plants. However, as demand rises through the day and through the year, they must use plants that are more costly to operate. Because of this need to use more costly plants, the differences in the overall costs of meeting hour-to-hour demand are sometimes quite large. For example, the average cost of generation can rise tenfold from when demand is at its lowest at night to when it is at its highest in the late afternoon. Although the cost of generating electricity during peaks can be quite high, these periods are generally short and account for only a small percentage of the hours during a year. According to one expert, although the 100 highest priced hours of the year account for only about 1 percent of the hours in a year, they can account for 10 to 20 percent of the total electricity expenditures for the year. Regardless of how often or how long demand reaches its highest levels, power plants must be built to meet at least this level of demand to avoid blackouts. Because the cost of building and operating these seldom-used plants must be recovered through higher electricity prices, the need to build and use them adds directly to these prices. A combination of federal, state, and local governments, as well as a private entity oversee aspects of the electric industry. The federal government, through FERC, oversees the interstate transmission of electricity and the operation of wholesale markets—competitive markets in which power is bought and sold by utilities and other re-sellers. FERC has the statutory responsibility to assure that prices in these markets are “just and reasonable.” As noted, FERC has historically done this by approving rates to recover justifiable costs and providing for a regulated rate of return. FERC now seeks to meet its statutory obligation by establishing and maintaining competitive markets, believing that competitive markets will produce prices that are just and reasonable. As part of this oversight, FERC has changed a number of rules to allow, for instance, new suppliers to enter competitive wholesale markets by granting them “market-based rate authority.” In essence, this authority permits suppliers to sell electricity in these markets at market-based prices. In contrast, FERC does not currently limit access of large buyers—including those who resell to retail buyers. To further competition, FERC also approves the creation of new regional entities to operate the electricity grid. In addition to overseeing the daily balancing of supply and demand, some of these grid operators also operate wholesale markets for electricity. States, through their public utility commissions or equivalent, oversee retail markets—markets directly serving customers. In this regulatory role, state commissions have historically approved utility plans for power plants, transmission lines, and other capital investments needed to supply electricity; they have also set rates to recover these costs and provide the utility with an approved profit margin. Under this arrangement, regulated electricity prices have historically been set as a single price, generally an average of the costs of serving a wide customer class, such as residential customers. Thus most of today’s electricity system is a hybrid— competition setting wholesale prices and regulation largely setting retail prices. In addition, neither FERC nor the states generally have jurisdiction over electricity entities owned by cities, such as the Los Angeles Department of Water and Power, or utilities owned by their customers, such as rural electric cooperatives and local public utility districts; these entities account for about 25 percent of the wholesale market and are self- regulated by an elected board. In addition to involvement by federal and state agencies, a private membership organization made up of large electricity providers in the United States—the North American Electric Reliability Council (NERC)— establishes technical and operational standards to maintain the reliable operation of the electricity networks. However, membership in NERC and adherence to its standards are currently voluntary, and it cannot penalize nonmembers who do not adhere to these standards. Among other NERC standards, utilities must maintain specific amounts of power in reserve in the event that demand rises to a higher level than expected or supply is interrupted, such as when a power plant has to shut down unexpectedly. In addition to FERC’s direct regulatory oversight, the federal government influences the electricity sector through the Department of Energy (DOE). Broadly, DOE formulates national energy policy, funding research and development on various energy-related technologies (e.g., energy-efficient air conditioners and refrigerators and other appliances); setting some standards for energy efficiency; analyzing energy issues; and disseminating information about energy issues to the states, industry, and the public. More specifically, DOE established the Office of Electric Transmission and Distribution in August 2003 “to lead a national effort to help modernize and expand America’s electric delivery system to ensure a more reliable and robust electricity supply.” This office worked jointly with FERC and the Canadian government to investigate the causes of the August 14, 2003, blackout in the northeastern United States and parts of Canada. Over the past 20 years, experts have begun to recognize the potential advantages of allowing customers to see and respond to market conditions. Historically, grid operators have maintained reliable operations by increasing or decreasing the amount of electricity supplied that was needed to meet changes in demand. However, industry experts have long said that allowing customers to change their demand in response to ongoing changes in prices or limitations in supply may offer cost and operating advantages over relying solely upon changes in supply. Further, these experts generally believe that only a small amount of demand, in total, may be needed to bring about these advantages. In this regard, FERC and DOE have said that demand-response is an important part of well-functioning electricity markets but is largely missing from today’s markets. In 2001 FERC staff concluded that demand-response could reduce market power, reduce price spikes, and reduce electricity bills, among other things. Over the past several years FERC has identified problems with some wholesale markets, such as periodic price spikes and efforts by some electricity suppliers to manipulate prices. Further, FERC has said that the absence of demand-response can worsen price spikes and allow suppliers to manipulate prices, both of which produce prices that are higher than its estimate of competitive prices. For example, in its 2002 proposed market design, FERC stated that if customers are allowed to respond to high prices, then price volatility and the ability of sellers to manipulate prices could be reduced. FERC has determined that several electricity sellers in the West manipulated prices during periods when supplies were scarce and that customers did not reduce demand in response to these high prices. Over the past several years, FERC has approved proposals by grid operators in New York State, New England, and California to incorporate demand-response into the wholesale markets they operate, but these efforts are unique to each grid operator and have not yet attracted significant participation. As part of a broader effort, referred to as Standard Market Design, to develop consistent rules for regional markets to promote more efficient and reliable electricity markets, FERC proposed a limited effort to encourage consistent demand-response in wholesale markets. However, this effort to implement demand-response was delayed because of resistance to certain aspects of the broad effort. In 2000, a DOE team studying a series of electric power outages in the U.S. found that the ability of customers to manage their demand in response to market prices was key to ensuring reliable electric service and the efficient functioning of competitive electric markets. More recently, DOE’s Office of Electric Transmission and Distribution believes that demand-response could help resolve price and reliability problems and plans a demand- response initiative as part of its strategy to help modernize the grid. Further, DOE’s Federal Energy Management Program has promoted awareness of demand-response programs, pointing out opportunities for electricity users to receive payment for reducing use during specific periods of time. The federal government is a large owner and user of commercial and other building space. As of September 30, 2000, the federal government owned about 3 billion square feet of office space and leased about an additional 350 million square feet. While the Department of Defense is the largest user of building space (accounting for about two-thirds of the total owned building space), the General Services Administration (GSA) is the principal landlord for the federal government, operating buildings totaling about 330 million square feet and leasing the space to federal agency tenants; it owns about 55 percent of this space and leases the remaining space from private building owners. Nationally, GSA pays the energy bills for about 200 million square feet of office space, including about $210 million for electricity used at its buildings. Almost half of this total was spent for electricity consumed in four states—California, Maryland, New York, and Texas—and the District of Columbia. Two types of programs enable customers to respond to price variations or to supply shortages that may compromise reliable grid operations: market- based pricing and reliability-driven programs. Market-based pricing programs provide customers with information on prices that vary during the day based on the actual cost of supplying electricity so that customers can voluntarily reduce their use of electricity when prices are high. Overall, market-based programs are in relatively limited use with a small share of overall demand subject to market-based prices. Reliability-driven programs allow grid operators and utilities to avoid widespread blackouts when electricity supplies are tight by calling on participating customers to reduce demand. While reliability programs are more widely available, active participation remains somewhat limited. GSA reported that many of its larger facilities are currently registered to participate in both market-based pricing and reliability-driven programs across the country. Market-based pricing programs provide customers with prices that follow changes in electricity production costs throughout the day. We identified three general types of market-based pricing programs: time-of-use pricing, real-time pricing, and demand bidding. Two of these programs---time-of- use and real-time pricing—provide customers with retail prices that reflect the changes in the cost of electricity throughout the day, as shown in figure 1. A variation of time-of-use pricing, referred to as critical peak pricing, is also shown in figure 1. The third type of program, referred to as demand bidding, allows customers to sell back into wholesale markets electricity that they otherwise would have consumed. The prices offered by these programs differ sharply from the flat average prices that most customers face. Market-based prices can rise significantly when demand is high or supplies are short. As a result, they provide customers with incentives to reduce consumption during periods of peak demand when prices are highest. With time-of-use pricing, different preestablished prices are in effect for predetermined parts of the day (e.g., off-peak, 11:00 p.m. to 6:00 a.m.; mid- peak, 6:00 a.m. to noon and 6:00 p.m. to 10:00 p.m.; peak, noon to 6:00 p.m.). The highest prices are established for periods such as the peak when demand and cost of supply are generally highest, based on historical cost and consumption information, and are designed to encourage consumers to reduce demand during those periods. We examined two time-of-use programs, one traditional program in California and a variation on that type of program in Florida. One industrial consumer operating a refrigerated warehouse, and participating in a traditional time of use program, explained how he adjusts his operations in response to these rates. By refrigerating some products at lower than normal temperatures during the night when prices are lower, he can turn the refrigeration equipment off during the middle of the day to avoid the higher daytime prices without temperatures rising above acceptable levels. While these responses can be useful, experts told us, traditional time-of-use prices are unable to reflect unforeseen events, such as increased demand because of extreme heat or a sudden supply shortage, which may occur if a power plant is unexpectedly shut down. To modify time-of-use rates to accommodate these possibilities, the Florida program we reviewed operates a variation on time-of-use rates in a voluntary program for about 3,200 residential customers. Gulf Power presets prices for three periods per day (peak, off-peak, and mid-peak). However, with some advance notification, an additional price preset at a much higher level (called the critical peak price) can be put into effect at any time when supplies are tight or demand is high; however, this higher price cannot be in effect for more than 88 hours per year. An innovative control system, provided by the utility, enables customers to program the system to shut off as many as four electrical devices in response to preset price periods and notifies participants if the critical peak pricing period is in effect. The critical peak price was not used in 2003, but in 2002 the utility put the additional price into effect on 11 occasions for a total of 12 hours. With respect to real-time pricing, prices generally vary for each hour of each day and are more closely linked to variations in the actual hourly cost of supply than time-of-use rates. There are several different ways of implementing real-time pricing programs. For example: Niagara Mohawk in New York State allows some of its large customers to participate in a program that prices electricity on an hourly basis, based on a forecast done the day before consumption is to occur (with about 140 customers and accounting for about 8 percent of total electricity sales). Georgia Power, a regulated utility, offers a voluntary real-time pricing program (with 1,600 customers and about 5,000 megawatts (MW) of demand) that sets hourly prices 1 hour or 1 day before electricity use, at the choice of the participant. Under this program, participants are only allowed to pay real-time prices for the new electricity demand added since joining the program while paying their regulated rate on the rest of their demand. Officials told us that the program was designed this way to assure that customers participating in this program continued to pay for their share of the utility’s existing network of power plants and transmission lines—like the rest of the utility’s customers. Over time, a growing business could have a large portion of its demand priced as part of the real-time rate, which is generally lower than the regulated rate. As a result, competitors in the same business can have different electricity costs, a feature that recently has made the program highly sought after by customers. Indeed, some customers that had not experienced growth sought regulatory and/or court-ordered changes to increase the amount of their demand eligible for pricing under the real-time rate. According to one participating customer, he actively monitor prices through a Web- based system several times per day, monitors his demand, and reduces his demand if prices exceeded predetermined levels. The third type of market-based pricing, referred to as demand-bidding programs, allows consumers to compete with traditional electricity suppliers, such as power plant owners and power marketers, in wholesale markets. While the other two types represent retail pricing efforts, demand bidding is a wholesale market effort. These programs, generally established by the grid operator or the local utility, enable mostly large customers to react to changing wholesale prices by offering bids to supply their large blocks of potential demand to the grid operator as if they were a power plant supplying electricity. We examined one such program operated by the New York grid operator, the New York ISO, and approved by FERC. In this program, customers who voluntarily sign up can bid amounts of demand reduction that they are willing to provide at prices that they determine. They are not penalized if they do not bid; however, they are penalized if their bid is accepted and they fail to provide the agreed-upon reduction. The New York grid operator told us demand bidding was a relatively small resource for reducing demand, accounting for 1,500 MWhs, for which 24 participants were paid $100,000 or more in 2002. One participant told us that they were willing to bid when prices reach certain high levels, but they were reluctant to do so if prices were low because reducing demand generally reduced their production or otherwise hindered their business operations. For demand-bidding programs to operate, the program operator must develop an estimate of participant demand for all hours of the year—called a baseline. According to experts, because individual consumer demand varies seasonally, in response to the economy, and for other reasons, it is often difficult to develop a baseline that accurately estimates demand. Further, because most of these customers have not agreed to purchase the electricity that they are offering to sell, some experts have questioned whether this lack of clear ownership of the electricity raises questions over property rights and opens the programs to manipulation. Overall, the use of market-based pricing is relatively limited, generally affecting only certain types of customers and some areas and accounting for a small share of overall demand, with most customers still paying prices that are not market-based. Time-of-use pricing programs are available from many utilities, but participation is generally limited to some commercial and industrial customers. However, in some parts of the country some customers have been required to pay time-of-use rates. For example, the California Public Utility Commission requires large customers of the state’s public utilities to be on time-of-use pricing plans. Real-time pricing programs are available in only a few locations, and the number of customers enrolled in these programs is generally small. With regard to demand bidding, these programs are relatively new and available only in a few locations. Even where they are available, active participation has been limited to times when wholesale prices are high. Reliability-driven programs allow the grid operator or utility to call on participating customers to reduce demand during periods of tight supply by shutting down equipment or by generating their own electricity. Grid operators and utilities activate these programs to avoid widespread blackouts during periods of extremely high demand or when a power plant or transmission line is shut down unexpectedly. Although enrollment in these programs is typically voluntary, the contractual agreements may entail financial penalties if a participant does not reduce demand as required by the program. We identified three types of reliability-driven programs: interruptible rates, direct demand control, and voluntary demand reduction. Some programs, such as interruptible rates, are targeted at large users such as commercial and industrial customers, while others, such as direct demand control, include residential customers. Interruptible rate programs provide participants with a discount on electricity prices during all hours in exchange for the right of the grid operator or utility to interrupt electricity supplies if needed. Typically, the grid operator or utility requests that the participant reduce demand by some preestablished amount. Under the terms of these agreements, interruptions are generally limited to a certain number of hours per year, and the customer is provided with advance notice that service will be interrupted. Although enrollment in these programs is generally voluntary, the participant can face significant financial penalties if it fails to reduce demand when directed to do so, such as paying market prices for electricity that they consume but had agreed to interrupt. These programs are appropriate for customers that can curtail consumption for short periods with minimal impact on their overall operations. For example, an official with one commercial participant that operated cold storage facilities also participating in an interruptible rate program told us that his operation could reduce consumption within 30 minutes of a call for interruption by turning off refrigeration units and turning down air conditioning and lighting. He said his operation could sustain a shutdown for as long as 6 hours without a problem. These programs are not appropriate for all consumers, however. Because of supply shortages in some areas, such as California, some programs have been used more frequently, and some customers realized that they should not participate. For example, when Southern California Edison needed to call on its participants frequently during the electricity crisis in 2000 and 2001, it realized that some customers, such as hospitals and other facilities, should not have signed up for the programs. Many of these entities were unable to comply with requests to reduce demand and faced financial penalties, which were later waived. Because of this experience, the company said that they now more actively limit participation and routinely examine whether participants can reduce demand to the level that they agree. Direct demand control programs compensate customers financially if the customers allow the utility or grid operator to remotely interrupt electricity use by one or more electrical devices, such as air conditioners. In some cases, electricity may be interrupted for an hour or more, in other cases, the operator may “cycle” the equipment, shutting it down for several short periods. Generally, these programs rely on a switch installed on the air conditioner or other device that the utility or grid operator can remotely activate. By controlling a large number of small devices, the utility can ensure that, at any given time, some of these devices are turned off, thus significantly reducing the peak demand. For example, Southern California Edison operates several demand-response programs and has developed infrastructure to support them including 250,000 remotely activated switches on electrical equipment. In total, in 2003 the company had about 20 years of experience with a program that has provided about 600 to 800 MW of potential reduction in peak demand. Finally, voluntary reduction programs are geared to large commercial and industrial customers that must meet certain requirements, such as a minimum amount of demand reduction, to participate. In one program, the New York grid operator notifies participants when it needs to reduce system demand, allowing the participant to decide how much, if any, it wants to reduce consumption from an agreed-upon baseline level. Customers are paid for any actual reduction below the baseline level. Overall, these programs provide more flexibility for customers than interruptible programs because there is no penalty if the consumer is unable to reduce its demand. However, financial benefits can accrue only if the consumer is called on to reduce demand and actually reduces its consumption. In another program, participants have signed agreements with the New York grid operator that pay them for their willingness to reduce demand. These agreements are voluntary to enter into, but commit participants to reduce demand when asked, or face financial penalties. As a result of these agreements, the grid operator is able to achieve substantial reductions in demand with 2 hours notice. These programs also require communication links between the utility and customers, as well as advanced meters so that the utility can verify and measure the consumer’s actual response. Customers told us that they reduce demand if their business situation and market prices warrant a reduction. For example, one manufacturer shuts down some processes to reduce demand and shifts workers to other tasks in the factory. In some cases, the manufacturer can compensate for the lost production by increasing output during normal work hours or during nights and weekends. However, if the factory were operating at full capacity— three shifts per day, 7 days per week—the manufacturer would need to consider whether the value of lost production exceeded the expected compensation from the grid operator. Two participants told us that certain provisions of labor contracts limited their ability to shift work to night hours, or limited the profitability of doing so, because night hours required the payment of higher wages to employees. Reliability-driven programs are more widely available than market-based pricing programs, but participation remains somewhat limited. Many utilities offer interruptible rate programs to large commercial and industrial customers. While offered for many years, these programs were generally used to provide lower prices for some selected customers, but electricity was rarely interrupted. As a result, program operators told us that some customers on these types of programs, such as hospitals and schools, would not be able to reduce demand if directed to do so, limiting the effectiveness of some of these programs. Direct demand control programs have been offered by utilities for many years. Many customers, including residential customers, currently participate in them, allowing their air conditioners, pool pumps or other devices to be remotely turned off. Voluntary reduction programs are relatively new and only available in a few locations. Although these programs may not be activated often, officials in California and New York State told us that the interruptible and voluntary demand reduction programs helped their states enhance reliability in recent years, providing the grid operator with an additional tool to avoid blackouts and other disruptions. Of the 53 GSA facilities we reviewed, 33 facilities in six states and the District of Columbia are registered to participate in either market-based pricing or reliability-driven programs, or both, according to GSA officials. These officials told us that the programs that they are signed up for are generally voluntary—they provide financial benefits when the buildings are able to reduce demand but do not include penalties if they do not respond to price changes or requests to reduce demand. Of the buildings that participate in a program, 21 facilities are registered for market-based programs such as time-of-use and real-time pricing, 7 for reliability-driven programs, and 5 are registered for both types. Demand-response programs have saved millions of dollars and could save billions of dollars more, as well as enhance reliability in both regulated and competitive markets, according to the literature we reviewed and experts we spoke with. For example, one market-based program in California saved $16 million per year and one estimate of the potential benefit of demand-response was as high as $10 to 15 billion. These actual and potential savings occur when consumers can respond to fluctuations in electricity prices, permitting markets to function more efficiently. In addition to improving the operation of electricity markets, demand- response can enhance the reliability of the electricity system if participants reduce their demand in response to higher prices, and they provide an additional tool to manage emergencies such as supply shortages or potential blackouts. Over the past 25 years, many electricity market studies have reported on demand-response programs. Recent studies have reported that several programs have saved millions of dollars and demand-response could save billions of dollars if widely implemented in the future. These studies generally fall into two categories: (1) studies of actual benefits from programs already available and (2) studies identifying benefits that could be obtained if such programs had been available to ameliorate previous crises or potential future benefits of widespread implementation. As shown in table 1, a number of studies of market-based pricing programs demonstrate that these programs have reduced demand and resulted in millions of dollars in customer savings. As the table shows, these estimates of actual savings include savings to individual utilities and their customers as well as regional savings. For example: Individual programs operated by utilities located across the United States have seen reductions in demand of between 5 percent and 60 percent during high-priced hours, resulting in millions of dollars in customer savings and/or cost reductions. For example, according to a study of a long-running time-of-use program in California, in the early 1990s 80 percent of participants were saving $240 per year (or about $16 million per year in total for all participants) by cutting back on their consumption during the hours of peak demand. According to another study, Georgia Power staff could plan on participants reducing about 750 MW of power during high-priced hours, and they have seen reductions in peak demand of up to 17 percent on critical days. These savings reduce the amount of costly peak-generation equipment necessary, they said, and the program passes these savings along to its customers. Regional programs operating in the Northeast (New York and New England) have witnessed significant reductions in demand, which resulted in (1) millions of dollars in participant savings through price reductions and direct payments and (2) price reductions for nonparticipants amounting to millions of dollars more per year. For example, according to one study, the New York grid operator’s demand bidding program reduced electricity prices by $1.5 million in summer 2001. Our discussions with individual participants also highlighted specific savings for them resulting from the availability and use of demand- response programs. For example: According to a manager at a rural textile mill participating in Georgia Power’s real-time pricing program, the mill reduced its purchases from the utility by increasing the output of an on-site generator during periods of high prices, for a savings of about $1 million per year. These savings allowed his mill to remain competitive while many others in the United States had shut down production and moved to other countries, in part because electricity prices were too high. In California, according to the manager at a three-building commercial office complex that participates in market-based and reliability programs, the complex reduced its total electricity costs by 17 percent in 2003. To achieve these savings, the facility used advanced energy controls that allowed building operators to raise or lower building temperature and lighting, as well as a thermal storage cooling system that allowed it to chill water at night and use it during the day to cool the building and thereby avoid using air-conditioning during times when prices were high. One residential participant in Gulf Power’s critical peak pricing program significantly reduced his demand during the most costly hours and saved nearly $600 per year, or more than a third of his annual power costs, by shifting many activities from the most costly hours to off-peak hours. As table 2 shows, retrospective studies of past crises in the West and other parts of the country that have experienced significant market problems estimate that these programs could have saved potentially billions of dollars had they been available and used in these areas. One study examined the electricity crisis of 2000 to 2001 in the West and estimated that, had market-based pricing been in place, the high prices seen in California during 2000 might have been reduced by 12 percent—resulting in a $2.5 billion reduction in the state’s electricity costs. Similarly, experts have prospectively estimated that the widespread implementation of these programs could result in significant reductions in electricity costs. For example, three separate studies concluded that widespread implementation of demand-response programs could result in savings ranging from $5 billion to $15 billion, depending on the extent of participation and the costs of implementation. In achieving these savings, demand-response programs promote greater efficiency in supplying electricity in two ways. First, they encourage greater reliance on more efficient plants producing electricity at a lower cost and correspondingly less reliance on the plants used to handle peak demand, producing electricity at a much higher cost. This increased reliance on more efficient power plants provides the immediate benefit of lowering the average cost of supplying electricity, according to the studies we examined. This lower average cost of supply is likely to reduce electricity prices for consumers in either regulated or restructured markets. Furthermore, the use of more efficient power plants results in less use of natural gas and other fuels, potentially lowering the prices of these fuels during parts of the year. In addition, by reducing the use of seldom- used peaking power plants, the industry will need to build and maintain fewer of them overall, which will improve the overall efficiency of the industry. Since 1,000 MW of peaking power plants currently cost about $300 million to build, avoiding their construction can substantially reduce the amount of money the industry must commit to these little used plants. Second, such programs reduce the incidence of price spikes caused either by market conditions or by market manipulation. As part of its 2002 proposed market design, FERC determined that the absence of demand- response can result in periodic high prices in wholesale markets, exceeding the prices it would expect from competitive markets. Experts believe that these spikes are worsened, or in some cases may be caused, because consumer demand is determined in isolation from wholesale market conditions. Price spikes caused by natural changes in market conditions can be worsened by the lack of demand-response. For example, in late July 1999 the wholesale price of electricity reached the unprecedented level of about $10,000 per MWh for a few transactions in the Midwest, instead of the usual summer day price of $30 to $50 per MWh. While FERC determined that hot weather led to high demand, it noted that the exceedingly high wholesale prices occurred principally because high wholesale prices were not passed through to retail customers. Consequently, customers did not face high retail prices—thus they received no signal that supply costs were extraordinarily high—and did not cut consumption, which would have reduced wholesale prices. Similarly, price spikes caused by market manipulation, such as when a pivotal supplier withholds supplies in order to raise prices, can also be lessened if some consumers are able to see prices increase and reduce demand. Following the western electricity crisis, FERC determined some suppliers were able to increase wholesale prices by withholding supplies, contributing to a dramatic increase in electricity prices in California and other states. To limit the ability of producers to use their market power to raise prices and as a substitute for needed demand-response, FERC has approved various ways to control prices including price caps—collectively referred to as market power mitigation—but recognizes that these rules are imperfect solutions. Despite the presence of market power mitigation efforts, FERC has said that without demand-response prices can still exceed competitive levels. On the other hand, according to FERC officials, if there were sufficient demand-response in today’s markets, the commission could significantly reduce its reliance on market power mitigation rules because markets would be more competitive. Whether high prices are caused by natural market events or market manipulation, experts believe that demand-response programs can serve to lessen the severity of price increases, if properly designed and implemented. Furthermore, experts believe that the ability to rely on more efficient plants and the ability to reduce price spikes, taken together, could significantly reduce market prices. For example, one expert estimated that a 5 percent reduction in peak demand could reduce prices by 50 percent. In addition to immediate benefits, better aligning prices with costs offers long-range benefits because it provides the correct incentives for investments in energy efficiency and conservation or for other investments that allow consumers to reduce or avoid consuming energy during the most costly hours. These investments include thermostats to alter building temperatures during high-priced hours and equipment such as more efficient air conditioners or equipment that allows consumers to shift their demand from peak to off-peak, such as thermal or other energy storage devices. When electricity customers have more incentives to invest in such equipment, manufacturers of this equipment also have added incentive to develop and sell it. These improved incentives could result in the availability and use of more efficient energy-using equipment with substantial long-term benefits for consumers and society. Demand-response may also result in environmental benefits in two key ways: reduced overall electricity supplied and reduced use of power plants with high pollution rates. First, to the extent that participants in market- based pricing programs reduce their consumption of electricity during peak hours and do not increase their consumption during other hours, the amount of electricity supplied may be reduced in total. In such a scenario, emissions of air pollutants are reduced. Second, in some cases, participants in market-based pricing programs may reduce their demand during high- priced peak hours, but increase their demand during low-priced, off-peak hours. These participants allow the suppliers, or grid operators, to avoid using peakers to meet demand but increase the use of another power plant. Since there are regional variations in markets and power plants, depending on the area of the country, this shift may result in the use of power plants that are more or less polluting than the avoided peaking plants. Such offsetting effects make it difficult to determine the net environmental effect. Also complicating the determination of the potential environmental benefit, some demand-response participants may rely on backup generators to supply electricity periodically. Overall, experts we met with noted that there may be net environmental benefits from these programs, but the amount of the potential benefits was uncertain and was likely to vary by region. Demand-response programs can lessen the likelihood of blackouts and other disruptions with their consequent financial losses, according to the literature we reviewed. An Electric Power Research Institute study of a “typical” year’s power outages and associated losses estimated that the annual cost of outages to some key sectors (industrial and information technology) of the U.S. economy ranges from $104 billion to $164 billion. In California—the state with the highest costs for outages—the costs range from $12 billion to $18 billion. Similarly, the August 14, 2003, blackout affected millions of people across eight northeastern and midwestern states, as well as areas in Canada, and lasted for several days in some areas. The U.S.-Canada Power System Outage Taskforce estimated that the blackout cost between $6 billion and $12 billion in lost goods and services. Demand-response programs enhance reliability in two important ways: (1) market-based pricing tends to reduce demand as prices rise and (2) reliability-driven programs provide grid operators an additional tool to manage the last minute balancing of supply and demand needed to avoid blackouts. First, market-based pricing programs tend to reduce overall demand during times when electricity is scarce and costly, as individual customers choose not to purchase increasingly expensive supplies. This mechanism is especially useful when demand is slowly approaching the total available supply and customers have some advanced warning that electricity is becoming more costly. For example, higher real-time prices seen by retail customers would reflect, generally within 1 hour, a power plant or transmission line’s unavailability. Seeing these prices, customers tend to reduce demand and hence the amount of electricity that must be generated from power plants during the next hour. This lower level of demand, in turn, makes it easier for the grid operator to add enough supplies to meet demand and perhaps reduces the cost of doing so. However, these programs may not be able to meet sudden needs or provide sufficient and predictable demand reductions to maintain reliability. Second, reliability-driven programs provide additional flexibility by allowing grid operators to either increase supply or reduce demand to avoid blackouts or other disruptions. These types of mechanisms are especially useful in obtaining known amounts of demand reduction relatively quickly and sustaining demand reduction over some predictable period of time. For example, one expert told us that this type of program would be very useful if a large power plant had to suddenly shut down for safety reasons, and the grid operator found that available alternative supply sources were very costly or insufficient to meet their quantity and location needs. In this case, the grid operator might be able to maintain reliability at a lower cost by interrupting electricity service to interruptible customers for a short period of time, an interruption for which they would be paid. By this planned and compensated interruption of service for a few customers, utilities and other service providers are able to avoid unplanned service interruptions—or blackouts—for a much greater number of customers. For example: During California’s energy crisis of 2000 and 2001, experts found that utility programs that could interrupt service were instrumental in avoiding blackouts on at least five occasions. During a heat wave in 2001, one reliability program in New York State reduced electricity use by 425 MW on four occasions, or about 3 percent of total consumption, and achieved estimated benefits of about $13 million in reduced market prices. In order to achieve these savings, the program paid selected customers $4.2 million to forgo consumption. More recently, grid operators used demand-response capabilities to aid in the recovery from the 2003 Northeast blackout, interrupting participants in order to speed a return to normal electricity service for the state’s grid. However, because some of these reliability-based demand-response programs provide for periodic payments to participants, but are used infrequently, they can be costly to maintain and difficult to justify during years when they are not needed. Nonetheless, according to experts, these programs are very important for maintaining reliability during times when electricity supplies are inadequate or demand is higher than expected. Further, several experts and program operators noted that these programs are difficult and time consuming to start up when a crisis is expected, and it is better to have them in place before a crisis. GSA has achieved some financial benefits from its limited participation in demand-response programs. Of the 53 buildings with the largest electricity expenses that we reviewed, 33 reported participating in a demand-response program, and 13 of these reported savings ranging from 0.1 percent to 10.8 percent, for a total of $1.9 million from 1999 through 2003. About 72 percent of these benefits were from facilities participating in market-based pricing programs, 9 percent from facilities participating in reliability-driven programs, and 19 percent from facilities participating in both types of programs. However, while we received some estimates from GSA about its participation in market-based programs, total savings may be higher. Some building operators did not quantify the benefits of these programs and many building operators did not actively participate, even though their buildings were enrolled in them. For example, while large GSA buildings in California are registered for the time-of-use rate, as California requires, GSA staff told us that some building managers do not actively monitor price changes or take steps to adjust demand to respond to changing prices. As a result, some GSA buildings do not realize the additional savings that could result from reducing demand when prices are highest. In contrast, GSA building managers at facilities in Illinois that are enrolled in reliability-driven programs have actively participated by reducing their electricity demand, at the utility’s request, in exchange for payment. We estimate that GSA might be able to achieve substantial savings if it participated more actively in demand-response programs. Based on savings actually achieved from demand-response programs by 13 large GSA buildings (over 100,000 square feet in size) from 1999 through 2003, the median savings potentially achievable for these 13 buildings over the 5-year period, 2004 through 2008, is $6.9 million and ranges from $1.4 million to $13.6 million, depending on how actively the buildings participate, weather conditions, and other factors, and assuming that at least time-of-use programs are available. If the other 40 GSA buildings of this size were to participate in demand-response programs that provided similar savings over this period, the median additional savings are estimated to be $20.5 million with a range of $4 million to $40 million. If all 419 GSA-managed buildings over 100,000 square feet in size were to participate in demand- response programs that provided similar savings over this period, we estimated median GSA savings of $58.2 million with a range of $12 to $114 million, according to our analysis. Demand-response programs face three main barriers to their introduction and expansion: (1) regulations that shield customers from short-term price fluctuations, (2) the absence of needed equipment installed at customers’ sites, and (3) customers’ limited awareness of programs and their potential benefits. In addition, several external factors, such as moderate weather, have kept prices low in recent years in many parts of the country, thereby limiting the financial incentives for participation. Lack of specific guidance to the tenants in GSA buildings regarding participation and the tenants’ lack of incentive to reduce consumption have also limited GSA’s involvement in these programs. Whether subject to traditional regulation or restructured markets, the costs of supplying electricity are generally not reflected in the prices that consumers see in the retail markets where they buy electricity. Instead, these prices are generally prescribed by state law or regulation as a single average price for all purchases made over an extended period. Seeing no variation in retail prices, customers lack the information and the incentive to respond to the actual variation in supply conditions throughout the day and from season to season. This lack of consumer response becomes particularly important during periods of high demand for electricity, when the actual costs of its production are the highest, but customers remain unaware of the higher costs and thus have no incentive to reduce their demand. In turn, since consumers do not reduce their demand, they can unknowingly drive up the price for electricity in wholesale markets as their suppliers purchase electricity to meet their demand. This impact on wholesale prices ultimately increases the cost to consumers over time and may result in energy and/or financial crises similar to those experienced in the West. In short, the presence of such traditional retail pricing acts as an impediment to both the introduction and expansion of demand-response programs and to the efficient operation of wholesale markets. Because retail prices remain subject to regulatory control in most cases, the introduction of market-based pricing arrangements that reflect the underlying costs of supply may not be possible without regulatory changes. In retail markets that remain subject to traditional regulation, local utilities cannot offer new pricing arrangements without first obtaining state approval. According to state utility commission staff, approval often requires demonstrating that the introduction of new pricing arrangements will benefit the participants while causing no price increases for nonparticipants. In restructured retail markets, competitive suppliers may be able to offer new arrangements that reflect costs without first obtaining regulatory approval, but the availability of flat average prices—as required by regulation or law—may continue to present a barrier to consumers switching to these rates. In addition, whether in regulated or restructured markets, because demand-response programs can reduce total electricity consumption—upon which owners and operators of the transmission system are paid—it may also be necessary to change how these entities are compensated. Similarly, the introduction of reliability-driven programs may not be possible without regulatory and other actions by federal, state, and other entities. In general, reliability-driven programs are developed in a broader, regional context, where their success depends upon their integration with the flow of electricity throughout a region. Because electricity grids have become highly regional, with supply and demand in one part of the grid instantaneously affecting the grid across a wide geographic area, it is important for grid operators fully understand supply and demand conditions within these regional grids and to have sufficient authority to maintain reliability. Since introducing restructuring to wholesale electricity markets, FERC has approved the formation of eight grid operators across the United States that have different levels of authority and a variety of rules. Therefore, the effectiveness of reliability-based programs depends on the amount of the grid the operators control and the extent to which the operator’s rules differ from the rules in a neighboring jurisdiction. As part of the changes needed to introduce reliability programs, it may not be possible to introduce several types without creating markets for them. For example, it may be necessary to make changes to allow companies to aggregate small individual demand-responses, such as residential air conditioners and water heaters, and provide a way to then sell the aggregated demand as a substitute for supply to the grid operator. To implement these changes, industry experts believe that FERC may need to change the rules used by grid operators so they can allow the creation of appropriate markets. Most customers currently lack the necessary equipment—meters, communication devices, and special tools—for participating in demand- response programs. Although the needed technologies are commercially available, they are not present at most customers’ homes and businesses. For example, the meters installed in most homes and businesses measure only total consumption, which is generally measured on a monthly basis for billing purposes. However, most demand-response programs require meters that are capable of measuring when electricity is consumed. These types of meters generally cost between $100 and $1000, according to experts we spoke with. Additionally, experts and program operators told us that the way in which some buildings are metered is inadequate to support effective participation in demand-response. For example, regulators, program operators, and others in New York State told us that the building code did not require that commercial and residential buildings be metered individually. They explained that in New York City, which has many large residential and commercial buildings, or multibuilding complexes, some of which may comprise hundreds to thousands of individual users, a single meter measures consumption. As a result, individual customers do not pay for the electricity that they consume; instead, they pay for a share of the total electricity consumed. In these circumstances, even if an appropriate meter were installed to replace the existing meter, individual customers would have only limited incentive to reduce their consumption, since the benefits of any individual reduction would be shared among all the other customers. Most customers also do not have appropriate communications equipment for demand-response programs. Because most customers’ electricity rates change infrequently, it has not been necessary to design or implement specific communications for this purpose. However, with most demand- response programs, more timely communication is important. According to operators of programs that we reviewed, they relied on some combination of e-mail, pagers, and telephones to provide timely communication. Finally, some demand-response programs may require other equipment. For example, in market-based and reliability programs that allow the retail energy provider or grid operator to interrupt specific pieces of electricity- consuming equipment, participants need installed switches on their electrical equipment that can be activated remotely. Installing these technologies can be costly and raises questions about who should pay for them and how best to install them. Historically, local utilities paid for and installed the meters, recovering this cost through electricity rates over several years. However, because of uncertainties about the future of retail restructuring and of the ability to recover these costs in competitive markets, utilities have been reluctant to pay for metering equipment unless cost recovery is guaranteed, which some regulators have been reluctant to do. Several experts told us that costs could be significantly reduced if the equipment were purchased and installed on a widespread basis. However, since not all customers participate in demand-response programs, it is not clear that such widespread installations are economical, even in light of the potential for reduced costs. In areas where demand-response programs are available, some customers are unaware of them or do not know how they could benefit from participation. For example, despite the widespread availability of demand- response programs in New York State, and of extensive outreach, many customers in New York State remain unaware of them, according to experts we spoke with. In a survey conducted for the operator of two programs in New York State, program operators learned that about half of the eligible customers it believed were well-informed about electricity matters were unaware of the demand-response programs. However, the same study found that the customers that were aware of the programs were highly likely to participate in them. In some cases, the simultaneous availability of and solicitation for multiple programs can confuse potential participants. For example, California state officials told us that, in response to the 2000 and 2001 electricity crisis, many new programs were created in addition to a number of existing programs. According to one utility we spoke with, customers found it difficult to sort through the multiple options and were also were confused by utility program complexities due to multiple programs and/or changing policies and requirements. According to program operators and industry experts, customers often do not know the specific sources of their own demand (such as various production processes and air-conditioning), when their demand is the highest, and what options exist to reduce their demand without significantly affecting their commercial operations or household comfort. For example, customers participating in the Georgia Power real-time pricing program told us that the utility staff was indispensable in initially informing them about the existence of the program, about quantifying the potential savings, and in identifying ways to reduce demand during high- priced hours. Several factors have also reduced the incentive to participate in demand- response programs over the past several years. These include (1) moderate weather across most of the country over the past couple of years that has limited overall and peak demand; (2) a slow national economy, which has limited overall demand; and (3) many new power plants in some parts of the country have increased supply and lowered costs in those areas. Consequently, prices have moved downward overall. However, experts note that these types of programs may be urgently needed when supplies are limited and prices are high. According to participants that we met with, they hoped to benefit from their ability to reduce demand when prices were high and, in some cases, increase demand when prices were low. Participants told us that although they signed up for demand-response programs, they often would not actively participate unless prices were high enough to offset the costs of shutting down. Some businesses said they may not continue to participate unless they could demonstrate the financial benefits of doing so on a regular basis to senior managers, either through higher prices or through some ongoing payment for their willingness to reduce demand if needed. Recognizing this problem, program operators, grid operators, and others said that the persistence of low prices could imperil demand-response programs. For example, in the parts of the West where prices have historically been generally low, there was only limited demand-response capability outside of California. However, this capability became urgently needed during the crisis of 2000 and 2001. Because these programs are difficult to start up, particularly during a crisis, little additional demand- response was available. According to GSA officials, participation in demand-response programs has been limited for the following reasons: GSA lacks specific guidance on how to participate. While GSA provides guidance regarding participation in reliability-driven programs, information regarding market-based pricing programs is limited. For example, a regional energy manager we spoke with was not generally familiar with market-based pricing programs and thought that backup generation was required to participate. Another regional energy manager told us that he relied on information provided by the local utility and grid operator to provide the information he used to make decisions on whether to participate in these programs. Federal agency tenants have little incentive to reduce their consumption. According to GSA officials, current leases require a fixed monthly payment from federal agency tenants, which does not provide a way to share any savings from demand reduction efforts or to pass on the higher costs to agencies creating higher demand during high cost periods. Therefore, tenants do not have incentives to seek opportunities for the electricity savings that could be realized from participation in demand-response programs. In addition, the need to reduce demand has been limited in recent years. As with other customers, GSA officials have not seen high electricity prices because of such factors as moderate weather. Consequently, GSA officials told us that they have had difficulty maintaining interest in reliability-based programs among their clients or in recruiting new ones. Certain demand-response programs that we reviewed illustrate how the barriers we identified were overcome and also point out three broader lessons on how to cultivate new programs. To overcome regulatory barriers, Gulf Power, a regulated utility in the panhandle of Florida, introduced its GoodCents Select market-based pricing program by receiving regulatory approval to offer it as a voluntary program. The utility demonstrated to state regulators that its program could offer benefits such as lower overall electricity costs and additional services to participants without raising prices for or otherwise harming nonparticipants. In general, state regulators told us that they review the impact of programs on the electricity rates of nonparticipants, which is referred to as the rate impact test. This test compares the avoided costs, including costs to construct power plants and transmission lines as well as costs to operate and maintain new facilities, with the costs of operating the program. In the case of the demand-response program that we reviewed, they approved the program proposed by the utility because of its benefits for both participants and nonparticipants. Gulf Power also overcame the barrier of inadequate equipment by installing an innovative package of new technologies, including a computerized controller, called a “gateway” that integrates the metering, communication, and switches to control demand. Figure 2 illustrates this system. The programmable thermostat receives and displays information about the current electricity price period (e.g., peak prices) and allows customers to preprogram demand reductions for up to four appliances based on time-of- day or in response to changes in prices, or both. The switches are automatically triggered if the preprogrammed criteria are met such as if high critical peak prices are in effect. For example, customers can choose to shut off the heat pump, air conditioner, pool pump, or hot water heater if prices reach a certain point or other events occur. By automating demand reduction, this program allows customers to avoid consuming costly electricity, even if they are not actually present to monitor or turn off the equipment. However, this system also allows the consumer to override the preset programming if desired; for example to operate the air-conditioning if they are home during the day. The data on electricity usage is sent periodically via an integrated telephone line. Utility officials noted that installing meters and related equipment for their programs costs, on average, $600 to $700 per customer. In addition, because Gulf Power was able to demonstrate to regulators that the program provided benefits to nonparticipants, it was possible to have some of the cost of the equipment paid for by a state mechanism used to fund energy efficiency and other similar programs. The cost-sharing required participants to pay 60 percent and all ratepayers to pay 40 percent of the costs. These technologies had the added benefit of making participation easy, a consideration that was important to customers. Gulf Power also overcame the barrier of limited customer awareness through advertising and providing additional services that customers valued, such as whole house surge suppression and power outage notification, for a fee of $4.95 per month. This charge also enables the utility to recoup some of its expenses. Gulf Power utilized mass marketing techniques to make consumers aware of the program and to provide basic information about the advantages available to participants. Further, the utility provided a detailed information package to interested customers and actively followed up with telephone and other contacts. Utility officials told us that customers require substantial education about the program’s benefits, its basic features, and its ease of access to make the program successful. Residential customers, according to these officials, must be convinced that they will not be worse off financially and that they can achieve savings without substantially reducing their quality of life. In addition to the services provided by the innovative package of metering and other technologies, participants also received other services that they valued as part of their participation. In New York State, the grid operator overcame barriers to establish both a market-based pricing program and a reliability-driven program primarily targeting commercial and industrial customers. In the summer of 2000, grid operators, utilities, and others expected supply shortages and quickly established these new programs to address these shortages. The New York grid operator overcame the regulatory barriers by convincing the state regulators and FERC to make changes needed to establish the programs. These included the creation of an electronic trading marketplace so participants could offer their demand reductions to the grid operator at a certain price. State regulatory officials told us that they and FERC were open to considering the regulatory changes because there were no other options for quickly adding new power. The New York grid operator overcame the barrier of inadequate equipment by identifying a state-funded entity to share the cost of installing the needed equipment. The program received financial support from the New York State Energy Research and Development Authority for installing needed equipment such as meters that can measure hourly consumption. This organization was allowed to provide as much as 70 percent of the cost of the meters, but it generally paid about 40 to 45 percent of the costs. The grid operator told us that the availability of this money made the customer’s decision to participate easier because costs were lower. The ISO also developed an automated telephone notification system, introduced in 2003, to replace the previous nonautomated process, which was described as time-consuming and inefficient. New York grid operators used the new system for the first time in August 2003 in conjunction with the blackout. The grid operator overcame the barrier of inadequate customer awareness by starting the program during a time when supply shortages were expected and by widely publicizing the program’s availability and its potential benefits. The grid operator provided brochures and other sources of information that identified the growing threat posed by the tight electricity supplies, the benefits of participating in the program, the role of participants, and the rules under which the program operated. In addition, state officials hosted a series of workshops that boosted awareness of the program and the need for demand-response. Enrollment in the program has grown substantially from its inception; in 2002 there were about 1,700 participants accounting for about 1,500 MW of demand. Industrial customers have also formed a trade association that has helped identify ways to improve the program. The demand-response programs that we reviewed offer important lessons for such programs to succeed. First, programs with sufficient incentives make customers’ participation worthwhile. For example, Gulf Power’s market-based pricing program provides a more than sevenfold difference between the lowest and the highest prices, depending on the time of day and season. Exposure to this great a difference in prices and the savings that result from adjusting demand accordingly provide a strong incentive for participation. In contrast, Puget Sound Energy began a somewhat similar program that was ultimately unsuccessful because the price differences with the regulated program were only about 20 percent different—too small to induce customers to change their consumption, according to studies we reviewed. Second, programs are more likely to succeed if state regulators and market participants are receptive to the potential benefits of demand-response programs in their areas. In both Florida and New York State, certain market factors made demand-response especially appealing. In Florida, Gulf Power’s customer base is predominantly residential and prone to sharp variation in daily and seasonal demand because of air-conditioning. In presenting their case to state regulators, utility officials, demonstrated that the avoided costs of adding new capacity were greater than the costs of introducing a market-based pricing program. Similarly, in New York State, state officials recognized the potential for supply shortages, the difficulty of adding new capacity, and the benefits of developing a reliability-driven program as an alternative. Third, to achieve these benefits and increase the chances of success, the design of programs should consider appropriate outreach, the introduction of necessary equipment, and the ease with which customers can participate. The programs discussed here have demonstrated that these factors are also critical to success. The goal of restructuring the electricity industry is to increase the amount of competition in wholesale and retail electricity markets. While wholesale market prices are now largely determined by supply and demand in those markets, retail demand does not generally respond to market conditions because of key barriers discussed in this report, especially the presence of flat, average prices generally set by states. These prices serve to insulate consumers from market conditions and prevent them from potentially choosing to reduce demand when prices are rising dramatically or when grid reliability is a concern. As such, retail consumers—as was the case in California—can unknowingly drive up wholesale market prices because they continue to consume as much as or more electricity than normal even when demand could exceed available supplies. Thus, this hybrid system— competition setting wholesale prices and regulation setting retail prices— results in electricity markets that do not work as well as they could. This hybrid system also makes it difficult for FERC to assure the public that wholesale prices are “just and reasonable.” While electricity markets are subject to divided jurisdiction, it is clear that these markets remain operationally joined; actions in one market affect the other. FERC has previously determined that actions in retail markets, particularly when consumers do not respond to market conditions, can cause prices in wholesale markets to exceed competitive levels. Such outcomes are not desirable or consistent with FERC’s responsibility for wholesale prices. Thus, FERC may have to take additional steps—within its jurisdictional boundaries—to ensure that competitive wholesale markets are not, unknowingly or unnecessarily, harmed by retail buyers. It is clear that connecting wholesale and retail markets through demand response would help competitive electricity markets function better and enhance the reliability of the electric system, thus potentially delivering large benefits to consumers. Overcoming existing barriers will not be easy, however. Capturing these benefits will require leadership, collaboration, and action on the part of FERC, interested state regulatory commissions, and market participants in order to develop electricity markets that are truly competitive. Without these efforts to incorporate demand-response in today’s markets, prices will be higher than they could be, the incidence of price spikes caused by either market conditions or by market manipulation will be greater, and industry will have less incentive for energy efficiency and other innovations, among other things. To date, GSA has benefited from participation in demand-response programs, but clearly could do more. As a large customer with buildings located across the country, GSA is uniquely situated to benefit from demand-response programs and to provide a benefit to local electricity markets. While it has signed up for some programs, GSA could participate more actively by adjusting its energy consumption in response to prices and/or emergencies when asked—without compromising the operation of its buildings or tenants. To the extent that GSA does so, it could further reduce its annual electricity spending, possibly benefit the broader electricity market, and provide an opportunity for the federal government to lead by example. We recommend that the Chairman of the Federal Energy Regulatory Commission take the following three actions: Because the lack of demand-response can result in wholesale prices that are not consistent with competitive outcomes and may not be “just and reasonable,” we recommend that the Chairman consider the presence or absence of demand-response programs when: (1) determining whether to approve new market designs or approve changes to existing market designs, (2) considering whether to grant market-based rate authority, and (3) determining whether to allow some buyers to participate in wholesale markets. As part of this process, FERC should consider its authority to use this information in making decisions on these matters. If there is inadequate demand responsiveness and FERC determines that it has authority, it should not approve these designs, authorities, or participation until such time as there is some combination of price and/or reliability based demand-response to assure that prices will be just and reasonable. If FERC determines that its authority is not sufficient to take such action, it should seek this authority from Congress. In reporting to Congress, the Chairman should identify the options that may have potentially large benefits and are cost-effective for achieving consumer response, as well as statutory or other impediments to putting these options into practice. Because the development of demand-response programs depends upon there being markets where these services can be sold, the Chairman should encourage, where reasonable, equal consideration of supply and demand when approving or changing market designs. In implementing these recommendations, it is important that the Commission continue working with system operators, regional entities, and interested state commissions, and market participants to develop compatible regional market rules and policies regarding demand-response. FERC should use these outreach efforts to identify regions of the country where demand-response programs are most urgently needed and where grid operators, state regulatory officials, and market participants are amenable to the collaborative introduction of regionwide demand-response programs. As part of its efforts, FERC should also engage the Department of Energy in its examination of demand-response options and involve the department in its outreach efforts, thus leveraging its expertise in identifying cost-effective technologies and its relationships with state, industry, and consumer groups. Because demand-response programs offer potential financial benefits to the federal government and to demonstrate the federal government’s commitment to improving the functioning of electricity markets, we recommend that, for locations where the General Services Administration has significant energy consumption, its Administrator take the following four actions: Require regional energy managers to identify what demand-response programs are available to them, require building operators to determine whether they could actively participate in the programs, and quantify the benefits of that participation. Develop guidance that clearly articulates to the regional offices that participation in demand-response programs should be considered as part of the energy decisions that they make. Require (1) guidance on specific measures that building operators can take to respond to market-based programs, similar to the guidance that they provide for responding to emergencies and (2) training on evaluating how to maximize benefits from participation in these programs. Clarify the incentives for participation by defining how the GSA, its building operators, and its federal agency tenants will share the benefits and risks of participating in these programs through its leases. We provided FERC and GSA a draft of our report for review and comment. The Chairman of FERC endorsed our conclusions regarding the importance of demand-response to competitive energy markets and to electricity system reliability. The Chairman also generally agreed with the report’s recommendations. In response to one recommendation, the Chairman agreed to consider conditioning market-based rate authority on the presence of sufficient demand-response, but noted FERC uncertainty as to whether it can require such a condition or that such conditioning would be workable, given current policy that separates wholesale and retail functions. Our recommendation, however, has a precedent in a similar state jurisdictional issue—that of the construction of new power plants. In this instance, FERC approved a mechanism, commonly known as “capacity markets,” that created an additional market for power plants and serves as a signal for when they are needed. In the same way, our recommendation, if properly implemented, could create such a market for demand-response as well as serve as a complementary signal for new capacity. FERC also provided several general and clarifying comments or suggestions that we incorporated as appropriate or address in appendix III. GSA agreed with the report’s conclusions regarding the importance of demand-response to an efficient and reliable electricity industry. GSA also stated that it agreed with the majority of our recommendations, but it expressed some concern about one of them. Overall, its comments focused on concerns about risk, especially in the form of financial penalties that GSA may incur through participation in demand-response programs. GSA also commented on the broad risks regarding price stability and power reliability that pervade the transition from regulated to restructured electricity markets. As such, GSA expressed concern about the fourth recommendation for GSA to define how benefits from successful demand- response participation will be shared with tenants. With this broad concern regarding risk to GSA in mind, GSA expressed the view that such sharing would not be practical because the agency would bear the risk while tenants reaped the rewards and because the savings to be shared are of a short-term nature. We revised the recommendation to reflect GSA’s concern by adding that risk should be shared between the agency and its tenants. As revised, we believe the recommendation provides sufficient flexibility for GSA to develop practical approaches for sharing financial incentives as well as penalties with its tenants to encourage participation in demand-response programs. However, we note that as the electricity market places greater emphasis on competition, consumers such as GSA and the federal agencies that it serves will face greater price volatility. Consequently, efforts to manage this greater price volatility by developing demand-response capabilities will be an important element in managing GSA’s operating costs. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to other appropriate congressional committees; the Chairman of FERC; the Administrator of the General Services Administration; and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512- 3841. Key contributors to this report are listed in appendix V. To assess demand-response programs, their benefits, barriers to expansion, ways to overcome barriers, and the federal government’s participation, we conducted an extensive review of the literature; analyzed industry and participant data on the performance of the programs, where such data was available to us; and conducted interviews with state and federal officials (in the Federal Energy Regulatory Commission , the Department of Energy, and the General Services Administration ) and the Edison Electric Institute, a trade association representing large electricity providers. To provide insights on the operation and experience of several current programs, we also examined programs in four states in greater detail: two in states with restructured retail markets (California and New York State) and two in states with traditionally regulated retail markets (Georgia and Florida). We selected these programs because they have operated for several years and experts consider them innovative and successful models. In particular, we examined the following programs: In California, we examined programs operated by one large electricity provider and several programs operated by others. We examined two programs operated by Southern California Edison: time-of-use rates for large customers, interruptible rates for large customers, and and direct interruptions to the operation of specific electrical devices, such as air conditioners at customers’ homes and/or businesses. In addition, we discussed a range of programs operated by the state grid operator (the California Independent System Operator ), and the state created in response to the electricity crisis in 2000 and 2001. We interviewed officials at Southern California Edison, the state public utility commission, the California ISO, the California Energy Commission, California Power Authority, and Pacific Gas and Electric. In addition, we met with four customers that participated in programs operated by Southern California Edison. In New York State, we examined programs operated by one large electricity provider and by the state grid operator. We examined a real- time pricing program implemented by Niagara Mohawk that provides day-ahead hourly prices against which actual consumption is billed. We also examined programs operated by the state grid operator (New York ISO)—one market-based pricing program and two reliability programs. We examined the New York ISO demand-bidding program (called the Day-Ahead Demand-Response Program). We examined one reliability program (called the Emergency Demand-Response Program) that pays participants who reduce demand when reliability is at risk. We also examined a reliability program (called the Special Case Resources) that requires participants to sign agreements in advance to reduce demand whenever requested and pays them for doing so. In our report, we combine our discussion of these two reliability programs. We also interviewed staff from Niagara Mohawk, the New York ISO, the New York State Energy Research and Development Authority, the New York Public Service Commission, and a consultant who annually reviews the performance of programs run by the New York ISO. In addition, we met with four customers that participate in programs operated by the New York ISO and/or Niagara Mohawk. In Georgia, we examined a real-time pricing program operated by Georgia Power, a regulated utility. We also interviewed staff at Georgia Power, the Georgia Department of Natural Resources—Environmental Protection Division, and the Georgia Public Service Commission. In addition, we met with two customers that have participated in the Georgia Power program. In Florida, we examined a critical peak-pricing program (GoodCents Select) operated by Gulf Power, a regulated utility. We also interviewed staff at Gulf Power, the Florida Office of the Public Counsel, the Florida Energy Office, and the Florida Public Service Commission. In addition, we met with one residential participant in the program. To determine GSA’s participation in demand-response programs, we interviewed GSA staff located in the headquarters’ Energy Center of Expertise and in GSA’s 11 regional offices and obtained information about electricity consumption at about 1,400 facilities where GSA pays for electricity. In addition, we obtained information about demand-response activities at 53 large GSA buildings. These buildings incurred the highest electricity expenses of the about 1,400 GSA-operated buildings nationwide and represented about 40 percent of the agency’s total electricity expenses in 2003. We obtained information on participation and the benefits of demand-response programs for a 5-year period—1999 through 2003. To estimate the potential benefits of GSA’s more widespread and active participation in demand-response programs, we used information on GSA’s participation and benefits from the 53 large buildings for 1999 through 2003 to estimate the potential benefits to large GSA-controlled buildings for 2004 through 2008. Specifically, we based our estimate of possible future GSA savings from demand-response programs on historical data on savings by GSA buildings participating in demand-response, the degree to which these buildings participated, and weather conditions, which we obtained from GSA and other sources. To account for variations in the factors affecting benefits, a Monte Carlo simulation was performed. In this simulation, values were randomly drawn 1,500 times from probability distributions characterizing possible values for participation rates, degree of participation, and weather conditions. The simulation resulted in forecasts of possible future savings from demand-response program participation by GSA. In developing our report we also met with 20 experts, who have extensive experience with demand-response programs. These individuals are listed in appendix II. We conducted our work from March 2003 through July 2004 in accordance with generally accepted government auditing standards. This appendix lists the 20 experts we interviewed on the issues surrounding demand-response programs. Their listing here does not indicate their agreement with the results of our work. 1. Severin Borenstein, University of California-Berkeley 2. Steve Braithwait, Christensen Associates 3. Richard Cowart, Regulatory Assistance Project 4. Larry DeWitt, Pace University School of Law 5. Ahmed Faruqui, Charles River Associates 6. Steve George, Charles River Associates 7. The following are GAO’s comments on the Federal Energy Regulatory Commission’s letter dated July 7, 2004. 1. We agree with FERC that the divided jurisdiction over electricity markets poses a challenge for implementing demand-response. We have already mentioned this divided jurisdiction in the opening pages of our report and discussed it in greater detail in the background section. GAO, which works for Congress to evaluate federal agencies and recommend changes at those agencies, cannot make “recommendations” to state commissions. We agree, however, that state commissions are important to the success of demand-response. Toward that end, our recommendation states that FERC should work with state commissions to develop complementary policies regarding specific demand-response programs. Accordingly, we made no changes to our report for this comment. 2. We agree with FERC that demand-response programs have been implemented in some markets, such as the NYISO, as we discuss in our report. These programs provide examples of the importance and success of demand-response, particularly with regard to reliability. However, we continue to believe that the amount of load actively participating in such programs is "limited" when compared with peak load in most regions, as FERC notes. Our finding that demand-response programs are in limited use, when viewed from a regional or countrywide perspective, is not meant to leave a negative impression, as described by FERC, regarding the potential of demand-response. In fact, the second objective of our report discusses its overall benefits at some length and finds that it shows substantial potential. Our point in identifying the limited extent of demand-response is meant to clarify that in many parts of the country additional efforts are needed to assure that sufficient demand-response exists in all markets overseen by FERC. As such, we made no changes to our report. 3. The sentence referred to in this comment was not intended to criticize the implementation of demand bidding. Rather, we are clarifying the limited extent of demand bidding, which so far has been relevant only when prices reach very high levels, as FERC observes. We agree that demand bidding is meant to provide relief when prices are high. However, we also note that program operators expressed concern that there was little demand bidding in some markets even when prices were at levels where many customers would benefit from reducing demand. These programs are generally subscribed to by customers with large demand, such as manufacturing. They are complex insofar as customers must develop baselines to reflect their expected consumption for all hours of the year, as we discuss in the report. We made no changes in response to this comment. 4. Our report intended to reflect the value and importance of voluntary and contractual ISO emergency programs. For both types of emergency programs, we noted that enrollment is typically voluntary. However, customers participating in contractual programs sign agreements that might entail financial penalties if a participant does not reduce demand as required by the program. We agree with FERC that these programs within the NYISO are important. In responding to our fourth objective, we discussed the reasons for the success of these programs, citing them as examples that might be applied in other areas. For these reasons, no changes in response to this comment were included in our report. 5. As FERC considers our recommendation to condition the granting of market-based rate authority upon the presence of sufficient demand- response, we are hopeful FERC will regard our recommendation as another way to dampen the ill effects of the “boom-bust” cycle. In this respect, we see our recommendation as a way help create a market for demand-response, which should benefit the development of these programs. In our view, the currently low electricity prices offer a perhaps short-lived opportunity to develop demand-response resources that may be urgently needed if demand intensifies in response to a stronger economy, weather events, fuel price increases, supply interruptions, or other events. With respect to actions to address resource adequacy, FERC may be in the position to limit the activities of energy sellers who are unwilling to develop or acquire adequate demand-response, even in markets without an organized ISO or RTO. It may be able to exercise this leverage when key participants in these markets seek FERC approval for market-based rate authority or for purchases from markets overseen by FERC. In view of these observations, we made no changes to our report. 6. While our report did not elaborate on DOE’s potential role in detail, we recognized its importance. In our report, we discuss DOE’s role in formulating national energy policy, researching technologies, and disseminating information to the public, among other things. In addition, in our recommendations to FERC, we suggested FERC should also engage the Department of Energy’s expertise in identifying cost- effective technologies and information dissemination capabilities, thus leveraging DOE’s technology expertise and its relationships with state, industry, and consumer groups. As such, we did not add additional information in response to this comment. In addition to the individuals named above, Mary Acosta, Dennis Carroll, Randy Jones, Jon Ludwigson, Paul Pansini, Frank Rusco, Anne Stevens, Barbara Timmerman made key contributions to this report. Important contributions were also made by Kim Wheeler-Raheb and Carol Herrnstadt Shulman. The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | The efficient and reliable functioning of the more than $200 billion electric industry is vital to the lives of all Americans. As demonstrated in the 2003 black- out in the Northeast and the 2001 energy crisis in the West, changes in the cost and availability of electricity can have significant impacts on consumers and the national economy. The Federal Energy Regulatory Commission (FERC) supports using demand-response programs as part of its effort to develop and oversee competitive electricity markets. GAO was asked to identify (1) the types of demand-response programs currently in use, (2) the benefits of these programs, (3) the barriers to their introduction and expansion, and (4) instances where barriers have been overcome. Additionally, GAO examined the federal government's participation in these programs through the General Services Administration (GSA). There are two general types of electricity demand-response programs in use: (1) market-based pricing programs enable customers to respond to changing electricity prices and (2) reliability-driven programs allow either the customer or the grid operator to adjust electricity usage when supplies are scarce or system reliability is a concern. The federal government's GSA participates in both types of programs. Demand-response programs benefit customers by improving the functioning of markets and enhancing the reliability of the electricity system. Some recent studies show that demand-response programs have saved customers millions of dollars and could save billions of dollars more. The GSA--as only one example of federal involvement in these programs--has reported saving about $1.9 million through the participation of only a few of its buildings in demand-response programs during the past 5 years. However, GAO estimates that GSA could potentially save millions of dollars more with broader participation in these programs. While benefits from demand-response are potentially large, three main barriers limit their introduction and expansion: (1) state regulations that shield consumers from price fluctuations, (2) a lack of equipment at customers' locations, and (3) customers' limited awareness about the programs and their benefits. Regarding prices, customers do not respond to price fluctuations because the retail prices they see do not reflect market conditions but are generally set by state regulations or laws. In addition, in recent years, moderate weather conditions and other factors have kept overall electricity prices low, reducing the benefits of participating in these programs. According to GSA, its participation in demand-response programs has been limited because it lacks specific guidance on participation and tenants have little incentive to reduce their consumption since current leases do not provide a way to share in the savings that might occur. Two demand-response programs that GAO reviewed illustrate how the barriers GAO identified were overcome and also point out lessons on how to cultivate new programs. Lessons learned include the necessity to provide sufficient incentives to make participation worthwhile, working with receptive state regulators and market participants to develop programs, and designing programs to include appropriate outreach materials, necessary equipment, and easy participation. In commenting on the report, FERC and GSA agreed in general with the report's conclusions and recommendations, but GSA expressed concern about one recommendation to share potential savings with its tenants. |
An underground storage tank is defined as a tank and any underground piping connected to the tank that has at least 10 percent of its combined volume underground. When the UST program was established, Congress and EPA excluded about 2 million tanks meeting this definition from coverage based upon their size, content, location, or regulation under other programs or laws. For example, certain tanks used to store heating fuel or small tanks used on farms and residences were excluded. Under EPA’s UST program, a tank owner must notify a designated state or local agency of any tank storing petroleum or hazardous substances. EPA and the states track and regulate these underground tanks, updating its databank as new tanks become active. Most regulated tanks store fuel for vehicles and are located at gas stations. Although tank owners and operators are ultimately responsible for cleaning up contamination from leaks, the Congress created a trust fund in 1986 to help EPA and the states cover cleanup costs which tank owners and operators could not afford or were reluctant to pay. In instances where owners and operators would not pay, EPA or the relevant state could proceed with the cleanup and later seek reimbursement from the owners and operators. EPA derives about $70 million annually from the trust fund, most of which it distributes to states to implement its cleanup program. The trust fund is replenished primarily by revenue generated from a $0.001 per gallon tax on gasoline, diesel, and aviation fuel. At the end of fiscal year 2000, the balance in the fund was about $1.5 billion. States receiving support from the trust fund must spend it on cleanup and related activities, and cannot use the money for inspections or enforcement of leak detection and prevention requirements. States can keep any reimbursements from owners and operators for states’ cleanup costs and use these extra funds on future cleanups. EPA also awards states annual grants of about $187,000 each to help states cover some of the program’s inspection and enforcement costs, and spends about $6 million annually on its own headquarters and regional program implementation, management, and oversight activities. In addition to setting equipment requirements for active tanks, EPA has established operational and maintenance requirements to help ensure that these tanks remain safe. These requirements specify actions that tank owners and operators are to take to prevent the spills, overfilling, and corrosion that typically cause leaks, such as periodic system testing. EPA has taken further steps to improve the UST program. For example, in recent years, MTBE —a gasoline additive designed to reduce emissions and raise octane—has been detected with increasing frequency in groundwater used for drinking water supplies. MTBE is a potential carcinogen and the effects of exposure include headaches, eye, nose and throat irritation, cough, nausea, dizziness, and disorientation. In recent years, water suppliers have incurred increasing costs to clean up MTBE contamination. In November 1998, EPA convened a panel of experts to help investigate reported releases of this fuel additive into some groundwater, including releases from tanks. In 1999, the agency also convened a focus group of nine industry representatives who provided comments on the current status of the tank program and leak prevention methods. Using information from these two groups and a variety of other sources, in October 2000, EPA announced a set of four program initiatives intended to: Achieve faster cleanups Evaluate the performance of tank systems Promote tank cleanups at abandoned and idled properties that are contaminated. At the time of our review, EPA had just begun to assemble working groups to define the initiatives’ time frames and implementation details. The Congress has introduced several legislative proposals to help states increase their capacity to inspect tanks and to enforce federal requirements intended to prevent problems with leaking tanks. For example, S. 2962, which was introduced in July 2000, would have allowed states, among other things, to spend a portion of the funds they receive from the tank cleanup trust fund on inspections and enforcement of leak detection and prevention requirements. Although most tanks have been upgraded with the federally required equipment to help prevent leaks, spills, and corrosion, the states and EPA regions report operations and maintenance problems that could lead to spills, leaks, and health risks. Consequently, some upgraded tanks still pose potential health risks. State and EPA officials believe that the tanks without the equipment are generally empty and inactive, but further investigation is needed to determine whether these tanks should be removed to guard against contamination or undergo cleanup. States also noted that owners, operators, installers, and inspectors need more training to help solve the operations and maintenance problems. As a result, EPA has included improved training and tank compliance in its program initiatives. Based on state responses to our survey, we estimate that about 89 percent of the 693,107 regulated tanks, or 616,865 tanks, had been upgraded with the federally required equipment by of the end of fiscal year 2000. Compliance rates among the states varied, as the following figure illustrates. In comparison, EPA data indicated that about 70 percent of the tanks that its regions regulate on tribal lands had also been upgraded, but this varied among the regions as well. For example, four regions reported upgrades in more than 90 percent of their tanks, while a fifth region reported that only 36 percent out of its 736 tanks complied with federal requirements. The accuracy of the states’ tank compliance estimates varies, however, because some are based on more reliable data than others are. For example, 29 states base their estimates on periodic physical inspections of all of their tanks. Other states base their overall compliance rate estimate on inspections of only a subset of their tanks or on information provided by owners and operators that certifies that their tanks had been upgraded. The accuracy of EPA compliance data for tanks on tribal lands also varies. For example, one region reported it lacked data to know the actual location of some of the 300 tanks it was supposed to regulate on tribal lands and therefore could not verify whether these tanks had been upgraded. We estimate that the remaining 11 percent, or about 76,000, of the regulated tanks may not be upgraded. Seventeen states and the three EPA regions we visited reported that they believe that most of these tanks were either empty or inactive, while five states reported that at least half of their non-upgraded tanks were still in use. EPA program managers surmised that many states most likely assume that the empty or inactive tanks pose less risk and therefore allocate fewer resources to their care. However, states also reported that they generally do not discover tank leaks or contamination around tanks until the empty tanks are removed from the ground during replacement or closure. Therefore, unless EPA and the states address the issue of empty or inactive tanks in a timely manner, this potential source of contamination may be overlooked. We estimate that 29 percent of regulated tanks, or 201,001 tanks, are not being operated and maintained properly. Operations and maintenance problems varied across the states, as the following map illustrates. States reported a variety of operations and maintenance problems that surfaced during routine inspections of underground storage tanks: 19 states reported frequent problems with the equipment intended to 15 states reported that leak detection equipment was frequently turned off or improperly maintained, and 7 states reported frequent problems with the equipment to prevent spills and overfilling. States also reported that the majority of operational compliance problems occurred at tanks owned by small, independent businesses; non-retail and commercial companies, such as cab companies; and local governments. EPA and the states attribute operations and maintenance problems to insufficient training for all staff implementing tank requirements, including owners, operators, installers, removers, and inspectors. Owners and operators are responsible for making sure that they and their staffs acquire adequate training. However, the owners and operators from these smaller businesses and local government operations may find it more difficult to afford adequate training for themselves and their staff, especially given the high employee turnover, or give training a lower priority. States and EPA must also ensure that their own inspectors receive proper training. However, 47 states reported the need for additional training for their staff, and 41 requested additional technical assistance from the federal government to provide such training. EPA’s expert and industry panels also called on the agency to take additional measures to address the problems surrounding tank operations, maintenance, and staff training. The expert panel concluded that releases were more likely to occur in smaller, independently owned tanks because owners and employees may have less training in performing operational and maintenance activities. The panel recommended the creation of expanded programs to train and to license tank staff. The industry group also identified the need to better address operations and maintenance problems and to provide better training. The group discussed various training methods that EPA could pursue, such as developing instructional videos for operators and inspectors, and suggested the establishment of a national program to certify tank staff and inspectors. To date, EPA has provided states with a number of training sessions and helpful tools designed to address these issues, including operations and maintenance checklists and manuals, and other publications and guidance. EPA has also publicized its training initiatives and operations and maintenance guides, which companies and the states have found to be successful. For example, the American Petroleum Institute now offers recommended practices on underground storage tank management and is in the process of developing operations and maintenance training for members. The state of California now requires training courses for all tank owners, operators, installers, and inspectors. EPA has entered a cooperative agreement with a university in another state to provide similar training. One of EPA’s tank program initiatives is intended to improve training and tank compliance with federal equipment, operational, and maintenance requirements. With this initiative, EPA wants to encourage EPA regions and the states to improve the quality of their tank compliance data so that the agency can compile an accurate and consistent compliance measure, get states to commit to annual targets so that substantially more tanks will be in compliance with federal requirements by the end of 2005, and provide owners, operators, and inspectors with the technical assistance, improved guidance, and training needed to achieve compliance. EPA program managers said the agency is currently working out the details of how it will implement and achieve this initiative. At the time of our review, the agency had set up a working group of state and EPA representatives whose initial tasks, among other things, will be the establishment of compliance targets. Twenty-two states and one of the three EPA regions we visited do not know the extent to which their tanks comply with federal requirements, because limited staff and resources inhibit the physical inspection of all affected tanks. Most states and industry stakeholders support establishing a federal requirement for periodic inspections, but the states would need more inspectors to ensure compliance. Likewise, only 24 states have the authority to prohibit fuel delivery to a non-compliant tank—the most effective enforcement tool. The law governing the tank program does not give EPA clear authority to regulate fuel delivery. Most states reported that they need either additional enforcement authority or resources. EPA plans to address inspection and enforcement issues under its initiatives, and the Congress could consider actions to allocate additional funds to help states with their tank inspection and enforcement activities. According to EPA’s program managers, only physical inspections can confirm whether tanks have been upgraded and are being properly operated and maintained. The managers stated that tanks should ideally be inspected on an annual basis to ensure that problems are being identified and resolved quickly. However, if a state or region lacks the resources to inspect tanks annually, all tanks should be inspected at a minimum of at least once every 3 years. Twenty-nine states reported that they inspected all of their tanks on a regular basis, but only 19 states—and two of the three EPA regions we visited—inspected all tanks at least once every 3 years. Twenty-two states do not inspect all of their tanks on a regular basis, and therefore, some tanks may never be inspected. These states typically target tanks for inspection based on factors such as a tank’s proximity to groundwater or the number of complaints lodged against it. Overall, we estimated that states and EPA inspected about 185,000 tanks in fiscal year 2000. However, 17 states inspected only 10 percent of their tanks or less that year. The possibility of a tank inspection provides tank owners and operators incentive to comply with federal requirements. If tank owners and operators did not think that their tanks would be subject to inspection, some might be less concerned about ensuring compliance, although others might comply for fear of being held liable for any damage from spills and contamination. Nevertheless, broader and more frequent inspection coverage would provide EPA and the states with more complete compliance data, which could then be used to better target their enforcement actions and improve tank compliance. However, states and EPA would need to hire additional staff to conduct more frequent inspections—every tank at least once every 3 years. For example, based on current staffing levels, inspectors in 11 states would have to visit more than 300 facilities a year to inspect all of their tanks within this time frame. However, this number exceeds EPA’s estimate of 200 facility visits that a qualified inspector can make in one year. Most states use their own employees to conduct inspections. Therefore, an increase in the number of inspectors may be dependent on whether their state legislatures consent to granting them additional hiring authority and funding. A few states supplement their programs by delegating inspection responsibilities to local government employees, such as local fire department personnel. Three states allow tank owners and operators to hire licensed or state-certified private inspectors who report the results of their inspections back to the state. EPA has issued a guidebook to states on the use of such third party inspectors. However, program managers caution that this approach raises the potential for a conflict of interest on the part of the inspectors. For example, the managers said that inspectors may not readily identify tank violations for fear that tank owners or operators may not rehire them for future inspections. Officials in 40 states said that they would support a federal mandate requiring states to periodically inspect all underground storage tanks. Some states expect that such a mandate would provide them the leverage they need to obtain additional staff and funding from their state legislatures. EPA’s industry panel likewise supported a requirement for periodic—annual if possible—inspections and a set of inspection standards to promote consistency across the states. EPA’s program managers stated that the most effective enforcement programs employ a variety of authorities or tools, including the ability to (1) levy a fine against a violator; (2) issue field citations to owners or operators at the time of the inspection for less serious violations; and (3) prohibit fuel deliveries to non-compliant tanks. Some states have also filed civil and criminal actions for more egregious violations, although these tend to be more time-consuming and costly. Only 8 of the 49 states that are responsible for enforcement activities reported having all three tools—levying fines, issuing citations, and prohibiting deliveries—at their disposal. As the following figure illustrates, 30 states reported that they did not have the authority to issue field citations and 27 reported that they did not have the authority to prohibit fuel deliveries. These variances indicate that a tank owner or operator in one state could be fined for a violation, while an owner or operator in another state could be forced to cease operations for a similar violation. In total, 27 states said they needed additional enforcement authorities, while 46 said they could use additional enforcement resources. EPA regions can levy fines or issue citations but cannot prohibit fuel delivery to non-compliant tanks. According to the program managers, EPA believes, and we agree, that the law governing the tank program does not give it clear authority to regulate fuel distributors. They also noted that the regional enforcement of tanks located on tribal land was more difficult because of the agency’s focus on respecting tribal sovereignty. For example, program managers in two regions stated that they could not impose any sanctions against tribal owners; they could only issue notices of compliance problems. Managers at EPA headquarters confirmed that regional program managers needed to obtain headquarters approval before any enforcement action could be taken against a tribal owner. The expert panel and industry group raised similar concerns about the effectiveness of program enforcement. The expert panel recommended that the states be granted the authority to prohibit fuel deliveries to non- compliant tanks and obtain additional resources. The industry group, which maintained that the fear of being shut down provided an incentive for owners and operators to comply with federal requirements, saw a need for more uniform and consistent enforcement across the regions and states. EPA is developing several initiatives to encourage states to improve their tank programs. A state must first demonstrate that it has the capabilities and enforcement procedures in place to ensure effective program compliance before EPA will approve a state program. EPA regions oversee the states and conduct annual reviews of their activities, focusing their efforts on more problematic states, such as those that inspect fewer tanks. The regions also have the opportunity, to some extent, to use the state grants as a means to influence state program implementation. According to EPA program managers, regions can also conduct inspections in states and, if necessary, take enforcement action. Program managers acknowledged that UST-specific resources are limited, problems with inspections and program enforcement continue, and more work is necessary. In EPA’s initiative to improve tank compliance with federal requirements, the agency has said that it will attempt to obtain state commitments to increase their inspection and enforcement activities if they do not meet their compliance targets through 2005. However, EPA does not plan to address the variation in enforcement authorities among states. EPA has announced that it may elect to supplement enforcement in those states that fall significantly below their targets, although the agency may be constrained by available resources. The Congress may wish to consider whether it can help address EPA and state resource limitations to develop better inspection and enforcement programs. The Congress could provide states more funds from the general treasury. The Congress could also increase the trust fund allotments it grants to states and give the states the flexibility to use some of these funds on inspections and enforcement rather than cleanup—an action the Congress has considered taking in the past. Officials in 40 states said that they would welcome such funding flexibility. The Congress may have to include some safeguards, however, to ensure that this reallocation of funds does not interfere with tank cleanup progress. Despite the equipment requirements, a number of states reported that some of the upgraded tanks leaked last year, while other states did not know whether this was happening with their tanks. EPA has launched studies to determine the extent of the leaks, the effectiveness of the current equipment, and whether the existing equipment standards should be strengthened. States and other stakeholders believe that further equipment requirements are needed and support EPA’s efforts. In fiscal year 2000, EPA and the states confirmed a total of more than 14,500 leaks or releases from tanks subject to federal regulation, although they were uncertain whether the releases occurred before or after the tanks had been upgraded. According to our survey, 14 states said they had traced newly discovered leaks or releases to upgraded tanks that year, while another 17 states said that they seldom or never detected such leaks. Twenty states, however, could not confirm whether or not their upgraded tanks leaked. States that reported leaks attributed them to poor operations and maintenance, although 33 states suggested that improper equipment installation may have caused some leaks . The remaining states were uncertain about the possible causes of continuing leaks. EPA is concerned that upgraded tanks may still be leaking and recognizes the need to collect better data to determine the extent and cause of this problem, including whether the current equipment requirements are sufficient to prevent leaks. Several states and three EPA regions have studies underway to try to determine the extent and source of leaks. Researchers studying tanks in California’s Santa Clara County suspected that 13 of the 16 tanks they reviewed had undetected leaks after the tanks had been upgraded, although they could not conclusively determine whether the leaks and releases came from tanks before or after they had been upgraded. To resolve this problem, California launched a new statewide study to trace leaks coming from newly installed upgraded tanks, which the state expects to be completed by the end of June 2002. Researchers with the Santa Clara study concluded that tanks with upgraded equipment do not provide complete protection against leaks, and tank monitoring systems, even when properly operated and maintained, cannot guarantee the detection of leaks. Other stakeholders expressed similar concerns about leaking tanks. The expert panel recommended that the agency evaluate the performance of current tank system design and equipment requirements and revise them where necessary to better prevent leaks. The industry group also called on EPA to strengthen the requirements, such as require additional leak containment systems and double-walled tanks. In response, EPA, as one of its four tank program initiatives, plans to undertake a nationwide effort to assess the adequacy of existing equipment requirements to prevent leaks and releases. The states and EPA cannot ensure that all active tanks have the required leak-, spill-, and overfill-protection equipment installed, nor can they guarantee that the installed equipment is being properly operated and maintained. While the states and EPA regions focus most of their limited resources on monitoring active tanks, empty or inactive tanks require attention to ensure that no soil and groundwater contamination has occurred. Half of the states have not physically inspected all of their tanks and several others have not conducted frequent enough inspections to ensure the tanks’ compliance with program requirements. Moreover, most states and EPA lack authority to use the most effective enforcement tools and many state officials acknowledged that additional enforcement tools and resources were needed to ensure tank compliance. EPA has the opportunity to correct these limitations within its own regions and to help states correct them through its new tank program initiatives. However, the agency has yet to define many of the implementation details, so it is difficult to determine whether the proposed actions will be sufficient to ensure more inspection coverage and more effective enforcement, especially within the states. The Congress has an opportunity to help alleviate the states’ resource shortages by providing additional funding for inspections and enforcement or more flexibility to use existing funds to improve these activities. To better ensure that underground storage tanks meet federal equipment, operations, and maintenance requirements to prevent leaks and contamination that pose threats to public health, we are making four recommendations to the Administrator, EPA. First, we recommend that EPA address the remaining non-upgraded tanks by working with the states to (1) review available information and determine those empty or inactive tanks that pose the greatest potential health and environmental risks, 2) set up time tables for the owners, states, or EPA to remove or close these tanks in accordance with federal procedures, and (3) take enforcement actions against owners and operators who continue to operate tanks without the required equipment. Second, we recommend that EPA supplement the agency’s more general training support, such as providing manuals and materials, by having each region work with each of the states in its jurisdiction to determine specific training needs and tailored ways to meet them. Third, we recommend that EPA negotiate with each state to reach a minimum frequency for physical inspections of all its tanks. Periodic physical inspections of all tanks will provide states better data on non- compliant tanks, and that, in turn, will help states better enforce federal requirements. Fourth, we recommend that EPA present to the Congress an estimate of the total additional resources the agency and states need to conduct the training, inspection, and enforcement actions necessary to ensure tank compliance with federal requirements. EPA can base the estimate on the information regions obtain from their annual state reviews and grant negotiations. The Congress may consider taking the following actions to strengthen EPA’s and the states’ ability to inspect tanks and enforce federal requirements. First, the Congress may want to increase the resources available to the UST program and base the amount of the increase on a consideration of the Administrator’s estimate of additional resources needed. One way to do this would be to increase the amount of funds the Congress provides from the trust fund and to authorize states to spend a limited portion of these monies on training, inspection, and enforcement activities to detect and prevent leaks, as long as this does not interfere with tank cleanup progress. Second, the Congress may want to (1) authorize EPA to establish a federal requirement for the physical inspections of all tanks on a periodic basis, (2) authorize EPA to prohibit the delivery of fuel to tanks that do not comply with federal requirements, and (3) establish a federal requirement that states have authority to similarly prohibit fuel deliveries. We provided a draft of this report to EPA for review and comment. We subsequently met with the Deputy Director and staff of the Office of Underground Storage Tanks who generally agreed with our conclusions and that our recommendations had merit. The agency noted that implementation of the recommendations would depend on a variety of factors, including the willingness of state legislatures to grant the state tank programs the necessary authorities and support. In terms of obtaining additional enforcement tools, EPA agrees that prohibiting the delivery of fuel to non-compliant tanks can be a valuable and effective enforcement tool. The agency does not believe that it currently has the authority to require those state programs that operate under their own laws to incorporate this tool. The agency was also reluctant to make the process of awarding state grants too dependent on the states meeting additional federal requirements, such as minimum frequencies of inspections, because this could seriously jeopardize some states' ability to qualify for grants, thus taking critical resources from these programs. EPA noted that it has recently begun an initiative to try to obtain more complete data from all of the states on, among other things, tank compliance with federal requirements. The agency is establishing compliance performance measures and asking states to provide data on their performance against these measures in their mid-year program reports to EPA, the first of which are due by the end of May 2001. The agency also suggested a number of technical changes that we incorporated. In addition to the state survey and work in the EPA regions, we (1) reviewed key tank studies and reports published by EPA, local governments, industry, and private organizations, (2) reviewed available EPA and state data on compliance rates, inspections, and enforcement actions, and (3) obtained the views of EPA’s tank program managers and key environmental association and industry officials. We conducted our work between June 2000 and April 2001 in accordance with generally accepted government auditing standards. Unless you announce its contents earlier, we plan no further distribution of this report until 3 days after the date of this letter. At that time, we will send copies of the report to appropriate congressional committees and interested Members of Congress. We will also send copies of this report to the Honorable Christine Todd Whitman, Administrator, EPA, and the Honorable Mitchell E. Daniels, Jr., Director, Office of Management and Budget. In addition, we will make copies available to others on request. If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key contributors to this report were Jim Donaghy, Eileen Larence, Gerald Laudermilk, Ingrid Jaeger, and Fran Featherston. | The states and the Environmental Protection Agency (EPA) cannot ensure that all active underground storage tanks have the required leak-, spill-, and overfill-protection equipment installed, nor can they guarantee that the installed equipment is being properly operated and maintained. Although the states and EPA regions focus most of their limited resources on monitoring active tanks, empty or inactive tanks can also potentially contaminate soil and groundwater. Half of the states have not physically inspected all of their tanks, and several others have not done inspections often enough to ensure the tanks' safety. Moreover, most states and EPA lack authority to use the most effective enforcement tools, and many state officials acknowledge that additional enforcement tools and resources were needed to ensure tank safety. EPA has the opportunity to correct these limitations within its own regions and to help states correct them through its new tank program initiatives. However, the agency has yet to define many of the implementation details, so it is difficult to determine whether the proposed actions will ensure more inspection coverage and more effective enforcement, especially within the states. Congress could help alleviate the states' resource shortages by providing additional funding for inspections and enforcement or greater flexibility to use existing funds to improve these activities. |
The 8(a) program, administered by SBA’s Office of Minority Enterprise Development, is one of the federal government’s primary vehicles for developing small businesses that are owned by minorities and other socially and economically disadvantaged individuals. Firms that enter the program are eligible to receive contracts that federal agencies designate as 8(a) contracts without competition from firms outside the program. During fiscal year 1995, 6,002 firms participated in the 8(a) program. SBA data show that during fiscal year 1995, 6,625 new contracts and 25,199 contract modifications, totaling about $5.82 billion were awarded to 8(a) firms. To be eligible for the 8(a) program, a firm must be a small business that is at least 51-percent owned and controlled by one or more socially and economically disadvantaged persons. A business is small if it meets the SBA standard for size established for its particular industry. Members of certain ethnic groups, such as black and hispanic Americans, are presumed to be socially disadvantaged. To be economically disadvantaged as well, socially disadvantaged individuals cannot have personal net worth (excluding equity in a personal residence and ownership in the firms) exceeding $250,000. In addition, the firm must be an eligible business and possess a reasonable prospect for success in the private sector. Firms can participate in the 8(a) program for a maximum of 9 years. The Business Opportunity Development Reform Act of 1988 marked the third major effort by the Congress to improve SBA’s administration of the 8(a) program and to emphasize its business development aspects. The legislation affirmed that the measure of success for the 8(a) program would be the number of firms that leave the program without being unreasonably reliant on 8(a) contracts and that are able to compete on an equal basis in the mainstream of the American economy. Over the years, reports by GAO, SBA’s Inspector General, and others have identified continuing problems with SBA’s administration of the program and/or with the program’s ability to develop firms that could successfully compete in the marketplace after leaving the program. To help develop firms and better prepare them to compete in the commercial marketplace after they leave the program, the act requires that 8(a) program contracts be awarded competitively to 8(a) firms when the total contract price, including the estimated value of contract options, exceeds $5 million for manufacturing contracts or $3 million for all other contracts. Of the approximately $3.13 billion in new 8(a) contracts awarded in fiscal year 1995, about $610 million, or 19.5 percent of the total dollar amount, was awarded competitively. In comparison, in fiscal year 1994, about $380 million, or 18.5 percent of the $2.06 billion in new 8(a) contracts, was awarded competitively. Between fiscal years 1991 and 1995, the total dollar value of new 8(a) contract awards increased by about 96 percent, while the value of contracts awarded competitively increased by about 190 percent. Appendix I shows the number and the dollar value of 8(a) contracts awarded competitively in fiscal years 1991 through 1995. SBA’s June 1995 revisions to the 8(a) program regulations closed a major loophole involving the competitive award of indefinite delivery, indefinite quantity (IDIQ) contracts. IDIQ contracts are used when an agency does not know the precise quantity of supplies or services to be provided under a contract. As the agency identifies a specific need for goods or services, it modifies the IDIQ contract to reflect the actual costs associated with providing that quantity of goods or services, up to the maximum amount specified in the contract. Before the June 1995 revisions, SBA’s 8(a) program regulations required that an agency, when determining whether an IDIQ contract should be offered on a competitive or noncompetitive (sole-source) basis, consider only the guaranteed minimum value of the contract rather than the estimated total contract amount. According to SBA, IDIQ contracts were often improperly used simply to avoid the need for competition, and wide differences often occurred between the guaranteed minimum values of IDIQ contracts and the amount eventually spent by agencies under the contracts. To avoid this problem, the June 1995 regulations require that for all 8(a) program contracts SBA accepts after August 7, 1995, including IDIQ contracts, the procuring agency must consider the total estimated value of the contract, including the value of contract options, when determining whether the contract should be awarded competitively. The concentration of 8(a) contract dollars among relatively few firms is a long-standing condition that continued in fiscal year 1995. SBA data show that in fiscal year 1995, 50 firms—less than 1 percent of the 6,002 total firms in the 8(a) program during the fiscal year—received about $1.46 billion, or about 25 percent of the $5.82 billion in total 8(a) contracts awarded. In fiscal year 1994, 50 firms—about 1 percent of the 5,155 firms then in the program—also received about 25 percent of the $4.37 billion in total 8(a) contract dollars awarded during the fiscal year. Twelve firms that were among the top 50 in fiscal year 1995 were also among the top 50 firms in the previous year. Furthermore, 22 firms that were among the top 50 in fiscal year 1994 were also among the top 50 firms in fiscal year 1993. Appendix II contains a table that shows the range of total contracts dollars awarded to the top 50 firms for fiscal years 1992 through 1995. While 8(a) contract dollars continue to be concentrated in a relatively few firms, many economically disadvantaged firms do not receive any 8(a) program contracts. SBA data show that of the 6,002 firms in the program during fiscal year 1995, 3,267 firms, about 54 percent, did not receive any program contracts during the fiscal year. In comparison, in fiscal year 1994, 56 percent of the 8(a) firms did not receive any program contracts. As we testified in April 1995, a key reason for the continuing concentration of contract dollars among a relatively few firms is the conflicting objectives confronting procuring officials, according to SBA officials. In SBA’s view, the primary objective of procuring officials is to accomplish their agency’s mission at a reasonable cost; for these officials, the 8(a) program’s business development objectives are secondary. At the same time, the agency’s procurement goals for the 8(a) program are stated in terms of the dollar value of contracts awarded. According to SBA, the easiest way for agencies to meet these goals is to award a few large contracts to a few firms, preferably firms with which the agencies have had experience and whose capabilities are known. In addition, according to SBA the concentration of firms receiving 8(a) contracts is no different than the concentration among firms that occurs in the normal course of federal procurement. However, while this may be true for federal procurement overall, the Congress in amending the 8(a) program in 1988 sought to increase the number of competitive small businesses owned and controlled by socially and economically disadvantaged individuals through the fair and equitable distribution of federal contracting opportunities. In 1995, SBA made several efforts to increase the award of 8(a) contracts to firms that had never received contracts. SBA required its district offices to develop action plans to increase the number of 8(a) contract opportunities offered to a greater percentage of 8(a) firms. These action plans were to include specific initiatives for marketing the program to federal procurement offices in their jurisdictions. In addition, the Departments of Defense and Veterans Affairs agreed to give special emphasis to 8(a) firms that had never received contracts. Although SBA has not assessed the impact of these activities on increasing contract awards, SBA officials believe that these steps have helped in getting 8(a) contracts to firms that had never received them. At the same time, in the view of SBA officials, the fact that some firms do not receive any 8(a) contracts may not be a problem because not all firms enter the program to receive 8(a) contracts. Rather, some firms, according to SBA officials, seek 8(a) certification in order to qualify as disadvantaged firms for other federal programs, such as the highway construction program funded by the Department of Transportation, or state and city programs that set aside contracts for disadvantaged firms. To increase the program’s emphasis on business development and the viability of firms leaving the program, the act directed SBA to establish target levels of non-8(a) business for firms during their last 5 years in the program. The non-8(a) target levels increase during each of the 5 years, from a minimum of 15 percent of a firm’s total contract dollars during its fifth year to a minimum of 55 percent in the firm’s ninth or final program year. SBA field offices, as part of their annual reviews of firms, are responsible for determining whether firms achieve these target levels. In April 1995, we testified that SBA data showed that while 72 percent of the firms in their fifth year that had 8(a) sales met or exceeded the minimum 15-percent non-8(a) target established for the fifth year, only 37 percent of the firms in their ninth or final program year that had 8(a) sales met or exceeded the minimum 55-percent target established for that year. The data also showed that of the 1,038 firms in the fifth through the ninth year of their program term that had 8(a) sales, 37 percent did not meet the minimum targets. SBA data for fiscal year 1995 showed that of the 8(a) firms in their fifth year that had 8(a) sales during the fiscal year, about 85 percent met or exceeded the minimum non-8(a) business target of 15 percent established for that year. In comparison, of the 8(a) firms in their ninth or final program year that had 8(a) sales during the fiscal year, 58 percent met or exceeded the minimum non-8(a) business target of 55 percent established for that year. Appendix III shows the extent to which firms met their target levels for fiscal year 1995. In a September 1995 report, SBA’s Inspector General (IG) discussed SBA’s problems in enforcing the business-mix requirements. According to the IG, over one-third of the 8(a) firms in the last 5 years of their program term did not meet the business-mix requirements, yet they accounted for about $1.4 billion (63 percent) of total 8(a) contract revenues of all firms subject to the requirements. The IG noted that SBA’s regulations identify a range of remedial actions that the agency can take to improve firms’ compliance with the requirements, including reducing or eliminating sole-source 8(a) contract awards, and that SBA personnel have the discretion of selecting which remedial actions to impose. The IG found, however, that SBA personnel often took minimal or no action when firms did not meet the requirements, and firms continued to obtain 8(a) contracts even though they were not complying with the regulations to develop non-8(a) business. To address this problem, the IG recommended that SBA limit the dollar value of new 8(a) contracts awarded to firms that do not meet their non-8(a) business target levels. SBA concurred with this recommendation and in March 1996 stated that it was exploring two options—eliminating all new 8(a) contracts to firms that do not meet their non-8(a) business levels, or placing a limit on the dollar value of 8(a) contracts awarded to such firms. In September 1996, an SBA official told us that the agency could not propose regulations implementing such restrictions until the Department of Justice finalizes its regulations regarding federal affirmative action programs. The IG’s September 1995 report also concluded that SBA could not measure the success of the 8(a) program as defined by the Congress, namely the number of firms that leave the program without being unreasonably reliant on 8(a) contracts and that are able to compete on an equal basis in the mainstream of the American economy. The IG reported that SBA’s procedures did not provide for compiling and reporting data on the (1) number of companies that met their business-mix requirements while in the program and (2) companies that remained in business after they no longer had 8(a) revenues. As a result, the IG concluded that neither SBA nor the Congress could determine whether the 8(a) program was accomplishing its intended purpose or whether any changes to the program were needed. To address these problems, the IG recommended that SBA annually compile data on the numbers of firms that leave the 8(a) program that are unreasonably reliant on 8(a) contracts and those that are not. The IG also recommended that SBA (1) track former 8(a) firms after they have completed all 8(a) contracts to determine whether they are still in business and (2) annually determine how many of the firms that are still in business were unreasonably reliant on 8(a) contracts when they left the program. With regard to this recommendation, the IG noted that responses to a questionnaire it sent to former 8(a) firms that had been out of the program for approximately 1.5 to 5.5 years showed that many firms still had substantial revenues from carryover 8(a)contracts. For example, 23 percent of the respondents reported that more than 50 percent of their total revenues were from 8(a) contracts. In March 1996, SBA stated that it would begin to annually compile data on the number of firms leaving the 8(a) program that met or did not meet the business-mix requirements and, as a result, were or were not unreasonably reliant on 8(a) program contracts. SBA also stated that it was currently tracking 8(a) graduates to determine their current status and levels of revenues. Finally, SBA announced that it was developing a more thorough survey to track graduates and was considering using external data sources, such as Dun and Bradstreet, for this information. As of September 1996, SBA had not developed this survey. According to an SBA official, work on this project has been delayed by several factors, including the furloughs of SBA staff and the turnover of a top SBA official. SBA’s regulations provide that any firm that (1) substantially achieves its business development goals and objectives before completing its program term and (2) has demonstrated the ability to compete in the marketplace without 8(a) program assistance may be graduated from the 8(a) program. According to the regulations, factors SBA is to consider in deciding whether to graduate a firm include the firm’s sales, net worth, working capital, overall profitability, access to credit and capital, and management capacity and capability. SBA may also consider whether the firm’s business and financial profile compares positively with the profiles of non-8(a) firms in the same area or a similar line of business. A determination of whether a firm should be graduated is a part of SBA’s annual review of each firm. A firm has the option to appeal SBA’s determination that it graduate from the 8(a) program. After graduating, a firm is no longer eligible to receive 8(a) contracts. According to SBA data, during fiscal year 1995, SBA graduated three firms from the program—the first graduations in the program’s history, according to SBA officials. The data also show that during fiscal year 1995, SBA terminated another 160 firms from the program for various reasons, including failure to comply with program requirements, and 250 more firms left the program because their program terms had expired during the fiscal year. According to SBA officials, SBA usually does not require that a firm graduate because of anticipated appeals and the difficulty in enforcing the graduation requirement, especially if the firm disagrees with SBA’s decision. SBA’s IG has identified companies that should have been, but were not, graduated from the 8(a) program. For example, the IG reported in September 1994 that its examination of 50 of the larger 8(a) firms found that most of these firms were larger and more profitable than firms not in the program. Specifically, the IG’s review showed that 32 of the 50 8(a) firms exceeded their respective industries’ averages for the following five performance factors: business assets, revenues, gross profits, working capital, and net worth. The IG concluded that allowing such firms to continue in the program deprived other truly economically disadvantaged firms of 8(a) assistance and understated the 8(a) program’s overall success because firms that had demonstrated success were not graduated. In May 1995, as a result of the IG’s review, SBA established requirements for its field staff to (1) compare annually five financial performance factors of 8(a) firms with the industry averages for companies in the same line of business and (2) consider graduation from the program for any 8(a) firm that meets or exceeds three of the averages. However, a February 1996 evaluation by SBA of annual reviews conducted by SBA field staff of 8(a) firms raises questions about the ability of the field staff to conduct such analysis. SBA noted that the staffs’ financial analyses are very poor, staff members do not fully understand the concepts of economic disadvantage, financial condition of the firm, and access to capital, and the annual reviews contained few comparisons of the condition of 8(a) firms with similar businesses. To address this problem, SBA recommended that field staff receive training in financial analysis and guidance on the concept of continuing economic disadvantage. As of September 1996, SBA planned to provide this training during a national meeting planned for October or November 1996. I would now like to provide some overall statistics regarding SBA’s disposition of applications made to the 8(a) program during fiscal year 1995, and the amount of management and technical assistance provided during the year. SBA data show that during fiscal year 1995, SBA processed 1,306 8(a) program applications. SBA approved 696 of the applications and initially denied the remaining 610. Among the reasons cited for denying the 610 applications were the following: The firm lacked potential for success (367 applications). The socially and economically disadvantaged individual did not own or control the firm (364 applications). The individual who owned and controlled the firm was not socially or economically disadvantaged (263 applications). The firm was a type of business that is not eligible to participate in the program (78 applications). Of the 610 applications that SBA initially denied, 323 were reconsidered and 189 were subsequently approved, bringing to 885 the total number of applications approved during fiscal year 1995. In comparison, SBA ultimately approved 1,107 of the 1,536 applications it processed in fiscal year 1994, and 540 of the 819 applications it processed in fiscal year 1993. As small businesses, 8(a) firms are eligible to receive management and technical assistance from various sources to aid their development. SBA’s primary source of such assistance has been its 7(j) program. Authorized by section 7(j) of the Small Business Act, as amended, the 7(j) program provides seminars and individual assistance to 8(a) firms. The 8(a) firms are also eligible to receive assistance from SBA’s Executive Education Program, which is designed to provide the owners/managers of 8(a) firms with executive development training at a university. SBA may also provide 7(j) assistance to socially and economically disadvantaged individuals whose firms are not in the 8(a) program, firms located in areas of high unemployment, and firms owned by low-income individuals. In fiscal year 1995, SBA spent about $7.6 million for 7(j) assistance to 4,604 individuals. This figure included individuals from 1,785 8(a) firms that received an aggregate of 9,452 days of assistance, and 190 firms that received executive training under SBA’s Executive Education Program. In fiscal year 1996, SBA changed the focus of the 7(j) program to provide only executive-level training. The individual assistance and seminar training previously provided will be provided by SBA’s Small Business Development Centers and Service Corps of Retired Executives. This concludes my prepared statement. I would be glad to respond to any questions that you or the Members of the Committee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Small Business Administration's (SBA) 8(a) Minority Business Development Program, focusing on SBA progress in: (1) requiring the competitive award of high-value 8(a) contracts; (2) distributing 8(a) contracts to a larger number of firms; (3) ensuring that firms rely less on 8(a) contracts as they move through the 8(a) program; and (4) graduating from the program firms that have demonstrated that they can survive without 8(a) contracts. GAO noted that: (1) while the dollar amount of 8(a) contracts awarded competitively during fiscal year (FY) 1995 increased over FY 1994, the percentage of contract dollars awarded competitively remained at about 19 percent; (2) SBA revisions closed a major loophole that allowed the use of indefinite delivery, indefinite quantity contracts to avoid competition; (3) although SBA made several efforts to more widely distribute 8(a) contracts, the concentration of 8(a) program dollars to relatively few firms continued in FY 1995; (4) during FY 1995, a larger percentage of 8(a) firms in their final year of the program achieved the required level of non-8(a) business than was reported for previous years; (5) during FY 1995, SBA graduated 3 firms from the 8(a) program, the first graduations in the program's history, and terminated another 160 firms for various reasons, and 250 firms left the program; (6) during FY 1995, SBA approved 885 8(a) applications; and (7) SBA provided management and technical assistance to 8(a) firms through its 7(j) program. |
The SSI program was established in 1972 under Title XVI of the Social Security Act and provides payments to low-income aged, blind, and disabled persons—both adults and children—who meet eligibility requirements. SSA administers the SSI program through more than 1,200 field offices around the country where staff process applications for benefits, verify financial eligibility, and compute benefit amounts. Following SSA’s initial review, state disability determination services offices assess applicants’ medical eligibility for SSI. In order to be eligible for SSI benefits based on a disability, an individual must have a medically determinable physical or mental impairment that (1) prevents the individual from engaging in any substantial gainful activity, and (2) has lasted or is expected to last at least 1 year or result in death. After a person is found to be eligible for SSI and begins receiving benefits, SSA conducts periodic redeterminations of financial eligibility and continuing disability reviews to ensure that only recipients who remain medically eligible continue to receive SSI benefits. To be financially eligible for SSI, individuals must meet program income and resource requirements. Specifically, in 2016, an individual recipient’s or married couple recipient’s monthly countable income must be less than the maximum monthly federal SSI benefit rate of $733 per month for an individual and $1,100 per month for a married couple. Generally, SSI recipients are eligible to receive up to a maximum benefit rate, with married couple recipients eligible for a lower maximum benefit rate approximately equal to 75 percent of the benefit rate for nonmarried individuals. Further, an individual’s or couple’s countable resources (such as financial institution accounts) must be $2,000 or less for individuals and $3,000 or less for married couple recipients in 2016. Although SSI is a benefit for an individual, SSA generally considers income of certain other people in the household when determining the amount of an individual’s SSI benefit to reflect a family member’s responsibility for certain other family members. For example, a parent’s or spouse’s income is generally included as part of the income of a child or spouse, respectively, living in the same household. Therefore, if the SSI recipient lives with a spouse who does not receive SSI benefits, SSA considers the income of that spouse when determining the recipient’s SSI benefit amount, potentially reducing the benefit payment. Similarly, food and shelter that an individual receives from others, referred to as in-kind support and maintenance (ISM), is also considered by SSA when determining an individual’s benefit amount. In situations where the householder is providing both food and shelter to an individual, SSA decreases the recipient’s SSI benefit by an amount equal to one-third of the federal benefit rate to account for ISM. In all other situations in which an individual is receiving ISM, SSA counts the presumed value of the food or shelter-related items received by the SSI recipient in-kind (including such assistance provided by individuals who do not live with the recipient) as unearned income, unless the recipient demonstrates that the actual value is less than the presumed value, in which case SSA uses the actual value. However, the amount that the recipient’s SSI benefit may be reduced in this manner is limited to an amount equal to one-third of the applicable benefit rate plus $20. SSA operates two separate, but linked, systems to update and store SSI recipient information and process benefits: the Supplemental Security Record (SSR) and Modernized Supplemental Security Income Claims Systems (MSSICS). Field office staff use SSR to calculate benefits, including any reductions to benefits from ISM, based on information retrieved from MSSICS. MSSICS, an online data collection system, is used by field office staff to collect recipient information. MSSICS houses data such as whether the individual lives alone, owns a house, has certain kinds of expenses, and what, if any, financial support the person receives from others. MSSICS stores information like a paper file. When SSA staff need to update records, they can open the recipient’s file and make changes electronically. Overall, SSA’s database systems are 40 years old, and the agency plans to expand their capabilities through a multiple-year initiative beginning in fiscal year 2017. We previously reported that SSI is one of over 80 federal programs that target low-income individuals, families, and communities to help them meet basic needs or provide other assistance. We reported that financial and nonfinancial eligibility requirements are established for each program, with financial requirements generally limiting eligibility to individuals, families, or households with income and assets below defined levels. In some circumstances, federal law extends automatic eligibility for one program for low-income people based on an applicant’s participation in another program. Such provisions can simplify the application and eligibility determination process for applicants and reduce the time program administrators spend verifying applicants’ income and resources. In most states, SSI recipients are automatically eligible for Medicaid health insurance and, if they live alone or in households in which all members receive SSI benefits, are automatically eligible for the Supplemental Nutrition Assistance Program (SNAP). Medicaid is a joint federal-state program that finances health insurance coverage for certain low-income individuals. An estimated 65 million low-income individuals were covered by Medicaid in fiscal year 2014, and the Centers for Medicare and Medicaid Services report that enrollment has been growing under the Patient Protection and Affordable Care Act. Medicaid allows significant flexibility for states to design and implement their programs; however, each state Medicaid program, by federal law, must cover certain categories of individuals and provide a broad array of benefits. Medicaid benefits are not adjusted based on an eligible individual’s income level. SNAP is intended to help low-income households obtain a better diet by providing benefits to purchase food. SNAP is the largest of 15 domestic food and nutrition assistance programs overseen by the U.S. Department of Agriculture’s Food and Nutrition Service. States administer the program by determining whether households meet the program’s eligibility requirements, calculating monthly benefits for qualified households, and issuing benefits to them. A household generally includes everyone who lives together and purchases and prepares meals together. An SSI recipient is generally automatically eligible to receive SNAP benefits, if they live alone or in households in which all members receive SSI benefits, and an individual’s monthly SSI benefit is counted as income when determining the individual’s SNAP benefits. In contrast, for the purposes of SSI benefit determination, the amount of SNAP benefits an SSI recipient receives is excluded. Medicaid and SNAP are not the only other federal assistance programs available to aged, blind, or disabled individuals with limited means. For example, monthly cash assistance is available to qualifying low-income families with children through the Temporary Assistance for Needy Families (TANF) block grant, administered by the U.S. Department of Health and Human Services (HHS). TANF provides federal funding to states, which states are required to supplement with their own funds, to provide cash assistance and a variety of other benefits and services to meet the needs of low-income families with children. In addition to eligibility requirements related to the target population, TANF includes both work requirements and requirements related to time limits on individuals’ receipt of TANF cash assistance benefits. While there is no federal prohibition to simultaneous SSI and TANF eligibility, most states prohibit payment of TANF benefits to SSI recipients, according to HHS. If an SSI recipient does receive TANF cash assistance benefits, that person’s benefit is counted dollar for dollar as income during SSI eligibility and benefit amount determinations. In May 2013, an estimated 15 percent of all households with SSI recipients included more than one SSI recipient (1.1 million households), according to our analysis of matched administrative and survey data. Specifically, households with married couple recipients represented an estimated 1.2 percent of all SSI recipient households; while 13.8 percent of SSI households were comprised of nonmarried multiple recipients (see fig. 1). Households with nonmarried multiple recipients include combinations of related or unrelated recipients living together, such as parents and children, siblings, or roommates. The vast majority of multiple recipient households reported having a one-family household (an estimated 86.7 percent or 941,000 households), with “family” defined as a group of two or more persons related by birth, marriage, or adoption who reside together. Based on our analysis of households with SSI recipients, we were unable to detect any changes in the proportions of one recipient and multiple recipient households, respectively, from 2009 to 2013. A vast majority of multiple recipient households had two SSI recipients (see fig. 2). Specifically, an estimated 953,000 of the 1.1 million multiple recipient households in May 2013 included two recipients, while an estimated 131,000 households included three or more recipients. SSI recipients living in multiple recipient households often shared their households with other individuals who did not receive SSI benefits (non- recipients). Almost two-thirds of multiple recipient households included at least one non-recipient (see fig. 3) and, as previously noted, most multiple recipient households reported being members of one family. As such, multiple recipient households may include a parent and child who both receive SSI benefits along with another parent who does not receive benefits, for example. An estimated 695,000 of 1.1 million multiple recipient households included at least one working-age adult recipient in May 2013 (see fig. 4). The most common recipient groupings in multiple recipient households were two or more working-age adult recipients or two or more elderly recipients. It was less common for multiple recipient households to have multiple generations of SSI recipients present, such as a combination of working-age adult recipients and child recipients, or working-age adult and elderly recipients. Although representatives from some stakeholder groups and staff we interviewed at all five SSA field offices noted that, in their experience, multiple recipient households commonly included children, we found that an estimated 69.5 percent of multiple recipient households in May 2013 had no child recipients present (see fig. 5). For multiple recipient households with SSI recipient children in May 2013, most included only one child recipient, and it was rare for these households to have three or more child recipients. Although SSA reports that a slightly greater percentage of SSI recipients were female, according to our analysis, a slightly greater percentage of SSI recipients in multiple recipient households were male in May 2013. Specifically, SSA reported that 53.4 percent of all SSI recipients were female in December 2013, and we found that 54.0 percent of SSI recipients in multiple recipient households were male in May 2013. This may be related to the fact that child SSI recipients were twice as likely to be male, according to SSA, and child recipients made up a slightly greater proportion of recipients in multiple recipient households than in the SSI recipient population as a whole, according to our analysis. The majority of multiple recipient households—an estimated 87.9 percent of which had two SSI recipients—reported no earned income and some unearned income in May 2013. Further, the percentage of households that reported earned income and the average amount of earned income per household were similar across one recipient and multiple recipient households (see table 1). In contrast, although the majority of both one and multiple recipient households reported receiving unearned income, the average amount of unearned income reported by multiple recipient households was greater than that reported by one recipient households. According to staff from SSA headquarters and our selected field offices, as well as disability rights advocates, and researchers, SSI recipients may make living arrangement decisions for various reasons. These may include family relationships and the role of genetics in the development of similar health conditions among family members. Married couples, parents and children, and extended families often share households because they are related. Further, some researchers we spoke with suggested that shared genetic conditions among parents or siblings could result in multiple members of the same household having the same disability, or a disability on the same illness spectrum. The potential network effect resulting from individuals living in close proximity and sharing information was another factor cited by groups we spoke with that may increase the likelihood of SSI recipients living together. Network effects potentially reduce perceived barriers to applying for benefits for individuals who may be eligible, and could increase the prevalence of multiple recipient households. Specifically, SSA field office staff and representatives of a disability rights advocate group we spoke with described word-of-mouth communication among potentially eligible individuals as one way that applicants learn about the SSI program. According to one researcher we spoke to, some applicants may hear from others how to navigate the application and appeals process for SSI benefits, thus increasing their likelihood of applying. The supportive care that comes from living with others may also contribute to SSI recipients choosing to live together. According to disability advocates we spoke to, SSI recipients may group themselves into a community to increase connectedness, decrease isolation, and receive supportive care when needed. In addition, one researcher told us that SSI recipients might also need assistance coordinating care or arranging appointments, and SSI recipients with different impairments may fulfill complimentary functions for other household members. A range of the stakeholders we spoke to, including SSA field office staff, disability advocates, and researchers, stated that economic factors may also contribute to the living arrangement decisions of SSI recipients. Specifically, according to these groups, SSI recipients may choose to live together in order to pool resources to share rent and other household expenses such as utilities or food. Additionally, current fair market rent levels often exceed SSI benefit rates, research shows. For example, according to one study, the national average fair market rent for one bedroom rental units was $780 in 2014, and for studio/efficiency rental units was $674 in 2014, or about 104 percent and 90 percent, respectively, of the maximum monthly SSI benefit payment in that year. In addition, SSA headquarters and field office staff, disability rights advocates, and researchers, with whom we spoke, stated that the recession may have exacerbated the economic factors that contribute to living arrangement decisions for SSI recipients. However, one researcher we spoke with noted that the effects of the recession varied by state. According to our analysis of matched administrative and survey data, the rate of multiple SSI recipient households with two families present decreased from an estimated 26 percent in 2010 to an estimated 10 percent in 2013. This suggests that the 2007 to 2009 recession may have played a role in the family composition of households, which is consistent with other research that has found low-income people tend to combine households during recessions. Other factors related to the location and features of housing may influence SSI recipients’ living arrangements, according to the groups with whom we spoke. In particular, these factors may contribute to a greater prevalence of multiple SSI recipient households in certain neighborhoods. For example, location-related factors noted by those we spoke with included proximity to accessible infrastructure and public systems such as transportation and schools. In addition, SSI recipients may need to live in housing units with universal accessibility features such as no-step entry, single-floor living, lever-style door handles, accessible electrical controls, and extra-wide doors and hallways. However, one study found that in 2011 less than 1 percent of U.S. rental housing units—roughly 365,800 units—included all five of these accessibility features. In May 2013, the estimated 15 percent of all SSI households that had multiple recipients received an estimated 28.6 percent of all SSI benefits, or approximately $1.2 billion, according to our analysis of matched administrative and survey data. (See fig. 6.) Because the total amount of SSI benefits received by a household includes benefits for all recipient residents, households with multiple recipients received higher monthly average SSI benefit payments (an estimated $1,131) compared to households with one recipient (an estimated $507). Marital status was also associated with different household benefit amounts. Households with nonmarried multiple recipients received a higher estimated average monthly benefit payment than married recipient households (see table 2). This is consistent with federal statute which stipulates a lower maximum benefit rate for married couple recipients, and those rates were $1,066 per couple or $533 per recipient in 2013. In comparison, all other recipients were not subject to this reduction and were eligible to receive up to $710 in 2013. Households typically received SSI benefits close to the maximum benefit for which their recipients were eligible. For example, in May 2013, monthly benefit amounts for most multiple recipient households were over $1,000, while monthly benefit amounts for most households with one recipient were between $500 and $999. (See fig.7) These findings show a concentration of households received benefits in the range of SSA’s 2013 maximum benefit rates for individuals and married couple recipients. These data on benefit amounts for households with one or multiple recipients are also consistent with our finding that an estimated 87.9 percent (953,000) of multiple recipient households had two SSI recipients in May 2013. Child SSI recipients received the highest estimated average monthly SSI benefit amounts, regardless of whether they were the only recipient in a household or lived in a multiple recipient household (see fig. 8). Elderly SSI recipients received the lowest estimated average monthly benefit amounts. According to SSA officials, children receive higher SSI benefit amounts because they are less likely to have other sources of countable income that would reduce their benefits. According to SSA’s 2013 SSI Annual Statistical Supplement and Report, about 28 percent of all SSI recipients age 17 or younger had some other countable income, compared to about 43 percent of adults ages 18 to 64, and 69 percent of recipients age 65 or older. Further, about two-thirds of all child recipients lived with one parent, and almost half of those parents had no other countable income. Since the 1990s, members of Congress, SSA officials, and some advocacy groups have discussed alternative benefit structures for individuals living in multiple recipient households. Based on our interviews with SSA headquarters and field office staff, researchers, and representatives of advocacy groups, these previously considered alternatives generally involved either eliminating the benefit reduction for married recipients—so married recipients would have the same maximum benefit rate as individual recipients—or applying a similar reduction to other multiple recipient households. Although these alternatives have not been fully studied to determine the effects they may have on SSI recipients or SSA’s administration of the program, there is some information available on their potential effects on recipients and the program. Eliminating the benefit reduction for married SSI recipients—so they would have the same maximum benefit rate as individual recipients— would increase benefit equity, simplify administration of the program, and also likely increase benefit costs, according to SSA staff and other groups with whom we spoke and research we reviewed. Because married recipients have a lower maximum benefit rate than nonmarried recipients, most disability advocates and researchers we spoke with said that married recipient households are treated inequitably. Further, according to SSA, the current benefit structure has led to some SSI recipients reporting a change in their marital status to avoid the benefit reduction. Specifically, SSA officials in 3 of the 5 selected field offices said that some SSI recipients, upon learning of the married couple benefit reduction, shortly thereafter return to the SSA office to tell SSA staff they have separated and are no longer living together. According to SSI policy, the benefit reduction no longer applies if the SSI recipients divorce or no longer live in the same household, for example. Eliminating the benefit reduction for married SSI recipient households would also simplify program administration overall, according to SSA headquarters staff, because there would then be one maximum benefit amount that applies to all recipients. However, such a change for married recipients would also likely increase SSI benefit costs. According to a 2003 SSA study, eliminating the benefit reduction policy for married recipient households could increase program costs by more than $900 million annually. Other alternative SSI benefit structures that have been considered focused on reducing the maximum benefit rates for different groups of nonmarried multiple recipient households. For example, the 1995 National Commission on Childhood Disability suggested reducing the maximum SSI benefit rate for households with multiple child SSI recipients. Another alternative described by SSA in 2008 would replace the policy under which an SSI recipient’s benefits are reduced to account for any in-kind support and maintenance they receive with a benefit reduction for all adult recipients living with other adult recipients. The report noted that administering the in-kind support and maintenance policy often requires month-to-month, recipient-by-recipient recomputations based on information that is unverifiable. In addition, we have previously reported that administering the in-kind support and maintenance policy has become increasingly complex and is a primary cause for overpayments. Another suggested alternative included applying a reduced maximum benefit rate to all households with two or more SSI recipients, which SSA examined in 2002. Potential Effects on Benefit and Administrative Costs If the maximum benefit rate for additional multiple SSI recipient households was reduced, SSI benefit costs would likely decrease, according to analyses we reviewed. Although not all of these alternative benefit structures have been analyzed for cost savings, those that have provide some information on potential savings. For example, the Congressional Budget Office estimated a cost savings of approximately $4.6 billion from fiscal years 2013 through 2022 if the benefit reduction for households with multiple SSI children suggested by the 1995 National Commission on Childhood Disability were to be implemented. Further, SSA’s Office of the Inspector General estimated a cost savings of approximately $3 billion for calendar year 2011 if the reduced maximum benefit rate for married SSI recipients was extended to all households with two or more SSI recipients. SSA headquarters officials we spoke with reported that savings in benefit costs resulting from a reduction in the maximum benefit rate for additional multiple recipient households may be tempered by increases in administrative costs; however, SSA has no estimates to help determine any potential effect. SSA staff we spoke with in 3 of the 5 field offices said changing benefits for some SSI recipients also could result in an increase in field office workloads. For example, staff from these three field offices said a change in the maximum benefit rate for some SSI recipients would result in more recipients visiting their field offices, and some added that there would be a need for new training for field office staff and outreach to inform recipients about the change. However, SSA has not previously assessed how field offices may be affected by changes in SSI policy, and therefore the full effects of extending the reduced maximum benefit beyond married SSI recipients on administrative processes and related program costs are unknown. Potential Effects on SSI Recipients Concerning the potential effects on recipients of a reduction in the maximum benefit rate for multiple recipient households, some of the groups we spoke with discussed how such a change may affect recipients’ financial situations, though research on these effects is limited. The reduced maximum benefit rate for married couple SSI recipients is based on the expectation that these couples realize economies of scale, according to previous SSA reports. In other words, married SSI recipients who live together are able to share certain household expenses, thus reducing the overall cost of housing and living expenses for each individual. Consistent with this, some SSA officials and researchers we spoke with told us that some multiple recipient households economize on living expenses, such as rent and food. However, disability advocacy officials from two organizations said that while recipients may share a living space, there may be certain out-of-pocket expenses that cannot be shared, such as medication or specific dietary requirements. While a 2006 report from SSA found that medical expenses for the majority of child SSI recipients were covered by health insurance rather than their SSI benefits, the extent to which multiple recipient households realize economies of scale, and for what purposes recipients in these households use their SSI benefits, have not been studied, according to SSA officials and several researchers. A reduction in the maximum benefit rate for multiple recipient households may lead some SSI recipients to alter their living arrangements, according to groups with whom we spoke. Although the extent to which a benefit reduction leads to such changes has not been studied, as mentioned earlier, SSA field office staff told us that some married SSI recipients attempt to avoid the benefit reduction by telling SSA staff they have separated and are no longer living together. If a reduction in the maximum benefit rate is extended to include other multiple recipient households, affected SSI recipients may similarly take steps to avoid the benefit reduction, according to disability advocates, researchers, and SSA field office staff with whom we spoke. For example, some SSA field office staff said that families living with multiple SSI children may move their children to live with relatives to avoid a reduction in SSI benefits. Potential Effects on Other Federal Programs for Low-Income Households and Individuals Because SSI recipients may be eligible to receive benefits from other federal programs for low-income households and individuals, these programs may be affected if a reduced maximum SSI benefit rate were to be extended to additional multiple recipient households, though the effects would likely vary by program. Federal programs that these households may also receive benefits from include, for example, Medicaid, TANF and SNAP. While the effects of changes in other federal means-tested programs, such as TANF, on SSI have been studied to some extent, the reverse effect of SSI benefit changes on other federal programs has not. However, based on our assessment of relevant laws, regulations, other reports, and data for selected programs, the effects of a reduced SSI maximum benefit rate on other programs would likely vary based on each program’s structure and rules and the extent to which SSI recipients already receive benefits from these other programs. Medicaid, which many SSI recipients concurrently receive, would likely be minimally affected by the extension of the reduced maximum benefit rate to other multiple recipient households, based on our review of relevant program laws, regulations, other reports, and data. In most states, SSI recipients are automatically eligible for Medicaid, and many currently receive Medicaid benefits. For example, according to one SSA study, approximately 80 percent of individuals ages 18 to 64 received Medicaid coverage within a year of being deemed eligible for SSI. Therefore, a reduction in SSI benefits may result in the small proportion of SSI recipients who are not currently enrolled in Medicaid applying for the program and receiving coverage. Further, because Medicaid benefits are adjusted based on eligibility and not on income level, an SSI recipient’s Medicaid benefits would not be affected by a reduction in their SSI benefits so long as the recipient remains eligible for SSI. TANF, which SSI recipients generally do not concurrently receive, would also likely be minimally affected by a reduction in the maximum benefit rate for additional multiple SSI recipient households, based on our review of relevant program laws, regulations, other reports, and recipient data. Although the federal government sets some requirements for TANF, states have broad flexibility to design their TANF programs, and most states do not allow individuals who receive SSI to simultaneously receive TANF monthly cash assistance benefits, according to the Department of Health and Human Services. However, other family members, living in households with SSI recipients, may receive TANF cash assistance benefits. The Department of Health and Human Services reported that about 267,000 child-only TANF families had a parent or adult caretaker who received SSI in fiscal year 2013. In contrast with Medicaid, TANF benefits are generally adjusted based on a family’s income level, and for child-only TANF cases, the income and assets of the parent or adult caretaker is factored in when determining the child’s TANF benefit. Therefore, TANF cash assistance benefits received by family members living in a household with multiple SSI recipients may increase if a family member’s SSI benefit was reduced. However, given that federal funding for TANF is provided through a block grant to states, the amount of federal spending on TANF is not adjusted for changes in cash assistance benefits provided to eligible families. In comparison with Medicaid and TANF, SNAP is more likely to experience an increase in program spending if a reduction in the maximum SSI benefit rate is established for additional multiple recipient households, based on our review of relevant program laws, regulations, other reports, and recipient data. Similar to Medicaid, SSI recipients can be automatically eligible for SNAP. According to a report by USDA, 82 percent of individuals in households with SSI recipients received SNAP benefits in fiscal year 2013. Further, according to SNAP administrative data, about 4.5 million households receiving SNAP benefits included at least one member who also received SSI benefits in fiscal year 2013. For the group of SSI recipients who do not receive SNAP benefits, a reduction in SSI benefits may cause them to apply for these benefits. In addition, because SNAP benefit amounts are adjusted based on household income, a reduction in SSI benefits would likely increase a household’s SNAP benefit, unless the SSI recipient’s household already receives the maximum SNAP benefit amount. According to SNAP administrative data, the average monthly SNAP benefit received by households with SSI as a countable income source was $205 in fiscal year 2013. Further, these data show that 15.4 percent of households with disabled nonelderly individuals received the maximum SNAP benefit that year, compared to 40.7 percent of all SNAP households. Although a reduced maximum SSI benefit rate for additional multiple SSI recipient households may therefore result in increased federal spending on SNAP, federal spending may decrease overall. Specifically, due to the way SNAP benefits are structured, each lost dollar in SSI benefits would represent less than one additional dollar gained in SNAP benefits. SSA’s claims management system, which is comprised of MSSICS and the SSR, is not able to automatically update the claim records for recipients living in multiple recipient households. SSA officials told us the claims management system was designed to manage the claims of, and pay benefits to, individual recipients. When SSA conducts periodic redeterminations of SSI recipient claims, or SSI recipients inform SSA of changes in their income or living arrangements, field office staff said they update recipients’ claims to ensure the correct benefits are paid. However, SSA headquarters and field office staff told us the system does not have the ability to automatically connect and adjust the claim records of individuals living in multiple recipient households. Although changes to one of the SSI recipient’s income or living arrangements in a multiple recipient household may affect another recipient’s claim in that household, SSA headquarters officials stated that staff have to go into each record separately to update each recipient’s benefits. For example, if a mother lives with two of her children who are both SSI recipients, and the mother reports a change in her earned income, SSA’s system does not automatically adjust both children’s benefit amounts to account for the mother’s change in income. Rather, while the system will add the new income information into all relevant claims records, staff need to go into each record separately to process the change. Further, if SSA field office staff do not go into a claim record to process such a change, the system does not alert them to do so. Without the ability to automatically connect and adjust the claim records for individuals living in multiple recipient households whose benefits are inter-related, SSA is at increased risk for improper payments because staff may not adjust benefits for all recipients in a multiple recipient household after a relevant change. Furthermore, SSA staff reported that processing claims for SSI recipients who marry another recipient or separate from another recipient are not possible in the claims management system. Field office staff must process these claims manually, outside of the claims management system, according to SSA headquarters officials and staff from 3 of the 5 field offices with whom we spoke. For these claims, they said field office staff must manually complete forms to gather recipient information, calculate benefits outside the claims management system, and then enter the information into the system. Although SSA officials stated SSA provides training on how to use the forms, staff from 3 of the 5 field offices with whom we spoke said they rely on more seasoned field office employees to demonstrate how to properly complete these forms. Further, staff from 3 of the 5 field offices we spoke with told us that manually processing these married and separating recipient household claims are a common part of their daily work. Although an SSA official told us that improper payments made in married couple claims in fiscal year 2014 were attributed to recipient errors, staff from 3 of the 5 SSA field offices with whom we spoke said processing claims outside of the claims management system is time consuming and error prone. This issue may be exacerbated in the near term due to the Supreme Court ruling recognizing the right of same-sex couples to marry, a concern specifically noted during one of our interviews with field office officials. SSA has no plans to update its claims management system to address issues with processing claims for multiple recipient households, including marrying and separating recipients, although the agency has broadly committed to improving other areas of its technology infrastructure. SSA officials told us that they have not conducted any specific assessments of the effects manual payment processing for multiple recipient household claims has on claim processing errors or improper payments as part of their payment accuracy reporting. SSA officials explained there is no program requirement to have the claims management system connect the records of individuals living in multiple recipient households, and they do not plan to make changes to do so. Yet, SSA has previously stated its commitment to investing in the capacity and modern technologies needed to update its aging and strained IT infrastructure. Furthermore, in its 2017 budget request, SSA stated its data systems are no longer the best solution to administer the agency’s programs, and added that it plans to undertake a larger, multiyear reform effort. According to our Organizational Transformation: A Framework for Assessing and Improving Enterprise Architecture, improving an agency’s enterprise architecture is an essential means to having operations and technology environments maximize institutional mission performance and outcomes. Moreover, Standards for Internal Control in the Federal Government states that agencies should identify and address risks to achieving their objectives, including significant changes to both external and internal conditions, as well as design their information systems to support the completeness, accuracy, and validity of information needed to achieve objectives. The increased opportunities for improper payments resulting from the claims management system’s limitations in updating and processing benefit claims for those living in multiple SSI recipient households is a risk to SSA’s overall goal of strengthening the integrity of SSA’s programs. According to staff at 2 of the 5 field offices with whom we spoke, fully automating the payment process for all claims and electronically connecting the records for multiple recipient households would make processing these claims more efficient and lower the number of improper payments by reducing errors in claims processing. However, SSA has not assessed the risks these systems limitations pose, despite its plans to make changes to its data systems. Absent such an assessment and without upgrades to the claims management system, SSA is missing an opportunity to improve its day-to-day work processes. Further, the agency will likely continue to experience related claim processing errors and improper payments, both under current program policies, as well as in the event related policy changes are implemented in the future. Although SSI provides cash assistance benefits to individuals, it is not surprising that some SSI recipients live together due to family relationships or economic and social factors. Any household with more than one member may potentially experience economies of scale, and when the SSI program was created, it included a lower maximum benefit rate for certain married couple recipients. However, despite the fact that the majority of households with multiple SSI recipients report including members of only one family, few report that they include married couple recipients. This raises questions for some about benefit equity and disincentives to marriage, as well as the ability of program administrators to effectively determine a recipient’s marital status. Although the potential effects of various benefit restructuring options have not been fully studied, our finding that households with multiple SSI recipients receive almost 30 percent of all SSI benefits suggests that changing the benefit structure for all or some of these households may have a significant effect on benefit costs. Further, regardless of whether a change to benefits for households with multiple recipients is made, there are limitations in SSA’s information systems with managing claims for SSI recipients who live with other recipients, which puts the agency at risk. However, absent a risk assessment, SSA lacks information on the impact current systems limitations may have on improper payments. The recent Court ruling recognizing the right of same-sex couples to marry also likely increases opportunities for improper payments to SSI recipients, because of the expected increase in the number of claims SSA staff must process manually due to the system’s constraints in converting claims for individual recipients to married couple recipients. Despite reported plans to upgrade SSA’s aging technology systems, SSA currently does not have plans to address issues related to processing claims for SSI recipients who live with other recipients, leaving the program at risk for improper payments. Should Congress choose to revise benefit structure policy for households with multiple SSI recipients, SSA will be poorly positioned to implement and administer those changes in the future. To ensure the agency has sufficient information about risks to SSI program integrity when making decisions about efforts to address them, we recommend that the Commissioner of the Social Security Administration conduct a risk assessment of the current manual process for connecting and adjusting claim records of SSI recipients who live in households with other SSI recipients, and, as appropriate, take steps to make cost-effective improvements to SSA’s claims management system to address identified risks. We provided a draft of this report to SSA for review and comment. In its written comments, reproduced in appendix III, SSA disagreed with our recommendation stating that current SSI program rules do not support connecting records of unrelated individuals living in multiple recipient households. SSA also noted that it does not have evidence from its fiscal year 2014 payment accuracy reviews that manual processing of married couple multiple recipient household claims led to payment errors. As such, the agency stated that it could not commit resources to address our recommendation at this time, but noted if a legislative proposal is put forth that affects unrelated multiple SSI recipient households, SSA will assess program policy and systems risks as part of its evaluation and planning. However, we continue to believe that the manual processing currently used to connect and adjust claim records of SSI recipients who live in households with other SSI recipients leaves the agency at risk. SSA has acknowledged that it has not assessed the extent to which manual processing leads to payment errors, and the data they provided us on fiscal year 2014 improper payments to married couple recipients does not address the full scope of the issues we identified. Specifically, field office staff reported several instances in which manual processing is used to connect and adjust claims records for multiple recipient households due to system limitations, and indicated that these manual adjustments increase the likelihood of erroneous payments. These manually processed claims are for households with multiple related recipients whose SSI benefits are currently inter-related under program rules, such as multiple child recipients who are siblings or individual recipients who marry another recipient. Without an assessment of the risks associated with the manual processing of these claims, SSA is unable to determine if additional adjustments to its system would be a cost-effective use of its resources. SSA officials also provided technical comments, which we incorporated into the final report, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Commissioner of the Social Security Administration, appropriate congressional committees, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report please contact me at (202) 512-7215 or bertonid@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. To better understand multiple Supplemental Security Income (SSI) recipient households and the potential effects of implementing a change in the amount of benefits received by these households on program administration and other factors, we employed several methods, including: analysis of matched data from Social Security Administration (SSA) Supplemental Security Record (SSR) and U.S. Census Bureau (Bureau) Survey of Income and Program Participation (SIPP) review of relevant program laws, regulations, and other reports for other federal programs for low-income individuals and families interviews with SSA staff. We conducted this performance audit from March 2015 to August 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. To respond to our questions, we obtained and analyzed matched data from the Bureau’s SIPP and SSA’s SSR on the number and characteristics of SSI recipients living with other SSI recipients, and the amounts of benefits received by these recipients. We determined SIPP was the best choice for matching with the SSR after interviewing experts who had worked with this and other similar data sets. According to these experts, SIPP was the best choice for our work because it is updated on a monthly basis, so it is well matched to the SSR data on the SSI program. To describe the living arrangements of SSI recipients, we needed data on both the population of SSI recipients and the characteristics of their households and families. SSA collects detailed data on recipients for the purpose of administering the SSI program. These data primarily included variables related to eligibility, benefit amounts, and beneficiary activities relevant to the program, such as earned and unearned income. SSA does not collect data on recipients’ living arrangements. This makes administrative data incomplete for the purpose of describing household and family composition among recipients. The Bureau’s program of matching administrative and survey data provided these data to supplement SSA’s administrative records. The Bureau matches SSA’s administrative data to SIPP public use files, using a complex algorithm that we describe in more detail below. The matched SIPP files provide detailed information on other people living in SSI recipients’ households, including related family members. Although SIPP data on SSI benefit receipt and amount are subject to measurement error, the survey’s data on households, families, and other social demographic variables were more detailed and reliable than SSA’s administrative sources. In this sense, the matched data benefit from each data source’s strength, and produced more reliable data for our purposes. The target population for our analysis included SSI recipients who do not live in large group housing environments, such as boarding houses or dormitories. The SIPP classifies these environments as “group quarters.” As a result, we analyzed a subpopulation of the matched SIPP respondents who received SSI benefits, according to the SSR, and who did not live in group quarters, according to the SIPP. We analyzed this subpopulation using methods for domain analysis that set analytical weights to zero for sample units that were out of scope. We analyzed two specific series of data from the Bureau and SSA: public- use “core” files from the 2008 SIPP panel and SSR data extracted at equivalent time periods. The 2008 SIPP is a longitudinal survey of civilian, non-institutionalized residents of the United States, with final-stage sampling of housing units. In the first wave, the survey attempted to interview people living in an initial sample of 52,031 eligible housing units. In subsequent waves, the survey attempted to re-interview respondents from the first wave, along with all other people living with them at later waves. The population covered by the SIPP is generally the same as the population eligible for SSI. However, the SIPP may exclude certain SSI recipients who live in institutions such as long-term medical facilities. We believe this coverage error to be minimal and therefore, we did not make weight adjustments for this population. The survey interviewed respondents roughly once every four months. Respondents provided data about the previous four month “reference” period, with many variables measured each month within the period. The Bureau administered the survey using a system of interview rotation groups, such that in any month, one-quarter of the eligible sample gave responses. For any month of measurement, data from four rotation groups, interviewed on different dates, make up a complete sample. We analyzed data for five unique time periods: May of each year from 2009 through 2013. We chose May as the reference month to align with the month of the most recent SSR extract in May 2013 (see below). In each time period, we built a complete sample by selecting rotation groups and waves that corresponded to the reference month of interest. For example, a complete sample for the reference month of May 2013 included data from rotation groups 1 from wave 16 and groups 2-4 from wave 15. Selecting complete sets of rotation groups avoided the need to adjust weights and maximized the available data. We applied monthly weights to make generalizeable estimates for the SIPP target population for each of the five distinct reference months. We did not include longitudinal data on whether respondents gave responses or were in- scope for all time periods, and instead made five cross-sectional estimates. The SSR contains various fields that describe SSI recipients’ participation in the program. For our purposes, the primary fields of interest include benefit receipt, benefit amount, marital status, earned income, and unearned income. The Bureau maintains a cumulative file of the SSR extracts that it has received since its record linkage program began. One record in the file exists for each SIPP respondent who ever matched an SSR extract. Fields include a subset of SSR fields in SSA’s version of the file, some of which are measured at multiple times and some only for the date of the file. We analyzed a May 2013 vintage of this file, which contains monthly historical data for all variables of interest except marital status. The Bureau has developed a general method of linking data with personally-identifying variables to their surveys, known as the Person Identification Verification System (PVS). PVS seeks to produce a unique identification number for a given person, called a Protected Identification Key (PIK), across all data ever used as input and reference files that the Bureau maintains from federal sources, such as SSA. According to Bureau documentation, PVS uses blocking and matching methods to estimate the probability that a given input record matches verified reference files and can be assigned a PIK. Blocking variables, such as the first three digits of a Zip code or first or last names, reduce the space of potential matches to make computation feasible. Matching variables, such as Social Security number, name, or date of birth, serve as input for calculating multivariate weights that describe the degree of record similarity across the matching variables. PVS assigns a PIK when the value of the match weight exceeds a threshold of similarity, assumed as an input parameter. The system contains multiple modules with different blocking and matching variables and similarity parameters. Records that are not assigned PIKs in one module move on to later modules. The Bureau research shows that PVS reliably assigns PIKs to federal data sources, such as the SSR. Since the Bureau has access to detailed data files on Social Security transactions, the agency can verify the accuracy of PVS using reference files. A 2014 validation found that observed false match rates varied from 0.005 percent to 1.174 percent for Medicare data extracted in 2011, with similar results found for the same file extracted in 2012. These low levels of misclassification are acceptable for our purposes. The matched data have some additional error from the record linkage process, but have substantially lower measurement error of key variables, such as SSI receipt. Although the Bureau research has found that the PIK is accurate, once it can be assigned, PVS cannot always assign PIKs for all records in a particular application. PIK assignment rates for 2008 SIPP panel waves range from 89.4 percent to 90.6 percent. This adds commensurate amounts of missing data to our analysis, which requires data from both the SIPP and SSR. The Bureau research has found that survey records without PIKs assignment are unlikely to be missing at random. This suggests that analysis of survey and administrative data matched using the PIK should adjust for potential bias from the PIK assignment process. We discuss our method of adjustment below. We matched the 2008 SIPP public-use core files to the Bureau version of the SSR using the PIK and unique identifying variables in each file. We then joined the two files using the PIK. This approach is not documented publically, but follows guidance we received from the Bureau staff. Since the SIPP is a longitudinal survey, missing data can accumulate across waves as members of the original sample stop participating. According to Bureau documentation, sample loss rates range from 19.4 percent in wave 1 to 53.1 percent in wave 16. Our analysis used data from multiple waves for each reference month of interest, including later waves that have moderate levels of unit nonresponse. To adjust for potential bias, we used the weighting cell adjustments that are integrated into the weights provided by the Bureau. As a further check, we compared select estimates to known values from SSA publications. Specifically, we compared, by age group, estimates of total beneficiaries and total and mean SSI benefits. If our estimates’ confidence intervals did not span the control values, we applied an additional post-stratification adjustment to align the results. Because many of our key estimates involve total beneficiaries and benefit amounts by age group, post-stratification adjusted for unit nonresponse bias for our specific population, supplementing the general Bureau adjustments. When the Bureau cannot assign a PIK to SIPP respondents, as discussed above, they have a zero probability of matching the SSR and contribute additional unit missing data. Rates of PIK assignment in our matched data ranged from 89.4 percent to 90.6 percent, depending on the SIPP wave, which implies that the matching process adds a small amount of missing data. However, Bureau research suggests that younger, non-white, and lower household income respondents, among others, are more likely to lack PIKs. As a result, we estimated the relationship between variables relevant to our analysis, such as age, income, and disability status, and the probability of a missing PIK, in order to mitigate potential bias and scale up estimated totals back to the controls used in the Bureau post-stratification adjustment. The latter goal is particularly important, because our analysis estimated many population totals. We used nonparametric weighting class methods to adjust for missing data due to record linkage. First, we cross-classified the adjustment variables to obtain a categorical variable identifying joint group membership, collapsing groups containing less than 0.1 percent of the sample into a residual group to avoid excessive weight variance and instability. Letting Xij denote the joint adjustment variable for respondent i, having levels j = {1, 2, …, J}, and letting Yi = I(Missing PIK), we estimated the probability of a missing PIK conditional on the adjustment variable with where wi is the final person weight provided by the Bureau . We calculated the adjusted weight as Following the Bureau methods, we used the adjusted weight for the household reference person as the adjusted household weight. Rates of item nonresponse and Bureau imputation are extremely low for the SIPP variables of interest. Item imputation rates generally do not exceed 5 percent for the SIPP variables we analyzed, which mostly include household, family, and age variables. Of the small fraction of data that are imputed, most are imputed responses from prior waves or logically implied by other, observed variables. The remaining imputed values are statistical estimates. Given the low rates of item missing data and the high rates of non-statistical imputation, we used the imputed data that the Bureau provides and assume that statistical imputation error is ignorably small. The SIPP is a multi-stage, stratified, cluster sample of households. Since the Bureau does not provide sample design variables to preserve respondent privacy, we used the supplied bootstrap replicate weights to calculate balanced repeated replication estimates of sampling variance. We analyzed small subpopulations, so we applied a Fay adjustment to ensure stable estimates across groups, consistent with Bureau guidelines. All estimates of interest are linear functions of weighted totals (e.g., mean and total recipients, benefits, or income), so standard estimators are appropriate. To better understand the potential effects of changing an SSI recipient’s benefits on other federal benefit programs, we reviewed relevant program rules and relevant data for three federal programs—Medicaid, Temporary Assistance for Needy Families (TANF), and the Supplemental Nutrition Assistance Program (SNAP). We selected these programs because they each serve large numbers of low-income individuals, and households with SSI recipients may be eligible to receive these benefits as well. To understand the extent SSI recipients receive benefits from each of these programs, we reviewed relevant studies on Medicaid and SSI, federally available TANF caseload data from the U.S. Department of Health and Human Services, and the U.S. Department of Agriculture, Food and Nutrition Service’s report on the characteristics of SNAP Households. To gather information on the characteristics of multiple recipient households, SSA’s administration of SSI claims for individual recipients and multiple recipient households, and how changing the amount of benefits received by multiple recipient households may potentially affect SSA, we conducted interviews with staff from SSA headquarters and select field offices. Specifically, we interviewed staff from SSA’s Office of Research, Demonstration, and Employment Support; Office of Systems; and the SSI Simplification Workgroup. In addition, we conducted interviews with field office managers and SSI claims representatives from five SSA field offices located in Los Angeles, California; Louisville, Kentucky; Baltimore, Maryland; Brooklyn, New York; and Houston, Texas. We selected these field offices to account for geographic dispersion, with at least one office representing the east coast, west coast, mid-west, and southern United States. We also selected these field offices based on their location in states and cities with high concentrations of SSI recipients, to better ensure the likelihood that the field offices we selected were managing claims of multiple SSI recipient households. Of the five states we selected, we included one state where at least 40 percent of its population lived in rural areas. The views of staff from these field offices are not generalizable to all field offices nationwide. To gain additional perspectives from SSA field office staff, we interviewed 10 additional SSA field office managers affiliated with the National Council of Social Security Management Associations. 15,005 – 34,700 54,396 516,439 – 788,617 $147.50 $69.10 - $226.00 $622.10 $560.20 - $683.90 95 percent confidence interval 2.5 – 9.2 95 percent confidence interval 15.6 – 27.0 $1,000 - $1,455 $2,838 - $3,280 67.4 – 75.3 95 percent confidence interval (in dollars) In addition to the contact named above, Rachel Frisk (Assistant Director), Kristen Jones and Michelle Loutoo Wilson (Analysts in Charge), William Carpluk, David Forgosh and Jeff Tessin made key contributions to this report. Additional contributors include Carl Barden, Holly Dye, Alexander Galuten, Sheila McCoy, Mimi Nguyen, Monica Savoy, Mark Ward, and Margaret Weber. | SSA administers SSI, which provides cash benefits to eligible aged, blind, and disabled individuals with limited financial means. Generally, SSI recipients are eligible to receive up to a maximum benefit amount, though the maximum is lower for married couple recipients. Other households with multiple SSI recipients are not subject to this benefit reduction. GAO was asked to review households that include multiple SSI recipients. GAO examined what is known about (1) SSI recipients who live in households with other SSI recipients, (2) SSI benefits received by households with multiple SSI recipients, and (3) potential effects of implementing a change in the benefits received by households with multiple SSI recipients. GAO reviewed relevant federal laws, and regulations; analyzed May 2013 SSA administrative data on SSI recipients that was matched with U.S. Census survey data, the most recent matched data available; and interviewed researchers, disability advocates, and SSA officials in headquarters and five field offices selected for geographic dispersion, a higher concentration of multiple SSI recipient households, and overall population density. In May 2013, an estimated 15 percent of the 7.2 million households with blind, aged, and disabled individuals receiving Supplemental Security Income (SSI) cash benefits included more than one SSI recipient, according to GAO's data analysis. Of the estimated 1.1 million households with multiple SSI recipients, most included two recipients (953,000) and at least one adult recipient between ages 18 and 64 (695,000). Most households with multiple recipients did not have any child recipients, though an estimated 190,000 had one child recipient, 111,000 had two, and 30,000 had three or more. Few households reported having married couple recipients (an estimated 90,000). Most multiple recipient households reported that members of one family—those related by birth, marriage, or adoption—lived in the household (an estimated 941,000). GAO was unable to determine the specific relationships of recipients in these households. The Social Security Administration (SSA) provided households with multiple SSI recipients almost 30 percent, or an estimated $1.2 billion, of the total $4.3 billion paid in SSI benefits in May 2013, according to GAO's data analysis. In that month, multiple recipient households received an estimated average of $1,131 in SSI benefits, compared to $507 for single recipient households. Further, consistent with federal law that applies a lower maximum benefit rate to married couple recipients, GAO's analysis found that households with nonmarried multiple recipients received a higher estimated average monthly benefit payment than married recipient households. Since the 1990s, several alternative benefit structures for households with multiple SSI recipients have been discussed, but the potential effects of any such change on program costs and recipients are largely unknown. Specifically, reducing the maximum benefit limit for these households would likely decrease benefit costs, according to analyses GAO reviewed; however, the potential effects of such a change on program administrative costs and SSI recipients have not been studied. Further, according to SSA staff, SSA's claims management system lacks the ability to automatically connect and adjust claim records of those living in households with other SSI recipients, as it is structured around providing benefits to individuals. For example, if a mother lives with two of her children who are both SSI recipients, and the mother reports changes to her income, SSA's system does not automatically adjust both children's benefit amounts to account for this change in income. In addition, the system is unable to automatically process claims when two SSI recipients marry or separate, so staff must manually complete forms and calculate benefits outside the claims management system, which is time consuming and error prone, according to staff GAO spoke with in three of five selected field offices. SSA officials said the agency has not assessed the risks associated with the system's limited ability to automatically process claims for multiple recipient households, and has no plans to improve the claims management system to address related issues. According to federal internal control standards, agencies should design their information systems to support the completeness, accuracy, and validity of information needed to achieve objectives. Without assessing risks and making changes to address the issues related to households with multiple SSI recipients, SSA is at increased risk of making improper payments to recipients who live with, marry, or separate from other recipients. GAO recommends that SSA assess risks associated with the manual process for adjusting claim records for SSI multiple recipient households, and, as appropriate, take steps to make system improvements. SSA disagreed, based in part on its prior payment and accuracy reviews, but GAO continues to believe an assessment is warranted, as discussed in the report. |
The primary mission of DHS is, among other things, to prevent terrorist attacks within the United States in the aftermath of the September 11, 2001, attacks on the World Trade Center and the Pentagon. The creation of DHS brought together 22 agencies with responsibility for securing the borders and coastal waters, transportation sector, ports, and critical infrastructure (such as telecommunications systems), among other things. In addition, DHS consolidated some nonsecurity agencies such as the Federal Emergency Management Agency’s natural disaster response functions and maritime safety and drug interdiction by the Coast Guard. The creation of DHS was also intended to coordinate the sharing of homeland security information and foster closer coordination with federal agencies that were not incorporated into DHS, such as the Federal Bureau of Investigation (FBI) and the Department of State. Under INS, and now within DHS, immigration enforcement and service are complex, multifaceted functions. Immigration enforcement includes, among other things, patrolling 8,000 miles of international boundaries to prevent illegal entry into the United States; inspecting over 500 million travelers each year to determine their admissibility; apprehending, detaining, and removing criminal and illegal aliens; disrupting and dismantling organized smuggling of humans and contraband as well as human trafficking; investigating and prosecuting those who engage in benefit and document fraud; and enforcing compliance with programs such as the Student and Exchange Visitor Information System (SEVIS) and the United States Visitor and Immigrant Status Indication Technology (US- VISIT). Immigration service includes providing services or benefits to facilitate entry, residence, employment, and naturalization of legal immigrants; processing millions of applications each year; making the right adjudicative decision in approving or denying the applications; and rendering decisions in a timely manner. Some background about the long-standing management problems at INS is useful to set the stage for the transformation task DHS inherited. In this respect, over the years, we have written numerous reports that identified management challenges INS experienced in its efforts to achieve both effective immigration law enforcement and service delivery. In assuming the responsibility for immigration enforcement and services, DHS inherits many of these management challenges. For example, in 1997 we reported that INS lacked clearly defined priorities and goals and that its organizational structure was fragmented both programmatically and geographically. Additionally, after a reorganization in 1994, field managers still had difficulty determining whom to coordinate with, when to coordinate, and how to communicate with one another because they were unclear about headquarters offices’ responsibilities and authority. We also reported that INS had not adequately defined the roles of its two key enforcement programs—Border Patrol and investigations—which resulted in overlapping responsibilities, inconsistent program implementation, and ineffective use of resources. INS’s poor communication led to weaknesses in policies and procedures. In later reports, we reported that broader management challenges affected efforts to implement programs to control the border, deter alien smuggling, reduce immigration benefit fraud, reduce unauthorized alien employment, remove criminal aliens, and manage the immigration benefit application workload and reduce the backlog. INS was abolished, effective in 2003, by the Homeland Security Act of 2002, and its functions were transferred to three agencies within the Department of Homeland Security. INS’s Immigration Services Division, responsible for processing applications for immigration benefits, was placed in CIS, which reports directly to the Deputy Secretary of DHS. INS’s interior enforcement programs—investigations, intelligence, and detention and removal—were placed in ICE. Within ICE, investigators and intelligence analysts from former INS and the U.S. Customs Service were merged into the investigations and intelligence offices, while staff from former INS’s detention and removal program were placed in the detention and removal office. CBP incorporated inspectors from former INS, Customs, and Agriculture and Plant Health Inspection Service, as well as former INS’s Border Patrol agents. CBP and ICE both report to the Undersecretary for Border and Transportation Security, who in turn reports to the Deputy Secretary of the DHS. See figure 1 for the organizational position of immigration programs in DHS. Immigration and Naturalization Service (INS) (Secretary) CBP, CIS, and ICE each have a separate chain of command and field structure. Under former INS, there were 33 district offices, each headed by a district director, who had responsibility for adjudications, detention and removal, inspections, intelligence, and investigations. In DHS, the responsibilities of the 33 district offices under the former INS were distributed among 33 CIS district offices, 27 Special Agent in Charge investigations field offices, 22 detention and removal field offices, 20 CBP offices for field operations (that oversee about 300 land, sea, and air ports of entry), and 6 field intelligence units. The former INS’s 20 border patrol sectors remained intact. CBP brought together INS and Customs inspections programs that, prior to the transition, largely worked side by side in many land ports of entry around the country and that shared similar missions. CIS was a direct transfer of the Immigration Services Division within INS, and the program remained largely intact. In contrast, ICE is a patchwork of agencies and programs that includes INS’s investigations and intelligence programs, Customs’ investigations and intelligence programs, Customs’ air and marine interdiction division, the Federal Protective Service, and the Federal Air Marshals. In combining the investigations programs, ICE has been tasked with merging INS investigators who specialized in immigration enforcement (e.g., criminal aliens) with Customs investigators who specialized in customs enforcement (e.g., drug smuggling). The integration of INS and Customs investigators into a single investigative program has involved blending of two vastly different workforces, each with its own culture, policies, procedures, and mission priorities. Both programs were in agencies with dual missions that prior to the merger had differences in investigative priorities. For example, INS primarily looked for illegal aliens and Customs primarily looked for illegal drugs. In addition, INS investigators typically pursued administrative violations, while Customs investigators typically pursued criminal violations. Most field officials with whom we spoke in CBP, CIS, and ICE characterized communication and coordination with their local counterparts as good or excellent. Officials also said that positive relationships were primarily based on previous working relationships built while the programs— particularly inspections, detention and removal, and adjudications—were all within one agency, INS or Customs. About a quarter of the officials we interviewed across the immigration programs in CBP, CIS, and ICE also said that they would like a clearer understanding of the roles and responsibilities of each program. Those ICE officials who characterized communication and coordination as fair to poor attributed the inability to resolve their problems to various reasons, depending on the program; these included a lack of communication or conflicts in roles with the Border Patrol and the intelligence program’s distance from, and production of useful work for, the SAC offices. Near the end of our work, some headquarters and field officials in CBP, CIS, and ICE told us efforts were under way, and agreed upon, to clarify issues related to roles and responsibilities that have arisen. Communication among CBP, CIS, and ICE occurs at the headquarters and field level in different ways. All three bureaus have liaisons at the headquarters level. For example, ICE has liaisons to CBP and CIS that serve as points of contact and facilitators in convening the appropriate officials for discussions on cross-cutting issues, and ICE’s liaisons are to contact those agencies’ liaisons should ICE initiate discussions. In the field, officials in CBP, CIS, and ICE said they typically used meetings to maintain contact with one another, although the frequency of meetings varied—from not at all to bimonthly—and there are no requirements for field officials to meet regularly. Officials who said that they met regularly also said that they found these meetings to be useful in sharing information and addressing issues that cut across programs. Overall, most field officials we contacted who responded to this question in CBP, CIS, and ICE characterized communication and coordination among their programs as good or excellent. Most SACs and ASACs said that communication and coordination with CBP’s inspections, CIS’s adjudications, and ICE’s detention and removal programs were good or excellent. On the other hand, about one-third of SACs and ASACs who responded to this question believed that communication and coordination with CBP’s Border Patrol and ICE’s intelligence programs were fair to poor. Some officials said they expressed this view concerning communication and coordination with the Border Patrol because there were conflicts or overlaps in roles and responsibilities or a lack of communication. SACs and ASACs who characterized communication and coordination with ICE’s intelligence program as fair or poor said they did so for such reasons as the intelligence office was not in close proximity to the SAC office or they did not feel that intelligence analysts were producing analyses useful to the SAC office. Table 1 presents the responses by ICE’s SACs and ASACs regarding communication and coordination with CBP, CIS, and other ICE programs. Many SACs and ASACs indicated that their positive views of communication and coordination with staff from other programs were primarily based on previous working relationships built while the programs were all in INS or Customs. In addition, officials we contacted in CIS and CBP, and other officials in ICE, said that they also relied on working relationships that existed before the transfer to facilitate communication and coordination on cross-cutting issues. Those SACs and ASACs who responded that they relied to a little or no extent on pre- existing working relationships said that they provided such a response because they did not have a prior relationship to rely upon. In addition, such informal means of maintaining communication and coordination among program officials, while helpful, can be short-lived as personnel retire or resign. For the long term, processes that provide a systematic way of building and maintaining such relationships among program staff provide better assurance of effective communication and coordination. Providing guidance that outlines roles and responsibilities among the programs is one way of helping to achieve systematic maintenance of such relationships. In this respect, the headquarters offices for CBP, CIS, and ICE have issued some guidance on roles and responsibilities of certain aspects of the immigration programs. For example, CBP and ICE issued general guidelines on each bureau’s roles and responsibilities regarding how they would transfer the assets of antismuggling investigators from the Border Patrol to ICE, and how they would handle antismuggling investigations after the transfer of these investigators to ICE. A memorandum jointly issued by CBP and ICE in April 2004 for SACs and Border Patrol sector chiefs in field locations outlined each program’s basic responsibilities. ICE would assume responsibility for administrative support; funding of the antismuggling investigators; and all investigations and complex cases such as international in nature or related to organizations or national security. The Border Patrol would have lead responsibility for cross-border and border- related interdiction activities, such as surveillance to interdict illegal border crossings. According to CBP officials, the intent of the memorandum was in part to provide each program with a basic framework for working together. CBP and CIS convened a working group to decide who would correct mistakes on aliens’ arrival and departure forms. Several advocacy groups argued in the months following the transfer that as a result of the dispersal of immigration programs across DHS agencies, aliens entering the country did not know who to go to if an error was made on their arrival/departure form. The two bureaus agreed that an alien must seek an official in CBP to correct a CBP mistake, and a CIS official to correct a CIS mistake. Additionally, CBP and CIS agreed that if an alien seeking a correction inquires at the wrong office, then that person is to be directed to the appropriate authorities for making the correction. CBP and CIS officials provided us with this policy in written memos dated March 31, 2004, and March 30, 2004, respectively, that they said each bureau provided to its staff. CIS issued guidance to its field offices in December 2003 stating that its Office of Fraud Detection and National Security is to serve as the focal point and clearinghouse for requests from law enforcement agencies for benefits or “cover” documents. The guidance outlined the procedures that CIS is to use in responding to law enforcement agencies outside DHS (for example, the FBI and Drug Enforcement Agency) that want to provide benefits for aliens they have brought into the country as witnesses in a criminal case or as informants. Notwithstanding the above guidance, some officials we contacted across CBP, CIS, and ICE said that they would like a clearer understanding of the roles and responsibilities of each program. In addition, some difficulties with coordination cannot be resolved locally or by pre-existing working relationships because they reflect a lack of clarity in the programs’ roles and responsibilities and impede communication and coordination between them. For example, four SAC officials were unsure how the role of the senior inspector, inherited from INS and now in CBP, would affect ICE investigators’ roles in conducting investigations in the ports of entry. CBP has stated that cases are not always referred to ICE by the senior inspectors, and there is no CBP policy to refer such cases to ICE. This is because some cases concern immigration violations related only to attempted illegal entry at a port of entry and as such are CBP matters regarding admissibility, not ICE interior enforcement matters. According to CBP headquarters officials responsible for inspections, the bureau is exploring the concept of expanding the senior inspector position to address broader types of investigations rather than only immigration matters, but the role of the senior inspector in relation to the role of ICE investigators has not yet been determined. Additional examples included problems (1) between ICE investigations and CBP’s Border Patrol in negotiating controlled deliveries, (2) between ICE investigations and CIS in the area of benefit fraud, and (3) among CBP, CIS, and ICE in the area of issuing paroles to aliens. According to some of the field officials we contacted, how the Border Patrol and ICE should communicate and coordinate with each other on controlled deliveries had not been fully defined. An ICE official told us that prior to the transition, this technique was used by both INS and Customs agents and, while INS typically coordinated with the Border Patrol, Customs agents, because they were often dealing with narcotics, did not necessarily coordinate with INS unless the controlled delivery was going through Border Patrol checkpoints. Based on what we were told, since the transition, ICE and the Border Patrol have had conflicting positions that hamper communication and coordination about controlled deliveries. Border Patrol officials we contacted stated that their mission is to prevent and detect illegal entry of persons or contraband between ports of entry. Some ICE investigators we contacted said that they believe, on the other hand, that in order to dismantle smuggling organizations—one of ICE’s priorities—they need to do more than arrest the individual drivers or couriers. We talked with ICE officials in one field office who told us that there have been occasions when the Border Patrol deployed additional agents to an area after learning that ICE intended to conduct a controlled delivery. ICE investigators stated that this not only can hinder the accomplishment of their mission but potentially puts ICE investigators at risk. This is because Border Patrol agents can unsuspectingly encounter an undercover ICE agent in the course of interdicting persons attempting to cross the border, and if a gunfight ensues, the undercover ICE agent risks revealing his or her identity to the smugglers, or the ICE and Border Patrol agents risk injuring each other. A Border Patrol chief and deputy chief we interviewed stated that if CBP headquarters issued a formal memorandum stating that controlled deliveries by ICE were allowed, they would be willing to coordinate with local ICE managers. A Border Patrol official in headquarters told us that after the terrorist attacks on September 11, former Customs investigators began to lead operations on the border and between ports of entry, and saw their program as having authority to conduct operations on the border. When these investigators transitioned to ICE in March 2003, both agencies eventually sought to clarify their roles and responsibilities concerning controlled deliveries. The two bureaus formed a working group to do this in April 2004. An outcome of the working group discussions, according to CBP headquarters officials, is that Border Patrol and ICE plan to issue guidance in the form of a memorandum of understanding concerning the general roles and responsibilities of their respective staffs for controlled deliveries. This new guidance, according to the Border Patrol official in headquarters who chaired the working group, is to state that all controlled deliveries between ports of entry have to be approved by the local Border Patrol chief, who will make a decision based on guidance from headquarters. Additionally, according to this same official, the guidance will state that the Border Patrol will have the responsibility, during controlled deliveries, for inspections to ensure that there are no weapons of mass destruction, for example, in vehicles or on persons in addition to the known smuggled goods or persons. Officials told us the guidance will also outline a process for grievances when local managers cannot agree. Border Patrol officials said they did not have a date when the guidance would be finalized, but that as of August 2004, a final draft was sent to CBP’s Commissioner to be signed, after which ICE’s Assistant Secretary would be given the draft for signature. At the time of our site visits, how ICE and CIS should communicate and coordinate with each other in cases of suspected benefit fraud has not been formally defined by either CIS or ICE headquarters, and the field officials we contacted said that this has caused disagreement among CIS and ICE field officials. The difficulty between CIS and ICE investigations regarding benefit fraud is not new. We have noted in a past report that INS had numerous problems related to its enforcement of benefit fraud, including a lack of protocols for adjudicators and others in coordinating benefit fraud and a lack of criteria for investigators in prioritizing benefit fraud cases. Prior to the transition, INS had begun to place a priority on investigating benefit fraud perpetrated by large-scale organizations or persons of special interest, and this priority has continued under ICE. As a result, some CIS field officials told us that ICE would not pursue single cases of benefit fraud. ICE field officials who spoke on this issue cited a lack of investigative resources as to why they could not respond in the manner CIS wanted. For example, one ASAC acknowledged that CIS depended on ICE to go forward with leads on benefit fraud but said that his office could not commit large numbers of investigators to benefit fraud until more investigators were cross-trained. An ASAC and group supervisor in another office also cited the lack of investigators to address benefit fraud and acknowledged that the vast majority of the CIS cases referred to that ICE office we not investigated because of this lack of resources. According to CIS officials, adjudicators refer single cases of benefit fraud to ICE, in part because they rely on ICE to conduct database checks on systems CIS adjudicators cannot access. For example, ICE’s Treasury Enforcement Communications System (TECS) may have information on individuals that could help adjudicators determine whether to approve or deny an application for benefits. However, CIS officials in three cities we visited stated that the applicants’ files they send over to ICE are sometimes kept without notification of whether an investigation was initiated or not by ICE investigators for long periods of time. An ICE official in headquarters responsible for managing benefit fraud explained that SAC offices may investigate single cases of alleged fraud but the extent to which that is done depends on the assessment of the SAC office’s staff resources and the priorities of the local U.S. Attorney’s Office. Without having information from ICE that might form the basis for denying an application, CIS still has the responsibility to adjudicate the application and instead may even approve applications or take other temporary action when fraud is suspected. For example, in one office we visited, CIS officials said that they had 154 cases of alleged benefit fraud that they had referred to ICE since June 2003. They said they had not received responses from ICE on the status of these cases or whether ICE intended to investigate them. In the interim, CIS officials said, their office could not close the cases and instead had been granting the suspect applicants temporary employment authorization or advance parole. One CIS manager and one ICE manager in the field indicated that while dismantling large-scale smuggling rings is important, single cases of benefit fraud can have national security implications. For example, a person who is allowed to remain in the country as a result of committing marriage fraud can become a naturalized citizen in 3 years and facilitate the entry of other persons into the United States who could possibly pose security risks. CIS and ICE officials in headquarters agreed that benefit fraud was important to national security as well as the integrity of the immigration process. CIS officials in three cities told us that ICE’s lack of responsiveness to some CIS referrals for benefit fraud investigations hindered their ability to meet their district and bureau goals for reducing the backlog of applications. While challenges were reported, there have been efforts by ICE and CIS to address benefit fraud. After the transition, CIS created a Fraud Detection and National Security office devoted to deterring fraud. ICE has established Benefit Fraud Units composed of investigative assistants and intelligence analysts who were working in CIS’s three regional offices and in the three of the four CIS service centers (who were working in these offices prior to the transition). CIS has Fraud Detection Units composed of adjudications staff in its four service centers who process applications, analyze applications to identify trends in fraud, and refer potential benefit fraud cases to ICE. ICE investigative assistants and intelligence analysts, in turn, are to refer cases to the local SAC investigations offices. Two CIS offices we visited were referring potential benefit fraud cases through this new process. Alternatively, in the other four offices we visited, CIS adjudicators were directly referring benefit fraud cases to local ICE investigators, who must determine whether to reject, postpone, or pursue the cases. Headquarters officials from CIS and ICE told us that the two bureaus were planning to do more to address benefit fraud. These officials told us that CIS and ICE are working on a memorandum of understanding that will document the creation of standard protocols for adjudicators to refer and investigators to accept, alleged cases of benefit fraud (including time frames for ICE in responding to CIS) and for CIS and ICE to communicate and coordinate in matters involving benefit fraud. Additionally, CIS created a new fraud position description to address single cases of fraud, and a CIS official told us that as of August 2004, the agency has hired 95 of 100 newly funded staff positions to work on benefit fraud and some of these staff have completed one training course at the Federal Law Enforcement Training Center (FLETC). In addition, while neither official knew when the memo of understanding would be final, in the interim, CIS and ICE have established time frames for SAC offices to review fraud referrals for criminal investigation. CBP, CIS, and ICE have the authority to grant aliens parole—temporary admission into the United States for such reasons as humanitarian purposes, public benefit (e.g., participating in a legal proceeding for the U.S. government), or for further inspection. A CIS official told us that the authority to make decisions regarding parole, under former INS, rested with the district director, who had responsibility for all of the immigration programs. However, since the transition, CBP, CIS, and ICE had yet to make formal the roles and responsibilities for each program regarding who has authority to grant parole and when it is most appropriate for one agency rather than the other to make decisions about a parole application. Without this guidance on roles and responsibilities, CBP, CIS, and ICE officials in local areas were making determinations as to how the parole process will work. For example, in one city we visited, as a result of monthly meetings, ICE investigations, CBP inspections, and CIS coordinated a panel of representatives from their local offices to review the applications or requests for parole and, depending on the facts of each case, decided what program would make the decision for granting parole to aliens. By contrast, in another city we visited, CBP and CIS were unsure as to who had the authority to make decisions about parole. CBP officials in headquarters who are responsible for inspections told us that the current practice is that the bureau that has possession of the person makes the decision about parole, and while there are ongoing discussions among managers in the three bureaus regarding authority, there have not been final decisions. In August 2004, CBP and ICE headquarters told us that the two bureaus have now drafted protocols regarding parole and that the completion of the protocols is contingent upon a decision by DHS on the placement and funding of the Parole and Humanitarian Assistance Branch. In commenting on a draft of this report, DHS said that the issues regarding parole operations have now been resolved. SAC offices have taken initial steps toward integrating the former INS and Customs investigative workforces. However, most SAC officials and investigators we spoke with said that one or more steps that are important for full integration remain to be completed. While officials in some SAC offices said they have not received enough specific guidance, such as performance measures from ICE headquarters on how to gauge their progress in merging INS and Customs investigators, many of the ones we contacted said there are some common initial steps SAC offices have completed in integrating investigators. These include (1) assigning former INS and Customs investigators to work together in mixed investigative groups, (2) providing formal and on-the-job cross-training to investigators so that former INS investigators can perform the functions of former Customs investigators and vice versa, and (3) establishing pay parity for all former INS investigators and supervising investigators. Many SAC officials with whom we spoke also noted that several important steps to fully integrate former INS and Customs investigators remain to be taken. These include (1) co-locating former INS and Customs investigators so their offices are in the same building, (2) establishing uniform ICE policies and procedures, and (3) issuing symbols for ICE’s Office of Investigations that identify all ICE investigators as being part of one agency. ICE headquarters officials told us in August 2004 that efforts are under way to address all of these steps. Of the 49 SACs and ASACs who responded to our question, 27 stated that investigators in their offices had been integrated to a great or moderate extent; 15 said they had been integrated to some extent, and 3 said they had been integrated to a little extent. SACs and ASACs who responded to our question indicated they had generally maintained the investigative focus that existed before the merger (e.g., groups continued focusing on money laundering, strategic investigations, and benefit fraud) but had mixed or intended to mix some of the former INS and Customs investigators into these investigative groups. An ICE official in headquarters said that the extent to which investigative groups would be integrated has been left up to individual SACs, and the characteristics of some geographic locations may make integration more difficult. Eleven SACs said they were working toward having former INS and Customs investigators work within mixed investigative groups. One SAC noted that he did not want to integrate investigators and group supervisors until they were formally cross-trained—training where former INS and Customs investigators learn the laws and regulations of each other’s discipline from experienced lawyers and trainers. Ten of 49 SACs and ASACs we spoke with indicated that former INS and Customs investigators in their offices were being assigned to work with one another on a case-by-case basis, and two of these said mixing of investigators in this way provided the investigators with opportunities to learn each other’s discipline through on-the-job-training. Such opportunities included having a joint duty roster where investigators from each former discipline responded to a call for an investigation together and having some investigators from former INS and Customs work in the same investigative groups. Eleven of 49 SACs and ASACs we contacted told us their offices had a joint duty roster such that investigators from different former agencies responded to cases together and learned from one another on the job. In one of the SAC offices, we were told that investigators from the former INS and Customs respond together to calls for investigations, but former Customs investigators process immigration- related cases and customs-related cases are processed by former INS investigators so they can learn the policies and procedures of the other discipline in a real-life setting. SACs and ASACs we spoke with said that in addition to on-the-job training, formal cross-training is key to eventually creating a unified workforce. ICE headquarters issued a cross-training curriculum to all SAC offices in January 2004 with a deadline for all investigators to complete cross- training by September 30, 2004. ICE headquarters officials did not set a deadline for the completion of training for group supervisors or senior managers, although these persons could choose to participate in the investigator training. ICE officials responsible for developing the cross-training curriculum indicated that the intent of the cross-training was to ensure that all investigators from the former agencies were prepared to address all components of ICE’s mission. The investigators are to participate in 8 days of classroom training, taught by investigators and attorneys, covering both legal and operational issues of the other discipline. For example, former INS investigators receive training in areas such as commercial fraud investigations, financial investigations, trade compliance, and drug smuggling, while former Customs investigators receive training in areas such as determining citizenship, benefit and document fraud, initiation of removals, and alien detention. Investigators must pass, with a score of 70 percent or higher, a series of nine written tests in order to be certified as cross-trained. As of late August 2004, ICE headquarters reported that 2,175 out of approximately 5,400 former INS and Customs investigators had taken and passed at least one of the nine exams, including 1,210 former INS and Customs investigators who had fully completed cross-training. In August 2004, ICE headquarters said that they still expected most investigators to complete the cross-training and nine examinations by the September 30, 2004, deadline. ICE officials cited the achievement of pay parity between former INS and Customs investigators as one of the successes of the merger. Prior to the merger and for approximately a little more than a year after the transfer, former INS investigators and their supervisors were paid at a lower grade level than their counterparts from former Customs. Specifically, most former INS investigators were paid at the GS-12 pay grade and most former INS group supervisors were paid at the GS-13 grade; most former Customs investigators were paid at the GS-13 grade and most former Customs group supervisors were paid at the GS-14 grade. In our site visits and during telephone interviews, many ICE officials, including most former INS investigators, said that the lack of pay parity had affected morale, made former INS investigators feel as if they were second class, and made integrating the investigative groups more difficult as the former INS investigators were doing the same work for less pay. In April 2004, DHS approved an upgrade from GS-12 to GS-13 for the majority of former INS investigators, and in June 2004 approved an upgrade from GS-13 to GS-14 for the majority of former INS group supervisors. Investigators and group supervisors we spoke with after pay parity went into effect said they believed morale had increased since pay parity was implemented, and former INS investigators felt they are now equal to their former Customs counterparts. Twenty-one SACs and ASACs we spoke with stated that other efforts important to integration — such as co-locating all ICE investigators in a given field location so they are in one building, establishing uniform operational policies and procedures, and “branding” ICE’s Office of Investigations with symbols that identify investigators as belonging to one agency — have been delayed. According to 19 of 49 SACs and ASACs we contacted, one of the obstacles to integration has been the fact that numerous investigators from former INS and Customs have continued to work in separate locations. Although INS’s and Customs’ investigations programs were merged into ICE, former INS investigators generally continued to work in former INS buildings, and former Customs investigators generally continued to work in former Customs buildings. Eight SACs and ASACs with whom we spoke noted that the lack of co-location of former INS and Customs investigators perpetuated the view among investigators that ICE is not yet integrated. For example, 3 officials said that creating a unified organization is difficult when members of a work group—8 to 12 investigators—are dispersed in different offices, sometimes miles apart. Some SAC officials reported they have moved some investigative groups, such as the benefit fraud and criminal aliens, to the same buildings in an effort to better co-mingle former INS and Customs investigators. Officials in some other locations told us this has not been possible because of lack of space. Fourteen of 20 SACs we spoke with by phone noted that their offices have been unable to co-locate former INS and Customs investigators because space in their current buildings was limited and building leases were signed before the transfer or because they could not secure additional funding from DHS to lease new buildings before existing leases expire. An ICE headquarters official said there are a few SAC offices that are completely co-located and there are additional SAC offices that have submitted co-location plans to ICE headquarters and requested additional space. This official also said that ICE will begin to co-locate offices that have had Occupational Safety and Health Administration violations or where leases will soon expire, and the goal is to have all SAC offices co-located in the next 5 to 7 years. ICE headquarters officials recently estimated that complete co-location immediately would cost about $150 million. Some officials told us that ICE has been slow to establish uniform operational policies and procedures, causing confusion and some delay in the creation of a new unified ICE culture. Policies and procedures on such things as the use of firearms or the steps to take when investigators are involved in car accidents while working in an official capacity vary between former INS and Customs investigators. In the absence of uniform policies and procedures, ICE headquarters officials said they directed SAC offices to continue to use former policies from both INS and Customs, applying the policy from the former agency to the agent from that agency. SAC officials from some offices said they have created new local office policies for all ICE investigators. One SAC official said that a lack of unified operational policies and procedures has in some cases resulted in confusion or the establishment of local policies. Other SAC officials told us this can be problematic if investigators working together are relying upon different policies and procedures to carry out their investigative work. In one city, we were told that two investigators—one from the former INS and one from the former Customs—were involved in an auto accident. The former agencies had different procedures for filing paperwork on an accident, and no one knew which policy to follow. The SAC made a local decision to use the policy of the driver’s former agency. In another city, the SAC decided to adopt a former Customs policy concerning making an arrest at a residence. Customs policy had called for a minimum of four investigators in making an arrest, while INS did not have a policy on the minimum number of investigators required for an arrest. The former INS investigators and supervisors said they did not understand the rationale for this policy, given the volume of arrests they typically had in a day. Officials in ICE headquarters explained the rationale to us, stating that under INS investigators often engaged in administrative arrests of individuals for administrative crimes, such as visa overstays or document fraud. Under ICE, they said investigators are often engaging in criminal law enforcement arrests and possibly arresting more dangerous suspects. As a matter of officer safety, ICE requires that investigators work in groups of four when making an arrest. Knowing this rationale may have helped the former INS staff avoid confusion over this change. Additionally, ICE headquarters officials told us that the investigations program prioritized the establishment of uniform policies, for example, focusing on a unified policy for undercover operations. These headquarters officials also said that, in the interim, SAC offices were instructed by ICE headquarters to use the policy of the former agencies. After more than a year as ICE, field officials said that investigators and managers were continuing to use their former agency badges and credentials, and ICE headquarters officials had spent months waiting on a request for a name change. Some SACs we spoke with said that at the time we contacted them, ICE still did not have the public identifiers that separate it from the former agencies of which it is composed. We were told that incomplete branding of the agency with a unique logo has at times contributed to frustration and embarrassment. Some of the former INS investigators and managers we spoke with said that the delay in branding ICE has held up the creation of a unified ICE agency. According to officials at ICE headquarters, one element in the process of establishing ICE is to brand it with a unique identity by creating badges, raid jackets, business cards, and other identifying materials or symbols. When DHS was created, INS staff were directed to retire all emblems and paraphernalia. However, Customs was not given the same orders. In some ICE offices, we observed Customs emblems and paraphernalia on display. In another example of the divide between INS and Customs, in one city we visited, former Customs investigators had created a mock-up of the new ICE badge that they said was for former INS investigators, which referred to the INS investigators as “Junior Officers” of the U.S. Customs Service. During one site visit, a group of former INS investigators we spoke with questioned why headquarters had been so slow to implement branding, and one investigators said the branding should have been completed prior to the transition or shortly thereafter. In another site visit, one investigator said this lack of an identity has proven to be frustrating and embarrassing when acting in an official capacity, such as testifying in court. One ASAC we spoke with said that he tried to board a plane with his weapon and was questioned by airline officials when he showed his INS badge to verify that he was law enforcement. Airline officials said that INS had been abolished, and the ASAC had to explain that ICE did not yet have its own badges. The ASAC was eventually allowed to proceed but said he knew this problem had plagued other investigators as well. In another example, an agent in one city said that he went out and purchased his own ICE raid jacket because he did not like having his authority questioned when he wore an INS raid jacket. Most of the decisions about branding were made at the DHS level, and there are written guidelines for the use of the DHS seal and agency signatures for such things as business cards, letterhead, and flags. According to an official in ICE headquarters who is responsible for branding, certain branding activities that are particular to ICE are in the final stages. At the time of our interview in July 2004 and confirmed in August 2004, ICE headquarters officials acknowledged the delay and said that raid jackets were made available for purchase locally in January 2004, badges will be issued beginning in September 2004, and uniforms were in the final stages of production. Many of those we spoke with from both the former INS and Customs noted that there have been benefits to merging the INS and Customs investigations programs. They noted that combining the expertise of former INS and Customs investigators has provided expanded authority in conducting investigations and could contribute to more thorough investigations. Other SAC officials said that expanded authority has been beneficial in investigating money laundering in alien smuggling cases and going after the assets of foreign-born persons running prostitution rings as they can now prosecute someone for multiple offenses. Four SACs and ASACs said they expect the benefits to increase as cross-training is completed and investigators more fully learn the expertise of the other former agency. Former INS investigators we spoke with also noted beneficial aspects of the merger. Many of the former INS investigators we spoke with in our site visits said they are now able to concentrate on investigative work rather than services and they have received a pay increase to bring them up to par with the former Customs investigators. In one location, former INS investigators said that prior to the merger, the District Director would task investigators to assist with naturalization exams or to fill guard duties at district offices or ports of entry. In another location, former INS investigators said they now have more employees to carry out missions. Although DHS has issued guidance via Email on how administrative support shared services would function, several CBP, CIS, and ICE field officials told us that they were confused about what constitutes shared services, the processes for receiving services from a shared service provider, and how many of the administrative staff in their offices would be transferred to other offices. One official in headquarters told us in July 2004 that decisions about shared services were not completely resolved. Additionally, officials in all three agencies cited problems with administrative computer systems for travel, budget, and payroll— administrative functions that are handled by the individual bureaus and are not a part of shared services. As a result of several problems and changes that have occurred, according to officials in CBP, CIS, and ICE, some field offices have assigned administrative duties to inspectors, adjudicators or senior adjudications managers, or investigative staff because the office needed additional administrative support. In an attempt to provide more efficient administrative mission support services, DHS is in the process of developing and implementing systems and processes called “shared services.” DHS initiated the shared services system in December 2003, making determinations about the realignment of approximately 6,100 administrative positions. In January 2004, the Undersecretaries for Management and Border and Transportation Security and the heads of CBP, CIS, and ICE signed an agreement finalizing the interbureau governance of shared services. In commenting on a draft of this report, DHS said that the Department encountered delays in the execution of service level agreement and resource allocation. Consequently, the implementation phase did not begin until late in the spring/summer of 2004. According a to DHS official, shared services is intended to represent a new model for government on delivering and managing administrative services. DHS’s shared services system utilizes four different approaches in providing and receiving services for CBP, CIS, and ICE staff. The shared services system’s approaches are (1) each bureau provides its staff some of its own services itself, (2) one bureau provides a certain service to staff in all three bureaus, (3) one bureau provides a service to its own workforce and staff in one other agency while the third bureau provides that service for its own staff, and (4) each bureau provides selected services to its own workforce as well as to selected staff in other bureaus. For example, CBP is providing human resource management to its workforce, in addition to workforces in CIS and ICE~. ICE is providing training for supervisors in ICE, CIS, and CBP but handles equal employment opportunity issues for only its own workforce, and CIS. CBP, CIS, and ICE are each providing their own workforces with procurement, budget, labor and employment relations, and professional development training, among other services. According to DHS officials, the decisions about which bureau would provide a certain service were made on the basis of an assessment of such factors as each bureau’s adaptability to an increased workload, level of modernization, and historical expertise with each shared service. See figure 2 for a description of the services each bureau is to provide under shared services. A DHS briefing document and communication strategy indicated that through such means as the bureau’s intranet, chain of command, memorandums, fact sheets, and video broadcasts, DHS would communicate the roles and responsibilities of CBP, CIS, and ICE for providing shared services. DHS provided us evidence that it has used some of these communication methods. However, a senior official at DHS told us in June 2004 (6 months after the initiation of shared services) that although a communication strategy was in place, communicating about shared services to the field is a work in progress. This official also said that it is the responsibility of the bureaus both receiving and providing services to communicate information about shared services to the field offices and staff. DHS officials also stated that the responsibilities of CBP, CIS, and ICE under shared services are still under development. One official who was involved in the formation of shared services told us that DHS would like to change some administrative functions that the bureaus currently handle for themselves—for example, procurement—into shared services. Further, even though CBP was designated as the provider of personnel services to CIS, the extent of that service is still in negotiation. Field officials told us that numerous officials in CBP, CIS, and ICE were uncertain about what constitutes shared services, the process for receiving services from a shared service provider, and which administrative staff would be re-aligned from their positions in local offices to work for providers of shared services. In our telephone interviews with SACs and ASACs, 33 of 40 said that their offices were experiencing problems with shared services to a moderate or great extent. The 4 SACs and ASACs who said they were experiencing problems to little or no extent provided such reasons as not interacting with shared services providers or relying on the staff who assisted them prior to the initiation of shared services in December 2003. Our meetings with field officials in CBP, CIS, and ICE indicated that despite communication from DHS, field office officials varied in their understanding about what constitutes shared services. For example, one ASAC believed that shared services consisted of sharing resources, such as buildings and computer technology, rather than having one bureau provide a certain administrative service for the other two. Additionally, in April 2004, approximately 3 to 4 months after the initiation of shared services, four ICE officials and one CBP inspections official were not aware that this occurred. Officials in four of the six sites we visited were unsure about who specifically to call or the process they were to use in obtaining a shared service from CBP, CIS, or ICE. For example, after the person responsible for facilities was transferred to ICE, an official in a CIS district office did not know who to call for assistance with setting up vacant office space for CIS staff who were being moved to that location. This official ultimately learned that the process was not a shared service but was instead handled within CIS. A SAC official in another office we visited said he and administrative staff did not know how to obtain an authorization to repair a vehicle that had been damaged in an accident in October 2003. The officials initiated a purchase order request in November 2003 for services to repair the vehicle and submitted it to ICE. However, under the shared services system, CBP was designated responsibility for authorizing fleet repairs for CBP, CIS, and ICE. The SAC official said that he and administrative staff spent several months contacting multiple officials at CBP offices and ICE headquarters about approval for the repair and how to pay for it. In March 2004 the car was scheduled to be sold at an auction. In late June 2004, CBP issued an informal policy, by Email to the SAC office, for receiving approval for repairs and invited the SAC office to resubmit a request (as it had been previously denied) if it had not already sold the car. Before SAC officials were informed of this process, we were told that the office paid approximately $1,000 for storage of the vehicle and stopped saving the funds initially set aside for the repair. In five of the six sites we visited, officials expressed uncertainty and unmet expectations about which administrative staff in their offices would be reassigned to shared services positions and transferred to other programs or agencies. The decision about the reassignment of administrative staff for shared services was made at the headquarters level by a working group of CBP, CIS, and ICE officials and led by DHS. For example, in one SAC office that we visited, approximately 50 administrative staff from former INS had been supporting CBP and CIS in addition to ICE, and all but 1 were moved because of the realignment of staff for shared services. Because the SAC had expected to retain 3 rather than 1 of the 50 administrative staff, he assigned administrative work to several investigators as a collateral duty. Administrative staff in one CBP office for field operations that we visited had received e-mail messages from CBP headquarters notifying them that, within a few days, they would be transferred to another program or bureau. We were told that some reassignments came as a surprise and involved moving from one office building to another, but usually they were in the same general geographic location. ICE provided us with a written statement explaining that it, along with CBP and CIS, could not begin delivering administrative services to one another under shared services until “reimbursable agreements”—the arrangement of costs and funding for a particular administrative service— were finalized. As such, this delayed notifications to administrative staff about reassignments and affected the agencies’ ability to provide information to the field. Many officials we contacted in CBP, CIS, and ICE said that problems with travel and budget, and computer systems have at times adversely affected office operations. For example, because of problems with travel computer systems, many officials in ICE’s SAC offices said that staff are not receiving reimbursements. Thirty-two of 49 SACs and ASACs responding to our question about shared services cited Travel Manager—ICE’s off-the- shelf computer system for processing travel requests and vouchers— and/or the Federal Financial Management System (FFMS)—the computer system ICE SAC offices use to track their budgets—as significant administrative problems. Additionally, CBP officials identified such problems as cumbersome procedures for accessing data systems and the lack of computer program updates to reflect changes on time and attendance cards. In August 2004, headquarters officials told us they were making efforts to resolve the problems by providing training, reducing funding strings for Travel Manager, and reprogramming FFMS. Twenty-six of 49 SACs and ASACs responding to our question about shared services also discussed the problems they were having with Travel Manager. ICE headquarters officials told us that Travel Manager is a new system to the former Customs field staff in ICE’s investigations program. It was used in the former INS’s headquarters and in some field offices prior to the transfer. ICE headquarters officials told us that Travel Manager was chosen because it could interface with ICE’s accounting system and automate the process for managing travel documents. ICE investigations officials in the field and headquarters told us that with Travel Manager, the funding strings (codes that tell the system what account to charge and to what program to attribute travel) have caused problems for staff in the field and headquarters. ICE headquarters investigations officials estimated that there are approximately 80,000 separate funding strings, each approximately 48 characters long, from which field staff have to choose in carrying out a transaction such as completing a travel voucher. They explained that because the system is new to many staff and the funding strings are not labeled so that the user can select words rather than a string of numerical characters, some ICE staff may choose incorrect funding strings, causing their vouchers to “disappear” in the system or be routed to the wrong approving official. When this occurs, ICE headquarters officials for investigations told us, neither the traveler nor the approving official receives a notice that the voucher has failed to be processed. Additionally, because ICE’s Travel Manager interfaces with its Federal Financial Management System, if staff choose the wrong funding string, the voucher may be routed to an account that does not have the funds. If this happens, ICE officials said the system would reject the voucher. As a result, they said that some ICE investigators and managers have not received timely or accurate reimbursements for their travel. According to some ICE field officials we contacted, when staff inadvertently select the wrong funding string, it takes from several weeks to months to process the voucher. A few officials said that when staff do not receive timely reimbursements, they sometimes use their personal funds to pay their government credit card bills. For example, one SAC said that an agent in his office used personal funds to pay $15,000 for bills incurred from business travel. Another SAC official said that not all investigators are able to use their personal funds to pay for their business travel expenses. One SAC said that he was waiting to be reimbursed for $11,000 in travel bills that he had accrued on his government credit card. Because he had not been reimbursed, he felt he was in danger of having his government credit card revoked. These examples are to illustrate the types of concerns reported to us. We did not verify the facts reported to us or the circumstances surrounding these specific examples, e.g., whether the problems were caused by the travel system, the individual, or both. ICE headquarters investigations officials responsible for Travel Manager said that they have made some changes to Travel Manager to aid ICE staff. For example, they reduced the number of funding strings from the initial 800,000 to about 80,000, and added alphabetical codes to help facilitate the use of the software. They also said they have suggested to an ICE group working on finance issues that either the system or a staff member should send notification to the approving official and traveler when vouchers cannot be successfully processed. Officials responsible for all of ICE’s financial management told us that the office responsible for mission support for all of ICE had provided over 200 contacts in the field to assist with Travel Manager, held a training conference, and provided training opportunities in the field and in headquarters for staff regarding Travel Manager. However, they recognized that 48-character numerical funding strings are difficult to use. They also discussed additional reasons why staff in the field were having problems with Travel Manager. First, because ICE did not have a full accounting of its staff, Travel Manager did not recognize all of the staff and was unable to route all of the vouchers. Second, many staff were unfamiliar with Travel Manager, so they did not know how to determine whether their vouchers have been approved or rejected. Third, in situations where staff did not travel for their home program office, e.g., if an investigator was traveling on behalf of the Federal Air Marshals, the travel documents could not be managed through Travel Manager. Twenty-two of 49 SACs and ASACs also discussed problems with FFMS, but the problems were not as numerous as those with Travel Manager. FFMS is a financial accounting system that allows the tracking of budget expenditures and balances. It was previously used by INS and ICE chose to adopt it, although DHS plans to transition to a new departmentwide financial system. The problems with FFMS are new to former Customs managers and administrative staff, but not necessarily new to former INS staff who began using the software shortly before the transition. The SACs and ASACs who stated that they had problems with FFMS said that it mostly affected their ability to manage the office budgets. In response to this problem, five SACs we contacted told us that they are tracking their budgets manually, with some using Excel spreadsheets so they can know how much they are spending from each budget area. One SAC said he is using over 20 Excel spreadsheets to track the office budget, and another bought an off-the-shelf budget software system to supplement FFMS. The officials in ICE headquarters responsible for finance told us that the limitations of FFMS were known, but FFMS was chosen after three studies were conducted by independent consultants approving its use by ICE and it was certified to meet auditing standards. Additionally, ICE officials in headquarters responsible for finance said in June 2004 that they have attempted to address field concerns by reprogramming FFMS to allow SAC offices to track their budgets in the manner they were used to doing in Customs and by providing weekly training to program officers in headquarters. CBP officials in inspections and Border Patrol in four of the six sites we visited also told us they were having problems with administrative computer systems and applications, mostly in the area of time and attendance. Inspections officials cited problems with CBP’s computerized time and attendance system, Customs Overtime Scheduling System (COSS), and in some cases, inspections officials said they were not accurately paid overtime. Officials we spoke with in CBP’s Border Patrol also cited problems with COSS and overtime payments and added that in some cases, staff were maintaining a manual record of actual time and attendance but inputting into COSS only the 40 hours per week recognized by COSS. CBP officials in Border Patrol headquarters acknowledged the problems with COSS when we talked with them in June 2004. However, in August 2004, CBP headquarters officials responsible for program management of COSS told us that there were initial problems with overtime payments for former INS staff that were attributed to errors in the calculation of pay after transmission from COSS to the Department of Agriculture for processing and the method the Border Patrol had used to schedule hours worked, while under former INS. They said that all problems with COSS had been resolved by January 1, 2004. We did not verify whether or when specific problems were addressed or the actual causes of the problems reported to us by Border Patrol and inspections officials but did note a difference in the causes field officials mentioned and the reasons provided by CBP headquarters officials. One criticism we had of the former INS was that because of staffing shortages, mission staff often had to assume administrative or other functions as a collateral duty. One effect of assigning mission staff to administrative work is that they are not spending all of their time on duties needed to accomplish the program’s mission and thus are not reaching the full potential of the program position. In our site visits, we found that this continues to be a problem in some offices. Some officials we contacted in CBP, CIS, and ICE said they had to use mission staff in this way because they did not have enough administrative support to compensate for the realignment of administrative staff to shared services, the addition of mission personnel that have come as a result of mergers of some programs in the transition, and hiring freezes. As a result, inspectors, adjudicators, and investigators in some field offices were taking on administrative work full-time or as a collateral duty: In three of the six sites we visited, we found examples where CBP inspectors were assigned to handle various administrative functions as a collateral duty. For example, an inspector in one city was detailed to resolving problems related to time and attendance and payroll for former INS inspectors. In another city, supervisory inspectors were detailed to perform scheduling duties normally performed by administrative staff. In three of the six CIS district offices we visited, we found examples of adjudicators or senior managers taking on administrative functions in addition to their work as a collateral duty. In two district offices, adjudicators were taking on such functions as managing office space and monitoring the budget. In another city, the third highest manager in a district office was assigned to handle personnel, procurement, and vacancies rather than duties related specifically to managing the adjudication of applications. Because these mission staff were spending time on administrative functions, they were spending less time addressing program missions such as reducing the backlog of applications. In two of our six site visits and in telephone interviews, we learned that ICE investigators are also taking on administrative functions as a collateral duty. In one SAC office we visited, the SAC assigned 10 special investigators, including 1 associate special agent in charge, 1 assistant special agent in charge, 2 group supervisors, and 6 junior investigators, to administrative duties. In our telephone interviews, we found examples consistent with our site visits. For example, we were told that special investigators in a subordinate office of one SAC office were assigned all of the clerical work in addition to their normal duties when the office lost its administrative support staff. Rather than assign administrative duties to investigators, other SAC offices said they are converting unfilled agent positions to administrative positions. For example, an official in one office said he would have to convert unfilled agent positions to administrative positions, and an official in another office gained an administrative staff member from CBP by transferring (through a personnel action) one of its staff vacancies to CBP. The challenges we identify in this report highlight the importance of using the transition of immigration functions into DHS as an opportunity for further addressing long-standing and new challenges through positive transformation. We realize that carrying out this transformation will be no easy or quickly realized task. In this regard, we and others have studied the experiences of other public and private organizations that have undergone successful mergers and transformations. In a July 2003 report, we identified nine key practices that have consistently been found at the center of successful mergers and transformations, as shown in figure 3. This report was done to help federal agencies implement successful transformations of their cultures, as well as help the new DHS merge its various originating components into a unified department. Collectively, in our view, these key practices and related implementation steps discussed in our July 2003 report can help transform the sometimes diverse cultures of DHS legacy agencies into a cohesive unit that fulfills its new mission, meets current and emerging needs, maximizes performance, and ensures accountability. We did not perform an in-depth analysis comparing these key practices with the transfer of immigration functions into DHS. Nonetheless, we believe that all nine are important for DHS in its transformation of immigration programs and noted two key practices that we think would be particularly helpful as it addresses the challenges we identified in this report. We realize that DHS has started using many of these nine practices and, while we did not assess how well each of the practices has been followed, we did identify certain parts of the two practices that we believe would further assist DHS in its transformation efforts. Creating an effective, ongoing communication strategy is essential to implementing a merger or transformation. Communication is most effective when done early, clearly, and often, and is downward, upward, and lateral. Organizations must develop a comprehensive communication strategy that reaches out to employees, customers, and stakeholders and seeks to genuinely engage them in the merger and transformation process. Implementation steps that accompany this key practice include communicating early and often to build trust and understanding, ensuring consistency of message, encouraging two-way communication, and providing information to meet specific needs of employees. DHS’s office responsible for shared services provided us with a communication strategy dated May 2004 and a briefing, dated February 2004, outlining communication strategies, both with the objectives of raising awareness and promoting understanding of shared services within and outside of DHS. CBP told us that the agency has developed and implemented a communications strategy and provided us with examples of communications activities. Additionally, 22 of the 36 SACs and ASACs responding to our question by telephone told us that concerning communication, they received information from headquarters regarding transition goals and milestones. In addition, a few of the SACs and ASACs who responded that they had received transition information said that the information was received through such means as e-mail, broadcast messages, ICE’s intranet, and SAC conferences. These efforts, however, do not appear to have been completely effective since, as previously discussed, about a quarter of the officials we contacted in CBP, CIS, and ICE wanted a clearer understanding of their roles and responsibilities with other immigration programs. A successful merger and transformation must involve employees and their representatives from the beginning to gain their ownership of the changes that are occurring in the organization. Employee involvement strengthens the transformation process by including frontline perspectives and experiences. Further, employee involvement helps to create the opportunity to establish new networks and break down existing organizational silos, increase employees’ understanding and acceptance of organizational goals and objectives, and gain ownership of new policies and procedures. Implementation steps that accompany this key practice include using employee teams, involving employees in planning and sharing performance information, incorporating employee feedback into new policies and procedures, and delegating authority to appropriate organizational levels. In conducting our field work and in meetings with headquarters officials, we did not identify any indication that the bureaus responsible for immigration programs had formal mechanisms for obtaining periodic feedback from field staff (other than the top manager in the office) about how well the transition was occurring or their concerns or ideas for improvement. In addition, several headquarters officials seemed somewhat surprised by the concerns reported to us by field officials when we discussed them in August 2004. On the other hand, while we did not conduct an exhaustive search of employee involvement by all field staff, our work did identify examples of such involvement. For example, we found two instances where field officials had participated in working groups held at headquarters regarding issues related to roles and responsibilities. That is, the working group to outline roles and responsibilities between the Border Patrol and ICE investigations involved field managers, two of whom we interviewed. Additionally, we were told that a meeting held in July 2004 involved CIS and ICE headquarters managers, field staff, investigators, and adjudicators in discussions about benefit fraud. Without a formal mechanism for obtaining employee feedback, however, the bureaus run the risk of missing opportunities for improvement and of allowing field-related problems to arise and continue without adequate responses. With its critical roles in helping protect national security and enforcing immigration laws, it is very important that INS’s integration into DHS and its related transformation successfully address longstanding and new management challenges. To accomplish this, DHS’s three immigration bureaus are tasked with establishing clear communication and coordination among one another and with the efficient and effective integration of the roles and responsibilities of the former immigration and customs investigative workforces, all while implementing a new system for providing administrative services. In managing this transformation, DHS is faced with not only the previous management challenges that beset INS for years, but with new challenges that come with creating a new department and managing diverse agencies. Notwithstanding this daunting endeavor, the transformation provides DHS with a unique opportunity to successfully address these inherited and new challenges and thus better accomplish its important mission. While DHS has started addressing many of the challenges and has experienced some successes in its communication and coordination and other efforts, the challenges and uncertainties reported by field officials and discussed in this report show that these efforts have not been sufficient to fully realize the potential benefits of this transformation. The sentiment among the field officials within CBP, CIS, and ICE we contacted demonstrates the importance of them having additional explanation and guidance from DHS and the headquarters management of each of the respective bureaus that delineates the (1) specific roles and responsibilities for conducting uniform immigration program operations, such as benefit fraud investigations, parole decisions, and controlled deliveries and (2) processes and procedures for making the shared services system work more efficiently. Without clear guidance, conflicts that the programs have had prior to and after the transition will likely persist and staff in the field will lack a complete road map for addressing cross-cutting issues that may arise in the future, as well as the necessary information to efficiently utilize the administrative services they need to accomplish their mission. Collectively, the nine key practices and related implementation steps that we identified in our 2003 report can help DHS transform the diverse cultures of former agencies into a cohesive unit that fulfills its new mission, meets current and emerging needs, maximizes performance, and ensures accountability. Specifically, while DHS efforts to incorporate the key practices and implementation steps we discuss in this report into its transformation plans should help address the challenges, in our view, a communication strategy that obtains and considers employee feedback to create shared expectations and gains their ownership in changes would improve the likelihood of success in addressing the integration challenges. We realize that carrying out a successful transformation is no easy or quickly realized task and believe that this makes having a strategy that fully incorporates these key practices all the more important. To assist DHS in successfully transforming its immigration related programs and address the challenges discussed in this report, we recommend that the Secretary of Homeland Security direct the heads of CBP, CIS, and ICE, as appropriate, in consultation with the Undersecretary for Border and Transportation Security, to take the following three actions. First, the bureaus should create a mechanism for periodically obtaining employee feedback on their ideas and concerns and consider this feedback in its future transformation and communications strategies, including assessing the challenges reported to us. Second, the bureaus should provide additional specific guidance to field managers and staff that establishes uniform policies and procedures on all cross-cutting integration issues that affect operational effectiveness, including specific descriptions of the roles and responsibilities of each bureau and its staff in investigative techniques such as benefit fraud investigations, parole decisions, and controlled deliveries. Finally, the bureaus should provide additional detailed written guidance to field managers and staff on the processes and procedures to follow for the provision of shared administrative services. DHS provided written comments on a draft of this report, and these comments are reprinted in appendix II. DHS said that, while there are instances where contextual clarification is needed, it generally agreed with our overall findings and recommendations and that our analysis would be beneficial to the department. DHS agreed with our recommendation that the bureaus–CBP, CIS, and ICE–should create a mechanism for periodically obtaining employee feedback. DHS commented that there have been accomplishments in this area and provided examples for each of the three bureaus. The examples include both existing and new efforts started since our field work, including a contract by CBP in September 2004 for a professional services firm to take periodic surveys of randomly sampled employees to measure the effectiveness of communications. If effectively implemented, the new efforts should provide the bureaus with additional employee ideas and concerns to consider in its transformation and communication efforts. Concerning our recommendation that the bureaus provide additional specific guidance to the field on cross-cutting issues, DHS said that it has provided clear and thorough guidance and uniform policies and procedures in critical cross-cutting integration issues. It also said that the transition challenges it faced were compounded because the overarching priority was to accomplish all of the department’s missions. DHS said there has been progress related to the consistency and delivery of guidance on cross-cutting issues that should be acknowledged in the final report. While we have not assessed the results of some of these examples of progress, we considered them and added them to the report where needed to add context. Further, we note that many of the examples DHS provided of its progress were ongoing during our fieldwork and staff still raised the concerns we report and said that more guidance on cross- cutting immigration issues is needed. Although these recent efforts, if properly implemented could address some of the deficiencies we identified, we believe that this feedback from field officials shows that more attention is needed in this area to address uncertainties and confusion about cross-cutting issues. DHS agreed with our recommendation that the bureaus provide additional guidance on the processes and procedures in providing shared services but noted its concern about our discussion of communication problems during the transition to shared services. DHS said that it used best practices to develop a communication strategy and plan to realign various administrative or support services into a shared services environment. It said that it experienced delays in rolling out the shared services initiative, so it is understandable that field managers lacked familiarity with certain issues at the time of our interviews. However, DHS did not believe the field managers views expressed in this report accurately portray the initiative or the level of comprehension of the initiative. We commend DHS for developing a communication strategy and plan for this initiative but believe that the views expressed in this report do portray the level of comprehension of the initiative by those officials at the time of our interviews. The concerns they raised, along with additional feedback DHS obtains in future employee surveys, should assist DHS in accomplishing the goals of this initiative. DHS also offered technical comments, which we considered and incorporated where appropriate. We plan to provide copies of this report to other appropriate committees, the Secretary of DHS, and other interested parties. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If your or your staff have any questions, please call me at (202) 512-8777. Key contributors to this report are listed in appendix II. The Homeland Security Act —(P.L. 107-296, Sec. 477(d)(1)—mandated us to review the transfer of functions from the Immigration and Naturalization Service (INS) to the Department of Homeland Security (DHS) and identify issues associated with the transition. Our overall objectives were to assess the status of (1) communication and coordination among immigration programs in DHS field offices, (2) integration of immigration and customs investigators in U.S. Immigration and Customs Enforcement (ICE) field offices, and (3) administrative services and systems used by DHS’s immigration agencies’ field offices. We did not assess program performance or DHS’s overall response to long-standing problems in this review. Additionally, our analysis was based on a snapshot in time, primarily during fiscal year 2004, and it is possible our results would have been different if our interviews had been conducted today. To obtain information on our objectives, we reviewed laws; U.S. Citizenship and Immigration Services (CIS) and ICE transition documents; DHS, CIS, U.S. Customs and Border Protection (CBP), and ICE memos on communicating and coordinating; DHS shared services implementation plans; our past reports; and other relevant documents. We also spoke with immigration experts in the public and private sectors, and with representatives of pro- and anti-immigration advocacy groups in the Washington, D.C., area. These included the American Immigration Lawyers’ Association, the Arab-American Antidiscrimination Committee, the Center for Immigration Studies, Electronic Data Systems Corporation Inc., the Institute for the Study of International Migration, the Migration Policy Institute, the National Immigration Forum, and the National Council of La Raza. We interviewed officials at DHS headquarters who were responsible for managing ICE’s detention and removal, intelligence, and investigations programs; CIS’s adjudications program; and CBP’s inspections and the Border Patrol. We also interviewed ICE, CIS, and CBP officials responsible for developing plans for the transition and officials in the former INS Office of Statistics and Office for Policy and Planning. We conducted structured interviews with officials in ICE’s special agent in charge (SAC) offices, CIS’s district offices, and CBP’s offices for field operations in 6 of the 27 cities that have SAC offices and with U.S. Border Patrol sector headquarter offices in 3 of those 6 cities. The 6 cities we visited were Arlington, Virginia; Baltimore, Maryland; New York, New York; Miami, Florida; Detroit, Michigan; and San Diego, California. Our visits to Arlington and Baltimore were used as preliminary site visits to design our interview questions. We selected these locations because of their geographic dispersion; their proximity to ports of entry; and the relative proximity of ICE, CBP, and CIS offices to one another. In site visits to CBP’s Offices for field operations, we met with directors for field operations, assistant directors for field operations, and, in some cases, inspectors. In these interviews, we collected information and documentation on (1) communication and coordination with ICE investigations and other DHS components, (2) the role of ICE investigators at the ports of entry, and (3) administrative services. In site visits to CBP Border Patrol offices, we met with Border Patrol sector chiefs, directors for administration, and administrative officers. In these interviews, we collected information and documentation on (1) communication and coordination with ICE investigations and other immigration components, (2) the Border Patrol’s work on antismuggling, and (3) administrative services. In site visits to CIS offices, we met with district directors, assistant district directors, as well as section chiefs. In these interviews, we collected information and documentation on (1) communication and coordination with ICE investigations and other immigration components, (2) benefit fraud, and (3) administrative services. In site visits to four ICE field offices, we used a structured interview instrument to obtain information from the SAC and associate special agents in charge (ASAC). In one location, we spoke with the two ASACs. In all four visits, we also met with assistant special agents in charge and administrative staff. In some locations, SACs and ASACs were in interim positions until ICE made permanent appointments. In New York, Miami, Detroit, and San Diego, we also conducted individual and group interviews with investigators and supervising investigators from the former INS. In these interviews, we collected information and documentation on (1) ICE’s investigative mission and performance measures for the program, (2), communication and coordination with other immigration components in DHS, (3) communication and coordination with other federal agencies, (4) integrating immigration and customs investigators, and (5) administrative services. We used our structured interview instrument to obtain information from ICE’s SAC offices with telephone interviews with the two most senior managers in the 21 ICE field offices we did not visit—20 SACs and 20 ASACs. We conducted these interviews between March and April of 2004 and made some follow-up calls in June 2004. In our telephone interviews we asked about (1) ICE’s mission and performance measures; (2) communication and coordination with CBP, CIS, and other ICE programs; (3) communication and coordination with other federal agencies; (4) integrating immigration and customs investigators; and (5) administrative services. We did not speak with one SAC because he was new to the position and did not believe he could provide us with useful information. We had previously interviewed him as the ASAC in another city. We did not speak with one ASAC because he, too, was new to the position. In total, we spoke with 49 SACs and ASACs in person and by telephone. David Alexander, Gabrielle Anderson, Leo Barbour, Carole Cimitile, Randall Cole, Patricia Dalton, Katherine Davis, Nancy Finley, Larry Harrell, Tahra Nichols, Rachel Seid, and Sarah Veale made key contributions to this report. | The Department of Homeland Security (DHS) assumed responsibility for the immigration enforcement and services programs of the former Immigration and Naturalization Service (INS) in 2003. The three DHS bureaus with primary responsibility for immigration functions are U.S. Customs and Border Protection (CBP), U.S. Citizenship and Immigration Services (CIS), and U.S. Immigration and Customs Enforcement (ICE). This transfer creates a great opportunity for DHS to address long-standing management and operational problems within INS. The Homeland Security Act requires GAO to review the transfer of immigration functions to DHS. In response, this report assesses the status of (1) communication and coordination of roles and responsibilities, (2) integration of immigration and customs investigators in ICE, and (3) administrative services and systems in CBP, CIS, and ICE. Most of the field officials with whom GAO spoke generally characterized communication and coordination with other DHS immigration programs in their geographic area as good or excellent. Other officials noted, that in some areas related to investigative techniques and other operations, unresolved issues regarding the roles and responsibilities of CBP, CIS, and ICE give rise to disagreements and confusion, with the potential for serious consequences. According to headquarters and field officials, some guidance has been made available to the field, and there are plans to provide more. Most ICE field officials GAO contacted said they have taken initial steps toward integrating the former immigration and customs investigators, such as establishing cross-training and pay parity. Most of these officials said, however, that additional important steps remained to be completed to fully integrate investigators. They reported that the lack of uniform policies and procedures for some ICE operations has caused confusion and hindered the creation of a new integrated culture. Headquarters officials said they were responding to these challenges. Officials in CBP, CIS, and ICE expressed confusion about a new shared services system for mission support when interviewed 3 to 4 months after the system was instituted. They also expressed frustration with problems they have encountered with travel, budget, and payroll systems, which are not a part of the shared services system. Additionally, the realignment of staff for shared services, along with other events, has resulted in some mission staff being assigned administrative work as a collateral duty, which may affect mission productivity. Key practices used by other public and private organizations that have undergone successful mergers and transformations may be helpful to DHS in addressing the challenges raised in this report and in transforming immigration enforcement and services. These key practices include establishing communication strategies to create shared expectations and involving employees to gain ownership for changes. |
The influx of recent advanced communications technologies, coupled with changing incentives in the health care marketplace, has resulted in a resurgence of interest in the potential of telemedicine. This technology is expected to affect health care providers, payers, and consumers in both the public and private sectors. Telemedicine is also expected to impact how medical care is delivered, who delivers it, and who pays for it. Although many players throughout the federal government and the private sector are involved in telemedicine, the Department of Defense (DOD) is considered a leader in research related to telemedicine efforts. DOD has devised ways to use this new technology to deliver health care on the battlefield or during peacetime operations. Currently, DOD has a major telemedicine effort underway to provide medical support for U.S. peacekeeping forces in Bosnia. As with other emerging technologies, telemedicine has not been precisely defined. An October 1996 Congressional Research Service report noted that the definition of telemedicine continues to be debated. The problem centers on what to include in the concept. The essence of telemedicine is providing medical information or expertise to patients electronically that would otherwise be unavailable or would require the physical transport of people or information. Telemedicine can be described in many different ways, depending on the level of technology used, main purpose of its use, and transmission timing. At the lowest level, telemedicine could be the exchange of health or medical information via the telephone or facsimile (fax) machine. At the next level, telemedicine could be the exchange of data and image information on a delayed basis. A third level could involve interactive audio-visual consultations between medical provider and patient using high-resolution monitors, cameras, and electronic stethoscopes. This level is currently receiving much attention in literature and demonstrations. A more comprehensive telemedicine system would integrate all components of technology for clinical, medical education, medical information management (also called informatics), and administrative services within a common infrastructure. The relationship of these components is shown in figure 1.1. Under its broadest definition, telemedicine has been practiced in some form in the United States for almost 40 years. Most projects have demonstrated that this technology can be used to exchange medical information between sites in both rural and urban settings. The first telemedicine project in the United States was established in 1959, when the University of Nebraska transmitted neurological examinations across campus. In 1964, the university established a telemedicine link with a state mental hospital 112 miles away. The National Aeronautics and Space Administration (NASA) was a telemedicine pioneer in the 1960s with its satellite support of a telemedicine project, conducted by the National Library of Medicine, that provided health services to the Appalachian and Rocky Mountain regions and Alaska. In the 1970s, NASA also sponsored a project, implemented with the Indian Health Service and the Department of Health, Education, and Welfare, on an Indian reservation in Arizona. According to a report issued by the Institute of Medicine, only one telemedicine project that started before 1986 has survived. Evaluations of these projects indicated that the equipment was reasonably effective and users were satisfied. However, when external funding sources were withdrawn, the programs could not be sustained, indicating that the high cost of complex, technically immature systems was a problem. In 1993, several members of Congress established the Senate and House Ad Hoc Steering Committee on Telemedicine to advise legislators on integrating new technologies into health care reform strategies. In 1994, the House Committees on Veterans Affairs and Science, Space, and Technology held hearings to examine economic and legal barriers that threatened to inhibit the expansion of telemedicine. In March 1995, the Vice President directed the Secretary of Health and Human Services (HHS) to lead efforts to develop federal policies that foster cost-effective health applications using communications technologies, including telemedicine. HHS was required to prepare a report on current telemedicine projects, the range of potential telemedicine applications, and public and private actions to promote telemedicine and remove existing barriers to its use. The Vice President also directed that this effort include representatives from several specific departments and agencies. As a result, HHS organized the Joint Working Group on Telemedicine (JWGT). DOD is providing the funding to carry out JWGT’s taskings related to constructing a telemedicine database. In addition, other agencies are providing personnel support. HHS issued a status report on JWGT’s efforts to the Vice President in March 1996. In 1996, the Senate and House Ad Hoc Steering Committee on Telemedicine sponsored a series of discussions by government and private organizations on telemedicine issues, such as financing, malpractice, and clinical standards. Also, the Telecommunications Act of 1996 (P.L. 104-104) directed the Secretary of Commerce, in consultation with the Secretary of HHS, to submit a report to Congress by January 1997 concerning the activities of JWGT regarding patient safety; the efficacy and quality of the services provided; and other legal, medical, and economic issues related to the utilization of advanced telecommunications services for medical purposes. The Secretaries of Commerce and HHS plan to jointly issue a final report to Congress and the Vice President on January 31, 1997. The Telecommunications Act of 1996 also directed the Federal Communications Commission to explore actions that would provide basic telecommunications services to all rural users. The act further required telecommunications companies to provide discounts to health care providers in rural areas. As a result of congressional concerns about the federal government’s role in advancing telemedicine, the Chairman and Ranking Minority Member, Subcommittee on Research and Development, House National Security Committee, asked us to help determine the steps that DOD and the federal government need to take to realize the full potential of telemedicine and achieve cooperation with the private sector. Specifically, this report addresses the (1) scope of public and private telemedicine investments; (2) telemedicine strategies among DOD, other federal agencies, and the private sector; (3) potential benefits that the public and private sectors may yield from telemedicine initiatives; and (4) barriers facing telemedicine implementation. Our overall approach was twofold. First, we conducted a broad data collection and analysis effort across nine federal departments and agencies and selected private sector entities. Second, we performed a cross-cutting case study of DOD, other public agencies, and private telemedicine projects in Georgia that provided us with examples for each objective. We chose Georgia because it had state, academic, and private sector funding for telemedicine efforts as well as collaboration with DOD on telemedicine projects. We used a comprehensive definition of telemedicine that included all four applications of telemedicine linked together within a common infrastructure. We excluded the lowest level of this technology—telephones and fax machines—from our data collection efforts. To determine what role DOD and other federal agencies played in the development of telemedicine, we collected and analyzed data on ongoing federal projects and applicable funding levels for fiscal years 1994-96. We also interviewed officials within numerous DOD components and eight federal departments and agencies. In addition, we reviewed DOD Inspector General reports, conference reports, and relevant information available through the Internet. To determine the efforts of the public and private sectors to advance telemedicine technology, we compared federal projects and funding levels and efforts to identify redundancy among projects. We categorized federal projects by one of the components of telemedicine identified through our analysis of definitions. We reviewed relevant literature on state and private sector efforts. We held discussions with state and private sector representatives involved with telemedicine projects. In addition, we attended bimonthly JWGT meetings to keep abreast of its ongoing efforts. To obtain an overview of state programs, we interviewed state officials and users from Georgia, North Carolina, and Texas who were involved in their state’s telemedicine network. We also interviewed officials of the Western Governors Association and George Washington University on their recent study on state initiatives. To identify information on private sector involvement in telemedicine, we interviewed officials and obtained data from many national associations and organizations. We also talked with representatives from private sector health care facilities in Georgia and Minnesota and equipment and telecommunications companies in Georgia and the Washington, D.C., area. To determine the potential benefits of and barriers facing telemedicine, we interviewed officials involved with telemedicine in DOD, other federal and state agencies, and the private sector. Also, we analyzed telemedicine evaluations and studies of potential barriers. We did not validate potential cost savings data. Appendix I contains a comprehensive listing of all of the federal, state, and private organizations we visited. We conducted our work from January to December 1996 in accordance with generally accepted government auditing standards. Numerous federal, state, and private organizations are sponsoring hundreds of telemedicine initiatives, but the total investment is unknown. Even though the federal government’s total investment cannot be determined, we identified nine federal departments and independent agencies that invested a minimum of $646 million in telemedicine initiatives for fiscal years 1994-96. During that time, DOD invested the most, $262 million, followed by the Departments of Veterans Affairs (VA), HHS, and Commerce, each investing over $100 million. The focus of the investments varied depending on the agency’s mission, but most projects were directed toward medical information systems, such as computerized patient records or digitized imagery. Other projects were directed toward infrastructure development, clinical applications for rural or remote areas, and medical education and training. The Defense Advanced Research Projects Agency (DARPA), working with some academic and private sector entities, is doing unique near- and long-term research for battlefield applications. Over 40 states have some type of telemedicine initiative underway funded by federal agencies, the private sector, or the states themselves. Ten of these states, especially Georgia and Texas, have taken an active role in sponsoring telemedicine initiatives. Estimates of telemedicine and related technology investments in the private sector have not been quantified because telemedicine costs are difficult to separate from health care delivery costs and most cost data is proprietary. Most private sector organizations, including telecommunication companies, private hospitals, and managed care organizations, have focused their telemedicine efforts on the telecommunications infrastructure. Other private sector efforts include developing the computer and medical equipment needed for telemedicine applications and delivering health care directly via telemedicine. Estimating total costs for telemedicine is difficult because agencies that deliver health care, such as VA, embed telemedicine costs within their health care programs. Also, the lack of a consistent definition of telemedicine may result in an agency not including certain project costs, whereas another agency would include the same type of projects in its costs. We identified over 35 federal organizations within 9 departments and independent agencies that were investing in telemedicine projects. Most officials from these departments did not know the amount their departments had invested in telemedicine. However, as table 2.1 shows, the federal government invested at least $646 million for fiscal years 1994-96. Details of federal telemedicine projects appear in appendix II. Although some agencies have attempted to develop an inventory of federal telemedicine projects, a governmentwide inventory has not been completed. For example, NASA had contracted with the Center for Public Service Communications in 1993 to develop an inventory of public and private telemedicine initiatives. Funding was cut in 1994, and the inventory subsequently became outdated. In 1995, the DOD Inspector General developed a directory of DOD telemedicine demonstrations and projects. According to the DOD Inspector General, this effort represented a starting point to track DOD’s telemedicine initiatives. JWGT expected to complete a federal inventory in January 1997. DOD and each of the military services have collectively invested more in telemedicine initiatives than any other federal department or agency. However, DOD and the services have not established telemedicine budgets. They currently initiate projects by reprogramming funds from other programs and are developing budget estimates for fiscal years 1998-2003. Nearly half of DOD’s $262 million telemedicine investment was devoted to unique long-term research and development of battlefield applications of telemedicine. For example, DARPA is developing devices to treat wounded soldiers, such as a hand-held, physiologic monitor that will help a combat medic locate a wounded soldier and monitor the soldier’s vital signs. The Army is investing in the development of a “virtual reality” helmet that will allow combat medics to consult with a physician during the first critical hour, referred to as the golden hour by DOD, after a soldier is wounded. The Navy has directed most of its telemedicine investments to establish telecommunications connectivity between its deployed ships and U.S.-based medical centers. The remaining DOD investment focused on peacetime health care. The Army, for example, is building medical communications networks to link its medical centers with each other. These networks will support numerous medical functions, particularly digitized, filmless x-rays or teleradiology. The most significant Air Force telemedicine effort will establish communications links between several Army, Navy, and Air Force medical centers, hospitals, and clinics in TRICARE Region 6. DOD’s investment helps provide medical care in several functional applications within a telemedicine system, including clinical health care delivery, medical information management, education, and administration. Figure 2.1 shows DOD’s investment according to functional application. DOD’s investment in telemedicine could double or even triple by the year 2003 depending on key budget decisions to be made in fiscal year 1997. Each service is currently developing its program objective memorandum for fiscal years 1998-2003. With regard to telemedicine, the services estimate that $464 million will be needed for the Theater Medical Information Program. This program is designed to link all the medical information systems within a battlefield or operational theater, including medical command and control, medical logistics, medical intelligence, blood management, and aeromedical evacuation. Such information will be used to collect and analyze environmental health data, and the analysis will help battlefield commanders make tactical decisions that may reduce disease and non-battle-related injuries. The current deployment of telemedicine to Bosnia, known as Primetime III, is an early test of some of the Theater Medical Information Program’s information management concepts. For example, Primetime III will use telemedicine to provide medical units access to numerous medical capabilities at any time during the day or night. These capabilities include computerized medical records; full-motion remote video consultation between theater medical units and tertiary care facilities; far forward delivery of laboratory and radiological results and prescriptions; digital diagnostic devices, such as ultrasound and filmless teleradiology; and medical command and control technologies. To achieve this access, DOD established an integrated electronic network between (1) the Landstuhl Regional Medical Center in Germany, (2) field hospitals in Hungary and Bosnia, (3) smaller brigade operating base medical units and forward operating base medical support units in Bosnia, (4) the U.S.S. George Washington in the Adriatic Sea, and (5) nine DOD medical centers located within the continental United States and Hawaii. To date, Primetime III expenditures totaled $14.6 million—the Office of the Assistant Secretary of Defense for Health Affairs funded $12.4 million, and Army’s 5th Corps in Europe funded $2.2 million. Total costs are estimated to be $30 million. Eight civilian federal departments or independent agencies with various roles in providing or supporting health care delivery invested $384 million in telemedicine from fiscal years 1994 to 1996. In some cases, these investments represented the estimated total costs of projects for the year first awarded and not the costs agencies actually incurred during those years. Most expenditures provided clinical services, telecommunications infrastructure, and information management resources, as shown in figure 2.2. In many instances, the agencies’ investments were directed toward rural populations or focused on teleradiology. In May 1995, the Primary Care Resource Center at George Washington University completed a comprehensive review and analysis of the states’ telemedicine activities. The report, entitled State Initiatives to Promote Telemedicine, explores the role that states have played in telemedicine and identifies their various initiatives, but it does not quantify total investments. The study found that overall state involvement in telemedicine has been expanding, particularly to provide health care to rural or remote areas. Although over 40 states have some initiatives underway that are funded by federal agencies, the private sector, or the states themselves, 10 actively sponsor telemedicine initiatives. Some states focus on the high costs of providing a telecommunications infrastructure by requiring carriers to subsidize services to certain educational and health care institutions, particularly in rural or remote areas. We reported in 1996 that three states—Iowa, Nebraska, and North Carolina—worked with the private sector and potential users to encourage private investment and ensure the availability of services in less densely populated areas. These states encouraged private investments in advanced telecommunications infrastructure by offering to become major customers of these services from the telephone companies. As a result of the states’ efforts, the telephone companies made improvements faster than they would have on their own. Georgia’s telemedicine program began when the governor signed the Georgia Distance Learning and Telemedicine Act of 1992, which established a telecommunications network to ensure that all residents of Georgia have access to quality education and health care. The act allowed the Public Service Commission to set a special flat-rate structure across the state and allowed one communications company to cross other companies’ service areas to set up a statewide infrastructure. The program received about $70 million from the state’s Economic Development Fund, which was established using fines paid by a telecommunications company. As of February 1996, approximately $9 million had been allocated for the telemedicine portion of the network, and the remaining $60 million was spent on distance education using telecommunications. The telemedicine money funded the network infrastructure, equipment for the sites, one-half of the monthly line charges for the first 2 years of operations, and one-half of the maintenance costs per site in the second year. The sites pay for personnel, administration costs, and remaining line charges. In addition, the state’s Department of Human Resources provides approximately $350,000 annually to advance telemedicine in rural communities. The Georgia telemedicine network includes 60 sites serving 159 counties. Seven of the sites are state correctional facilities. Three of these facilities have permanent telemedicine systems, with the other four serviced by a mobile telemedicine van. The network is primarily used to provide inmates with more timely access to specialty care. Before telemedicine, non-emergency specialty care services took 30 to 90 days to schedule. With the implementation of the system, inmates can see a specialist in 7 to 21 days. Several Georgia departments and agencies are actively involved in the statewide network. A governing board sets policies and awards funding for the network. The state’s Department of Administrative Services develops and administers the infrastructure network. The Medical College of Georgia plans, coordinates, and implements the daily operations of the network’s medical system, and the Office of Rural Health and Primary Care, within the Department of Human Resources, approves proposed expenditures, ensuring that funding is used entirely to advance telemedicine in rural communities. Texas uses state-operated networks to provide telemedicine consultations and continuing medical education to small rural clinics. For example, the University of Texas Health Science Center at San Antonio operates the South Texas Distance Learning and Telehealth infrastructure network. In addition, the Texas Tech Health Sciences Center and the University of Texas Medical Branch at Galveston provide all of the medical care to the 130,000 inmates at 104 state prison facilities. These facilities have physicians and other clinical staff to provide primary care, but patients who require specialized care are referred to the Galveston and Texas Tech hospitals. The state has funded a telemedicine project to link specialists in Galveston with four state prisons and has plans to expand the project to other locations. Texas officials estimated that telemedicine has greatly reduced the number of patients transferred from their home facilities to the hospitals. The state has arranged with the private owners of the telecommunications systems to charge a flat rate for usage. Specifically, rural clients and other low utilization users are charged $425 per month for up to 40 hours of usage. Commercially, a facility would pay an access charge of $475 plus a use charge of $60 to $100 per hour. In 1992, the East Carolina University Medical School began providing telemedicine consultations to the state prison in Raleigh, 100 miles away. Physicians see and talk to the patients via the telemedicine link and then diagnose and prescribe medications when necessary. A digital stethoscope, graphics camera, and miniature hand-held dermatology camera are used to aid patient examinations. These tools, along with a computerized patient record system and a comprehensive scheduling system, form the basis of an integrated health care information system being implemented across a wide area network in North Carolina. The model developed for the prison system is now being expanded to six rural hospitals within the state and the naval hospital at Camp Lejeune. Estimates of private sector investments have not been quantified because telemedicine costs are difficult to separate from health care delivery costs and most cost data is proprietary. The Koop Institute estimates that the U.S. telemedicine market totals $20 billion for telecommunications infrastructure, computer hardware and software, and biomedical equipment. A breakdown of this funding is unavailable. Further, any estimate of private sector investments would partially duplicate amounts reported by the public sector because of contract and grant relationships. Also, the Koop Foundation, a sister organization to the institute, is expected to compile an inventory by the year 2000 of private sector telemedicine projects. Dozens of private interests, including telecommunications companies, equipment manufacturers, private hospitals, and managed care organizations, have positioned themselves to capture future telemedicine market shares. For example, telecommunications companies are providing the infrastructure that allows telemedicine consultations and data transfers to occur. Private companies built and own the National Information Infrastructure and lease the lines to telemedicine users and others. Most telemedicine end users do not own high-technology telecommunications lines and thus rely on private enterprise to provide this infrastructure. Equipment manufacturers use their own funds and federal financial support to develop data transmission technologies, such as digital coding and decoding equipment, to facilitate telemedicine consultations. Private firms also develop medical sensory devices, such as electronic stethoscopes, specialized cameras, and robotic surgical assistance devices. Until recently, most telemedicine efforts in the health care delivery area either received some federal or state funds or were limited to teleradiology. Some providers have now invested in their own telemedicine networks, seeking to achieve cost and operational efficiencies. For example, a large managed care organization in Minnesota established telemedicine networks between its facilities to expand specialty care to members in rural areas. Another provider established telemedicine links among its three facilities in Minnesota, Florida, and Arizona and became one of several health care providers seeking to expand to international telemedicine linkages. One manufacturer of medical robotics, Computer Motion, Inc., believes that improved automation has been fundamental in opening huge new markets. For example, many surgeons, nurses, and medical assistants all see the use of robotics for laparoscopic surgery as extremely positive. The movements of the laparoscope are smooth, and the video image remains steady throughout the procedure. The physician who, in August 1993, performed the first laparoscopic surgery using the robotic arm said the biggest advantage is that surgeons have complete control and do not have the difficult task of communicating to assistants where to move the laparoscope. Literature indicates that giving directional instructions can be a distraction from the procedure itself; most surgeons can be more efficient if they do not have to keep asking someone to correct the positioning of the scope. The manufacturing company has been working closely with Yale University in support of research and education programs in telesurgery and robotically assisted laparoscopy. One university official said that the partnership would allow the university to bring robotics into the education system and demonstrate how it could be used effectively to reduce costs and improve the quality of patient care. Medical robotics continues its rapid expansion into the worldwide marketplace. European countries and various training centers have begun to launch collaborative efforts in medical robotics education. According to the manufacturer, more than 100 robotic arms have been used in approximately 13,000 minimally invasive surgical procedures. Voice control will be a feature of the next generation of robotic arms, which will require clearance by the Food and Drug Administration (FDA). No overarching, governmentwide strategy exists to ensure that the most is gained from numerous federal telemedicine efforts. Until recently, there was little or no coordination of telemedicine activities among federal agencies. Although JWGT is a first step toward providing a mechanism to help coordinate federal support of telemedicine, federal departments have not developed agencywide strategies to manage their own telemedicine efforts. Without clear goals and priorities for telemedicine investments, some programs are difficult to justify and may be in jeopardy. Federal agencies have recognized the need for a strategic plan to fulfill their telemedicine visions. Even as the largest single federal investor and perhaps the main sponsor of long-term telemedicine research, DOD does not have a plan to ensure it is maximizing the value of its investments. As a result, DOD’s (1) organizational structure to ensure the infusion of telemedicine into application is still evolving, (2) telemedicine program has not been precisely defined, (3) budgets do not reflect a comprehensive telemedicine program, and (4) partnerships with the private sector have not been fully explored. DOD’s telemedicine experiences may be indicative of telemedicine activities throughout the federal government. In addition, the private sector has recognized that telemedicine technologies have developed to the point at which telemedicine strategies are needed to guide investments. No formal mechanism or strategic plan exists to ensure that telemedicine development is fully coordinated among federal agencies and that telemedicine efforts have a common purpose. A well-coordinated plan is important because over 35 federal government organizations directly or indirectly conduct or sponsor (1) research and development; (2) demonstrations using telemedicine for health care delivery; or (3) evaluations of telemedicine’s effects on the quality, accessibility, cost, and acceptability of health care. Some of the involved federal organizations are shown in table 3.1. The organizations involved with telemedicine initiatives are seeking solutions to narrowly defined problems that fall under their purview. For example, the Department of Justice, specifically the Federal Bureau of Prisons (BOP), is responsible for the detention and care of approximately 95,000 prisoners, nearly 4,000 of whom receive medical attention on any given day. A small but growing percentage of these prisoners must currently be moved under guard from detention sites to distant medical facilities for diagnosis and treatment. BOP is interested in telemedicine because of the opportunity to reduce the significant cost of providing medical care to prisoners. In addition, telemedicine offers the chance to reduce the number of times prisoners are taken to outside medical facilities, thus reducing the potential for escape and risk to the attending medical staff and citizens within the local communities. Other organizations are using telemedicine to meet their mission needs. For example, NASA is interested in telemedicine primarily to understand its application to medical care in space for future long-duration platforms, such as a space station, and minimize the risk of inadequate medical care for astronauts, which would increase the probability of mission success. The Department of Commerce has two core programs that promote private sector development of advanced telecommunications and information technologies for health-related projects. Within the Department of Agriculture, the Rural Utilities Service plays a key role in the rural aspect of the National Information Infrastructure. One grant awarded in 1996 will help the Rural Utah Telemedicine Associates to implement a mobile health clinic that will provide primary care and specialty consultation via telemedicine technology to rural communities with few or no health care providers. Some interagency coordination occurs on an ad hoc or narrow basis (e.g., through symposiums, technology demonstrations, and joint programs), but this approach does not necessarily provide a firm basis for technology exchange. Many agency officials we met with cited the lack of an established coordination mechanism as an obstacle to determining information that could help advance telemedicine. Further, some agency officials were concerned about possible redundant efforts, especially those related to teleradiology—the most common current application of telemedicine supported by federal funds. However, the officials lacked information to determine whether the work was redundant or actually complemented other’s efforts. Several agency officials said that some federal telemedicine efforts repeated previous mistakes rather than benefited from them because information on previous efforts was not available. To help fill the information gap, DOD funded JWGT’s project to develop a database of all federally funded telemedicine projects. JWGT considers such an inventory a critical first step toward achieving coordination across federal agencies. The database should allow federal agencies to more easily learn about the federal investment in various telemedicine projects. JWGT will make this database available to the public on the Internet to assist states and communities with their own telemedicine plans. Because of the magnitude of the federal government’s involvement in telemedicine development, JWGT has thus far been unable to develop an accurate, comprehensive inventory of federal projects. JWGT believes that its efforts to develop an inventory have demonstrated the weaknesses in the information maintained by federal agencies and highlighted the need for greater attention to routine data collection on federally funded programs. For example, departments or agencies have many different definitions of telemedicine, making it difficult to collect compatible data. The inventory, originally scheduled for release in June 1996, was expected to be released by the end of January 1997. JWGT stated that each participating agency would be responsible for maintaining the inventory. However, members of JWGT have expressed concern as to whether each of the agencies would be supportive of maintaining their inventories. In addition, JWGT meets approximately twice a month to help coordinate federal telemedicine activities and share relevant information. JWGT meetings include over 60 individuals representing executive branch agencies. However, no representatives from each service’s Surgeon General’s office or DARPA attend these meetings. Further, private sector participation was limited mostly to professional medical associations. In addition to the lack of an overall federal telemedicine strategy, federal agencies do not have departmentwide strategies to maximize the value of their telemedicine investments. If each agency involved in telemedicine had its own strategy, a governmentwide strategy could be built from it. The absence of departmentwide strategies has contributed to unclear definitions of telemedicine and the lack of a comprehensive inventory of telemedicine projects among all involved federal agencies. DOD, as well as other federal agencies, are beginning to recognize that an intra-agency strategy may be the first step to target their investments in telemedicine. According to the Assistant Secretary of Defense for Health Affairs, who oversees the Military Health Services System (MHSS), telemedicine will be a major enabling technology in reengineering health care delivery in DOD and throughout the United States. The Assistant Secretary believes that a mature telemedicine infrastructure can reduce health care delivery costs, but mechanisms must be put in place to manage the infusion of telemedicine into application while still proceeding with appropriate research and development or prototype efforts. However, no such mechanisms are currently in place in DOD. DOD has recognized the need for a strategic plan to fulfill its telemedicine vision, as stated in the December 1994 testbed plan published by the U.S. Army Medical Research and Materiel Command. This document also stated that the Telemedicine Technology Integrating Committee, led by the Commanding General of the Medical Research and Materiel Command, would develop a plan that would provide a framework for multispecialty integration of entrepreneurial efforts and ensure the optimum use of scarce resources for DOD’s peacetime and wartime medical activities. However, no milestones were established for accomplishing this plan. Health Affairs officials told us that they are responsible for developing an overall strategic plan for telemedicine. As of December 1996, the Assistant Secretary of Defense for Health Affairs had not approved this plan. Officials told us that the DOD telemedicine organizational structure resulting from this plan would be modeled after the one established for DOD’s information management and information technology systems. However, no other details were available. Some defense organizations have begun developing their own strategic plan. For example, in June 1996, the Center for Total Access, which includes TRICARE Region 3 and the Army’s Southeast Regional Medical Command, published a 5-year strategic plan to support both commands.The plan recognizes the need for telemedicine projects to adhere to specific guidelines and provides a framework for ensuring that the projects and initiatives undertaken conform to an open standards environment and that new telemedicine initiatives can easily be integrated with existing systems. However, this regional telemedicine plan could be fundamentally different than the strategic plans of the other 11 TRICARE regions. Many officials expressed concern as to how telemedicine would be integrated into the continuum of DOD medical care—from the battlefields overseas to the medical treatment facilities in the United States—with so many activities underway and no overriding strategy to link them together. For example, the Army Medical Department must provide mobile, flexible support for its own forces across long distances in a variety of wartime environments. The Army has developed a mission needs statement for medical communications in combat casualty care and established a program manager under an Army program executive office for this work. The Air Force’s medical forces are responsible for most of the air evacuations from the theater of operations to the United States in wartime, but the Air Force is not part of the Army’s medical communications initiative. Army officials acknowledged that this initiative should eventually be a triservice program. Further, no parallel mission needs statement ensures the continuum of care from theater to the continental United States. Without a formal strategy to define the goals and objectives of DOD’s telemedicine initiatives, some DOD programs may be difficult to justify and therefore may be in jeopardy. For example, research and development efforts led by DARPA are subject to discontinuation due to a change in the agency administrator’s priorities. DARPA initiated its telemedicine efforts in fiscal year 1994 with a defined program to find ways to improve medical care on the battlefield. Even though DARPA’s efforts are starting to mature, there is no clear plan regarding how individual projects will be infused into application. DARPA will be looking to the individual services to continue its research and development function. NASA, a pioneer in developing telemedicine technologies for almost 40 years, is developing a strategic plan for its telemedicine initiatives. The plan will address the use of telemedicine in the human space flight program and the use of NASA-developed technology in telecommunications, computers, and sensors to enhance health care delivery for humans in space. The plan will also incorporate industry input into these areas. According to 1994 VA testimony, the use of telemedicine is having a major impact on VA’s approach to health care, but VA does not have a telemedicine strategic plan. To provide overall leadership to its telemedicine program, VA recently established the position of Chief of Telemedicine. This official serves as the principal advisor on telemedicine to the Offices of the Under Secretary for Health, Patient Care Services, and Chief Information Officer. VA officials told us that the Chief of Telemedicine would develop a strategic plan. Other responsibilities of the Chief include facilitating the coordination of VA facilities undertaking telemedicine projects; overseeing VA activities regarding selection, funding, and evaluation of telemedicine projects; consulting with medical centers about the application of telemedicine standards; and identifying needs for telecommunications and infrastructure support. HHS does not have a strategic plan linking the efforts of its six agencies investing in telemedicine. HHS officials believe that JWGT effectively communicates information about telemedicine development to the six applicable HHS agencies. However, agency officials acknowledged that a strategic plan may be needed. The officials also stated that such a plan should strengthen, support, and build on the work of JWGT and not create a new bureaucracy. Although DOD has a large and growing investment in telemedicine, it has not yet structured its telemedicine initiatives, which are led by numerous organizations, to determine if, collectively, their cost is commensurate with potential benefits DOD stands to gain. Within DOD (1) the roles of numerous key players are still evolving, (2) the telemedicine domain is unclear, (3) comprehensive program budgeting has not occurred, and (4) partnerships with the private sector have not been fully explored. Further, DOD’s telemedicine activities may be indicative of other federal agencies’ telemedicine efforts. Many different DOD organizations generate telemedicine projects, including the ones shown earlier in table 3.1. The problems of organizational responsibilities are exacerbated by the large number of organizations involved in telemedicine activities. In September 1994, the Assistant Secretary of Defense for Health Affairs designated the Army Surgeon General as the DOD Executive Agent for telemedicine and established the “DOD Telemedicine Testbed Project” to explore and develop new clinical approaches for using telemedicine. The Commander of the Army’s Medical Research and Materiel Command was designated as the testbed’s Chief Operating Officer, and the Command’s Medical Advanced Technology Management Office (MATMO) was designated the principal manager and administrator for the testbed. However, the responsibilities for the Executive Agent, Chief Operating Officer, and MATMO were never approved in a charter. Air Force, Navy, and other agency officials told us that an office similar to MATMO is needed to bring focus and coordination to telemedicine within DOD. They also said that MATMO has been too focused on mainly supporting Army deployable telemedicine projects and excluding the other services’ needs. It was difficult for us to distinguish between what MATMO initiates for the DOD-wide testbed and what it is pursuing for the Army. Most of MATMO’s accomplishments are associated with the Medical Diagnostic Imaging Support system, which the Medical Research and Materiel Command was involved with before the Army became the DOD Executive Agent for telemedicine. Further, many service officials we met with, except from specific Army programs, were either not familiar with MATMO or were not getting guidance from them. For example, the Air Force program manager responsible for initiating a program in TRICARE Region 6, which Health Affairs expects to be a model for other TRICARE regions, had not received any assistance from MATMO in designing the program. The official told us that he relied on officials from the Medical College of Georgia for assistance. In addition, Navy telemedicine program officials at Camp Lejeune, North Carolina, were familiar with MATMO but relied on East Carolina University for advice. Further, this official stated that a group of TRICARE regions were attempting to develop their own coordinating mechanism on the Internet. Other layers of oversight have evolved without clear responsibilities, with the Army fulfilling many key positions. Executive oversight of the testbed was vested in a Board of Directors, chaired by the Assistant Secretary of Defense for Health Affairs. Board members include the Director, Defense Research and Engineering; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Joint Staff Director for Logistics; the three Surgeons General; and the Director of DARPA. At one point the Army Surgeon General served as both the Executive Secretary of the Board and as the Chief Executive Officer of the testbed. With the retirement of the former Army Surgeon General, the Navy Surgeon General became the Chief Executive Officer. However, the Chief Executive Officer’s responsibilities have not been defined. In addition, the Army Medical Department and MATMO had been responsible for overseeing evaluations of telemedicine projects, such as those being demonstrated in Bosnia. Army officials informed us that this responsibility was being transferred to another service; as a result, the future of some of the Army’s and MATMO’s efforts was undecided. Other officials told us that the change was being made to prevent any conflict of interest on the Army’s part, since the Bosnia telemedicine deployment is primarily an Army effort. In August 1996, Health Affairs officials told us that its Information Management Proponent Committee would soon be responsible for providing oversight of telemedicine initiatives, including those under MATMO’s purview. However, officials could not provide additional insight at that time regarding the concept of this structure. In addition, another organizational change is underway that will impact on telemedicine, including DOD’s research and development initiatives. In June 1996, the Deputy Secretary of Defense directed the Army to take the lead in establishing an Armed Forces Medical Research and Development Agency. The future impact of this new agency on the organizations responsible for telemedicine functions and funding is unknown. A 1995 DOD Inspector General report suggested that DOD needed to define telemedicine more clearly. Without a consistent definition to describe telemedicine initiatives, responsible officials from the various DOD organizations participating in telemedicine efforts do not know precisely what their programs encompass. Although defense officials generally agree that telemedicine involves the use of communications technology to deliver health care, they have not agreed on the types of initiatives to include within the scope of telemedicine oversight. For example, some Army and DARPA officials consider patient identifiers that allow the electronic storage of medical information on a card or dog tag-like device to be the first element in an integrated telemedicine system, but the Navy does not view these devices in the same manner. Air Force officials initially classified one of their projects as telemedicine but later said that the project fell outside of its definition of telemedicine. The project, called Provider Workstation, is intended to provide medical personnel with the capability to access medical records on a personal desktop computer no matter where the patient or the relevant information is located. Air Force officials now identify this project as one of its many medical management information systems. However, a 1996 DOD Inspector General report noted that Provider Workstation was a successful DOD telemedicine project. Although MATMO tried to identify the full scope of telemedicine projects that might fall within its oversight function, our analysis revealed that its inventory (1) did not include the services’ actual telemedicine efforts and DARPA-initiated projects and (2) contained inaccurate information. During the course of our review, MATMO and Health Affairs provided us information on six different inventories that included anywhere from 22 to 94 projects. In addition, a Health Affairs official told us that Health Affairs did not directly fund any telemedicine projects, but several telemedicine project managers informed us that they received funding from Health Affairs. DOD has not developed a comprehensive telemedicine budget or program objective memorandum. In a 1994 memorandum to the Army Chief of Staff, the Director for Program Analysis and Evaluation noted that the concept of telemedicine needed to be defined by the Office of the Army Surgeon General to compete for funding during the budget process. Funding for telemedicine has been derived from other programs or congressionally directed. Some service officials are especially concerned about budgeting for MATMO projects because MATMO managed about $47 million during fiscal years 1995 and 1996 in telemedicine initiatives that were funded by Health Affairs or reprogrammed through the Medical Research and Materiel Command. Service officials have pointed out that MATMO does not have an approved funding line and therefore can operate outside the normal DOD development and acquisition process. As a result, none of MATMO’s telemedicine projects are subject to milestone decisions, cost-benefit analyses, or life-cycle management decisions, which are all required in the acquisition process. MATMO officials believe that their approach is necessary at this time because technology is changing at such a fast pace that the normal acquisition cycle would prevent DOD from capitalizing on the newest telemedicine technology. Other than the telemedicine initiatives led by DARPA, few partnerships between the private sector and DOD are planned. The Medical Research and Materiel Command attempted to promote a collaborative working relationship between the Army and the private sector. The Command was planning to develop state-of-the-art telemedicine technologies—called the U.S. Army Federated Laboratory Concept—that are focused on combat casualty care. In May 1995, the Command issued a broad agency announcement. Interested parties were required to form consortiums involving health service providers, industry, and academia. Two parties whose proposals had not been accepted stated that DOD needed a more defined plan to which the private sector could respond. However, funding for the laboratory concept had not been programmed and was therefore subject to the availability of reprogrammed funding. Although the Navy is seeking to form partnerships with academia, industry, and other government agencies, East Carolina University School of Medicine and Pitt Memorial Hospital, instead of Portsmouth Naval Medical Center, took the initiative to integrate the Camp Lejeune Naval Hospital in a telemedicine network. The TRICARE region that encompasses Camp Lejeune does not have a telemedicine strategy that identifies goals for pursuing such partnerships. Also, according to Army Medical Department officials, the Army’s Great Plains Health Service Support Area, responsible for managing medical care at Army facilities in 14 states and Panama City, has attempted to establish cost-sharing agreements with Texas Tech and a VA clinic in the area, but these attempts have been unsuccessful because of the lack of clear goals and objectives. Given the wide range of private sector players in the implementation of telemedicine, it is understandable that no single private sector strategy exists to advance this emerging technology. For example, manufacturers develop new products, utility companies build the telecommunications infrastructure, professional organizations develop health care standards, health providers deliver medical care, and special interest groups promote the use of new technologies. Each of these groups has its own interests and strategies for advancing telemedicine. Nonetheless, the private sector is an important player in furthering the development and application of telemedicine technologies. Two private sector health care providers—the Mayo Clinic and Allina Health Systems—and a major telecommunications company—American Telephone and Telegraph (AT&T)—illustrate the critical role played by the private sector in advancing telemedicine and developing strategies for greater usage of this emerging technology. Telemedicine at the Mayo Clinic evolved to facilitate integration of group practices at three separate locations—Jacksonville, Florida; Scottsdale, Arizona; and Rochester, Minnesota. In 1986, the Mayo Foundation installed a satellite-based video system that enabled physicians, researchers, educators, and administrators to communicate with each other. When the Jacksonville and Scottsdale facilities were not fully staffed, they used specialists from Rochester via telemedicine for four or five consultations per week. However, with the addition of specialists at the Jacksonville and Scottsdale locations, the telemedicine system was increasingly used for education, research, and administrative purposes. According to Mayo, in 1995, its telemedicine system was used for over 700 telemedicine consultations in echocardiology between Rochester and the other two sites. Mayo is also involved in a project supported by NASA and DARPA to explore the combination of satellite communication and terrestrial services in an economic telemedicine model. To conduct the project successfully, Mayo has assembled a consortium of leaders in the industry (Hewlett-Packard, General Electric Medical Systems, Sprint, U.S. West, Martin Marietta, Healthcom, and Good Samaritan Hospital in Arizona), along with Mayo Foundation entities. The results from this project will help determine a strategic policy for telemedicine at the Mayo Clinic and provide knowledge about the use of asynchronous transfer mode technology for local area and wide area networks. Mayo officials told us that there has to be a need for which telemedicine is a solution—otherwise telemedicine applications will not be financially viable. These officials believed that managed care organizations may ultimately drive the development of telemedicine. A representative from Allina Health Systems, a managed care organization and insurer from Minneapolis, Minnesota, stated that the market will determine the pace and extent to which it expands its telemedicine services. Along with an alliance of eight rural hospitals, Allina has operated since 1995 a telemedicine network that links hospital emergency rooms. Allina believes that emergency medicine in rural areas is the best application of telemedicine currently available for its operation. As of October 1996, Allina’s telemedicine network had been used for about 130 medical consultations and about 450 emergency service consultations. Allina’s network is a single-state system, which eliminates concerns about licensure requirements that plague many telemedicine efforts. The use of Allina’s telemedicine network in urban areas is quite different than its use in rural areas. For example, in urban areas there is more extensive use of the system for administrative and educational purposes and virtually no use for consultative purposes. Allina recognizes the need for better cost-benefit data to justify major investments in telemedicine and prove that the applications are worthy. Toward this goal, the company plans to improve the development of project evaluations and its marketing strategy. Allina must decide in the near future whether to view its telemedicine initiative as a service and thus a cost of business or as a separate business entity or profit center. One of the complicating issues is that so many variables in measuring costs are difficult to separate (i.e., normal operating costs versus special costs associated specifically with telemedicine). AT&T’s strategy for telemedicine development involves developing services for telecommunication applications, transactions, and networking and providing telecommunications and some training for computer-based medical systems. These efforts have accelerated since the creation of the National Information Infrastructure. AT&T’s involvement in telemedicine efforts is largely due to the company’s perception, which was confirmed by clients, of a need for reliable and secure communication lines for health care. AT&T is making a substantial investment—both financially and from a personnel resource perspective—in telemedicine development. For example, an official told us that by December 1996 AT&T expected to assign about 100 staff members to servicing or managing one agency’s telemedicine system. Even though it has contracts with federal agencies and is assisting many private sector groups, AT&T plans to seek FDA review of its products and services. AT&T said that many products involving telemedicine are possible but that customers may not be willing to pay for them. As a result, manufacturers must make certain that there is a market for the products being developed. HHS commented that our report should acknowledge the role that the High Performance Computing and Communications Program has played in the coordination of federal telemedicine research and development activities. During our review, we collected data from the National Library of Medicine on funding from this program specifically for telemedicine initiatives. However, agency officials did not highlight to us the role that this program plays in coordination of telemedicine activities across the federal government or with JWGT. We believe that the program is one of several federal initiatives supporting telemedicine initiatives. However, we did not evaluate the program, since it was beyond the scope of our review. Telemedicine offers numerous benefits for the military, other federal and state government organizations, the private sector, and individual patients because it eliminates distance as a factor in treating patients. Such benefits include access to care where it is not otherwise available; improved quality of care; and, in many instances, reduced costs. However, costs could increase due to investments in infrastructure and increased utilization of health care services. No comprehensive studies have been completed to prove that telemedicine delivers cost-effective, quality care. Early efforts included few consultations and only provided anecdotal, or retrospective, observations about the benefits. Several federal agencies and the private sector are beginning to implement some comprehensive studies, but results from most of these studies will not be known for several years. By eliminating distance as a factor in treating patients, telemedicine benefits health care providers and patients, no matter whether the setting is a military site, rural hospital, or correctional facility. Without telemedicine, persons who need specialized care could be left untreated; improperly treated; or, if time and circumstances permitted, transferred to another facility for the care. Telemedicine provides benefits to the various groups by allowing access to care where it is not otherwise available and improving the quality of care delivered. In addition, telemedicine may, in many instances, reduce health care delivery costs. For the medic on the battlefield, telemedicine provides immediate access to a clinician with greater skills so that they can work together to save a soldier’s life. DOD believes telemedicine could reduce the mortality and morbidity rates on the battlefield by as much as 30 to 50 percent. Quality trauma care depends on the timely, efficient, and accurate flow of information at each step of the crisis management process. Telemedicine can provide the vehicle for this flow of information, which includes patient information, treatment records, and medical knowledge. Telemedicine could provide a “bridge” for the 100,000 to 150,000 personnel deployed on military ships around the world who have limited access to medical diagnostic and consultant services. For example, during a 6-month Western Pacific deployment in 1995, sailors aboard the aircraft carrier U.S.S. Abraham Lincoln had access to enhanced specialist medical care from the Naval Medical Center in San Diego, California, 6,000 miles away. That access proved critical for one sailor who injured his hand on a gun mount. The injured sailor was transferred from another ship to the Abraham Lincoln with the gun mount part still implanted in his hand. X-rays and video of his injury were transmitted to San Diego where a specialist consulted with the ship’s surgeon to treat the injury. The sailor returned to light duty on his ship 3 days later. Another case involved a sailor aboard the U.S.S. Enterprise who sustained a neck injury on the flight deck. Immediate telemedicine consultation was able to rule out a cervical fracture. For peacetime military health care, telemedicine allows remote military treatment facilities to link up with DOD medical clinics to obtain specialized health care. Similarly, telemedicine allows rural communities to communicate with larger medical facilities to obtain specialized care. For example, a physician in remote Montana can send a trauma victim’s x-rays to a large hospital in Seattle, where a radiologist can confirm that the patient has a broken vertebra and needs to be evacuated immediately. The states and private sector can also benefit from improved access to health care. For example, an emergency medical technician on an ambulance call or at a disaster site can use telemedicine to provide immediate access to an emergency room physician who has greater knowledge and can provide guidance to the technician to perform skilled procedures to save an individual’s life or limbs. Improved access to health care is especially important to patients in remote areas. For example, the University of Washington’s telemedicine network serves four communities in remote locations in the states of Washington, Alaska, Montana, and Idaho. Each site is located in an area with rugged terrain and extreme cold weather, which can make travel extremely dangerous or impossible. In addition, the Georgia Statewide Academic and Medical System is dispersed among 60 health care facilities to ensure that all state residents have immediate access to quality health care. Many of the state’s large, poor rural populations may lack adequate access to health care without traveling long distances. Of the state’s 159 counties, 9 have no physician, 85 have no pediatrician, and 140 have no child psychiatrist. Finally, telemedicine may allow physicians to provide medical care to patients in their homes. For example, VA’s Eastern and Western Cardiac Pacemaker Surveillance Centers routinely use standard telephone lines to monitor the electrocardiograms of pacemaker patients from their homes. A 1996 VA testimony indicated that the surveillance centers save time and effort, provide pacemaker expertise to remote and underserved areas, and decrease the need for pacemaker clinic appointments. In addition, pacemaker monitoring improves health care quality and is convenient for veterans, since they can be monitored 24 hours a day from any place that has a telephone. VA estimates it has made over 386,000 “house calls” from 1982 to 1996, or about 2,300 a month, using this system. In another effort, the Army’s Center for Total Access at Eisenhower Army Medical Center joined the Medical College of Georgia, the Georgia Institute of Technology, and a local cable company to develop a telemedicine home health care network, known as Electronic Housecall. This program, which became operational in February 1996, links a nursing home and the homes of 25 chronically ill patients with their health care providers. Through daily monitoring, the health care practitioners should be able to detect early changes in the patients’ condition. If practitioners find changes, they can prescribe a different treatment or request that patients come in and see their physician. By detecting problems earlier, hospital stays may be avoided or reduced. Each patient selected for this project was chronically ill and averaged six or more hospitalizations per year at an average cost per hospital stay of about $25,000. Telemedicine gives health care providers a chance to enhance their skills and expand their professional knowledge by linking providers with experts. In remote locations, health care is provided by general practitioners. When the practitioner believes a patient needs specialized care, the practitioner frequently has to refer the patient to a specialist in a different location and may not be present in the consultation between the patient and the specialist. With telemedicine, the general practitioner is present during the consultation and can learn from the specialist. Telemedicine advocates expect that such experiences will increase a practitioner’s medical knowledge, which in the future may help the practitioner to diagnose and treat illnesses earlier or determine that the patient needs to see a specialist right away. Enhanced knowledge would have been helpful to general practitioners and medics during the Vietnam War. According to an Army dermatologist, if telemedicine had been used during the war, the number of hospitalizations, evacuations, and days lost due to skin diseases could have been reduced by about one-third. Skin disease was the primary reason for outpatient visits to Army medical facilities during the war. Between 1968 and 1969, skin diseases accounted for 47 percent of total days lost for the U.S. 9th Infantry Division. According to the dermatologist, if the general practitioners and the medics at the forward facilities had been able to consult with skin specialists via telemedicine, they would have learned to recognize and treat skin diseases earlier. Telemedicine also has the ability to deliver continuing medical education to deployed medical units and remote health care practitioners so that they have the opportunity to enhance their professional knowledge without having to travel. For example, medical units in Bosnia received weekly continuing education classes via telemedicine from a DOD medical center in the United States. Two of the classes covered acute care of burn victims. One week after the classes, two soldiers in Bosnia were severely burned in an explosion. The medical unit used what it had learned in the classes to stabilize and treat the soldiers until they could be transferred to a facility with more skilled care. According to medical unit personnel, without the classes the soldiers would not have received the same quality of care at the site. The Medical College of Georgia offers one continuing professional education credit for the referring health care practitioner participating in telemedicine consultations. The University of Washington’s School of Medicine is the only medical school directly serving the states of Washington, Alaska, Montana, Idaho, and Wyoming. The medical school operates a medical education program via a telecommunications network to affiliate teaching facilities in these states. In California, a health maintenance organization provides continuing medical education over its telecommunications networks. One of the organization’s programs delivers monthly lunch-hour medical education classes that reach about 1,000 of its 3,500 physicians. An Arthur D. Little Foundation study published in 1992 on the U.S. health care crisis said that just the video conferencing component of telemedicine used for remote medical consultations and professional training could reduce health care costs annually by over $200 million. For example, video consultations can shorten diagnostic time, reduce treatment time, and decrease hospital stays. Telemedicine can also reduce evacuation or travel costs incurred when patients and specialists have to travel for consultations. Several service officials believe that telemedicine’s biggest cost benefit to DOD will be its application to the reengineering of health care delivery during peacetime. In fiscal year 1997, MHSS’ budget is over $15 billion and includes 115 hospitals and 471 medical and dental clinics operating worldwide. In a case involving 12 patients over a 4-month trial period, Eisenhower Army Medical Center’s critical care telemedicine project with Fort Stewart’s hospital saved DOD at least $54,000 in transportation costs and expenses associated with the Civilian Health and Medical Program of the Uniformed Services. Two patients did not need to be transferred to Eisenhower or the local hospital, and one patient’s stay at a non-DOD hospital was shortened. Teleradiology used on a 4-month deployment of the U.S.S. George Washington in the Mediterranean Sea and Indian Ocean eliminated the need for 30 evacuations and saved about $100,000. Telemedicine also saved DOD $63,000 in evacuation costs during its deployment to Somalia. Telemedicine can provide cost savings to states in prison health care transportation costs. For example, since Georgia began using telemedicine in its prisons in 1993, only about 25 percent of the prisoners seen via telemedicine had to be transferred to another facility for further treatment. In the first 10 months of 1995, 218 consultations were done, saving between $82,000 and $246,000 in transportation costs for those consultations that did not result in a transfer to another facility. In Texas, the Department of Criminal Justice contracts with the University of Texas Medical Branch at Galveston and Texas Tech Health Sciences Center to provide health care to its inmates in correctional facilities. In the first 20 months of operation, 2,607 telemedicine consultations were conducted with high patient satisfaction. An evaluation showed that about 96 percent of the consultations saved at least one trip to the Galveston Medical Center at an estimated cost of about $190 per trip, or about $495,000. Telemedicine can also provide savings in hospital costs. Initial data from the Medical College of Georgia showed that over 80 percent of patients seen via telemedicine did not need to be transferred from their primary medical facility to a specialized care facility. Given the cost difference of between $500 and $740 per day per bed between rural hospitals and the Medical College of Georgia, cost savings resulting from telemedicine may be significant. In Minnesota, a managed health care company and a rural health care company formed a partnership to develop a rural telemedicine network. As part of this network, eight rural hospitals were connected to a larger community hospital for emergency room consultations. Early indications have pointed to overall cost savings for the participating facilities. For example, one referring rural hospital was able to decrease its emergency room operating costs by $47,500 a year, even after paying an additional $50,000 fee to the community hospital for consultations. Due to the increased referrals from the eight rural hospitals and the yearly fees, the community hospital was able to eliminate its yearly $300,000 emergency room operating deficit. In addition, because telemedicine brings specialized health care to the patient, the patient does not need to take as much time away from work or duty to receive care. This results in increased productivity for the worker and the employer and fewer lost wages. In DOD’s case, reducing the time away from work results in increased readiness of its military forces. For example, Tingay Dental Clinic at Fort Gordon, Georgia, used telemedicine to provide specialized dental consultations to active duty personnel at Forts McPherson and Benning, Georgia; Fort McClellen, Alabama; Soto Cano Air Force Base, Honduras; Gorgas Army Hospital, Panama; and the Naval Dental Detachment, Key West, Florida. Without these consultations, the soldiers would have to take time away from duty and travel for specialized dental care. A study done by the clinic showed that soldiers at Fort McPherson saved at least one-half day away from duty for each consultation. A telemedicine project at Fort Jackson, South Carolina, decreased the amount of time a soldier missed basic training. Typically, a soldier on sick call would lose a whole day of training because of the time to drive to the clinic, wait to see the physician, get a prescription filled, and return to the field. Of 101 soldiers seen via telemedicine, about 20 percent returned to training without going to the clinic. DOD officials believe that as the practitioners get more familiar with the equipment and the medical procedures are streamlined, more than 50 percent of the soldiers will be able to return to training without going to the clinic. Although some data show that telemedicine can save costs, other data indicate that there is a high cost for using telemedicine both in total dollars and per consultation. Main factors include infrastructure start-up costs and operational costs of the systems and equipment. For example, the infrastructure start-up, equipment, and operational costs for DOD’s telemedicine deployment to Bosnia are estimated to total about $30 million, and only about 60 consultations, excluding teleradiology cases, have been performed to date. Also, recurring basic telemedicine line charges in rural communities can run about $1,500 a month. Various officials expressed concern whether the volume of rural telemedicine consultations can ever be high enough to pay the recurring line charges as well as initial equipment expenditures. Another factor that will affect the cost of telemedicine is increased utilization by persons who previously did not have access to such care. According to the Institute of Medicine’s report on telemedicine, home monitoring via telemedicine may result in earlier identification and treatment of problems that would be more costly to treat if not caught early, but it may also identify more borderline problems that would generate more home or office visits. The potential cost impact of inappropriate utilization of health services via telemedicine is a concern for many third-party payers, such a Medicare. These concerns are not as apparent in managed health care settings, including DOD and VA, where many costs are fixed, including physician salaries. On the other hand, fee-for-service providers receive their income from the volume and type of services provided. In such settings, some providers may use complex and costly medical technologies when less costly techniques may suffice. Without a payment support mechanism, infrastructure or health care providers may not consider telemedicine alone to be capable of delivering a sufficient return to justify their investment. However, if multiple applications are available to use the infrastructure, such as those related to business, education, or entertainment, the infrastructure cost can be shared among the various users. Officials at the Health Care Financing Administration (HCFA) are also concerned that Medicare expenditures could significantly increase if Medicare were to begin reimbursing for telemedicine consultations. Various reports have cited an estimate that telemedicine consultations could increase the total Medicare budget by $30 billion to $40 billion annually by the year 2000. Our review found no evidence to support this increase. HCFA officials indicated that the agency could not estimate what the impact would be to the Medicare budget if the federal government began reimbursing for telemedicine consultations, but the amount should be much less than the $30 billion to $40 billion increase cited by various reports. Although many individuals strongly believe that telemedicine is a good value, no one has quantified the benefits through a comprehensive cost-benefit analysis. Evidence supporting these beliefs is mainly based on anecdotal examples, small retrospective reviews, or personal opinions. In fact, the lack of comprehensive evaluations was a major theme throughout the 1996 American Telemedicine Association Conference. In the past, such studies have not been done because adequate sample sizes were not available or the financial resources for conducting the evaluations were lacking. However, several agencies are now funding or conducting comprehensive studies. Early telemedicine programs concentrated on demonstrating that the technology would enable the health care practitioner to diagnose and treat patients at remote sites. The primary focus was on whether the technology worked, and cost-benefit analyses were not built into these early projects. Despite 12 telemedicine deployments since 1993, DOD’s only documented studies appear in three articles in professional journals. DOD has compiled some lessons learned from Army deployments, the Advanced Warfighter Experiments, and Joint Warfighter Interoperability Demonstrations. These studies, however, had a limited scope and raised additional questions. A 1996 Army study on telemedicine deployments showed that telemedicine significantly changed the diagnosis in 30 percent of the cases seen and the treatment in 32 percent of the cases. However, the study noted that because of limitations, such as lack of follow-up and outcome data, response time, and user satisfaction, the data may provide limited results. Additionally, the exclusion of incomplete records may have also skewed the results. For example, the use of telemedicine may have precluded air evacuations, but there was little or no information on whether the patient had a worse outcome or needed evacuation after the consultation. Because of the lack of a central records system, it was impossible to follow individual cases to determine case outcomes. This study also noted that the types of patients seen in operations other than war differ from those seen in active combat, suggesting that the results may not be indicative of the benefits of battlefield telemedicine. For example, combat support hospitals are staffed to treat previously healthy young soldiers suffering from trauma and are not configured for pediatric patients and chronic infectious disease cases. The study concluded that further analysis may help determine if a combat support hospital in an operation other than war needs modification. It also suggested that the large number of dermatology consultations may indicate that dermatologists should routinely deploy with combat support hospitals. During its Advanced Warfighter Experiments in 1994 and 1996, the Army Medical Department demonstrated that medics using lightweight, hands-free, two-way radios were able to communicate with medical officers at battalion aid stations to provide lifesaving medical treatment. This communication impacted the number of soldiers who may have never been evacuated off the battlefield. However, few trends become apparent from analyzing the data from the different experiments. Some data showed that medics utilized the consultations more if the number of casualties was small. As the number of casualties increased, consultations went down. Because the time required to treat each casualty increased, other wounded could die while the medic was in a consultation. The Joint Warfighter Interoperability Demonstrations showed that the different services’ medical communication systems were incompatible with each other and the warfighter. Early rural health demonstrations have also provided some lessons learned about network structure, personnel, funding, and equipment considerations when establishing telemedicine networks. For example, HHS’ Office of Rural Health Policy (ORHP) compiled results and preliminary lessons learned from 1995—the first year of experience of 11 of its 25 telemedicine grantees—but it is too early to know whether these projects will be successful in improving access to care for rural residents. It is also unclear how the projects will affect the multispecialty hospitals, rural hospitals, and clinics that are part of these networks. Further, an ORHP internal study reported that developing a telemedicine network is complex, requiring coordination and cooperation from multiple players both within and outside the health care arena. A number of DOD organizations are planning and implementing telemedicine evaluations. However, there is little coordination among the sites in developing these evaluations. In addition, the evaluations may not be used outside each organization to develop a DOD-wide database or collective evaluation to provide DOD policymakers with data they can use to establish a DOD strategic plan or prioritize funding. Some TRICARE regions are planning to evaluate telemedicine costs and benefits. Tripler Regional Medical Center in Hawaii allocated $700,000 to fund an evaluation of its telemedicine initiatives. The evaluation will address (1) clinical outcomes, (2) patient and provider satisfaction, (3) costs and benefits, (4) human behavior factors such as personnel and training, and (5) organizational impact. According to officials, the telemedicine protocols and evaluation tool were developed without coordination with other TRICARE regions, although they were shared among DOD agencies during an August 1995 workshop in Hawaii on telemedicine evaluation methodologies. Two separate evaluations are planned for Madigan Army Medical Center’s teleradiology and telemedicine systems. The teleradiology evaluation, being developed and conducted by a Department of Energy contractor, will address the impact of the Medical Diagnostic Imaging Support/teleradiology on radiology operations, procedures, costs, and patient satisfaction. The evaluation of other telemedicine systems will identify (1) the impact of telemedicine procedures on the costs of collecting clinical information for consultations conducted at the military treatment facilities and VA’s Puget Sound Healthcare System and (2) the correlations of user and service characteristics to clinical information acquisition costs of telemedicine procedures. The study will result in lessons learned and a proposed methodology for future projects. VA’s medical center in Seattle is developing the study, which will be tested at all DOD and VA facilities in the Puget Sound area. The VA official responsible for developing the evaluation said that she has not received any input or assistance from DOD personnel, except for Madigan Army Medical officials. The Center for Total Access plans to evaluate its telecardiology program once it is operational. Center personnel are working with a MATMO contractor that is developing software, including cardiac protocols or standardized procedures. The Center’s director was unaware that a project at Tripler Regional Medical Center had already developed cardiac protocols. Wilford Hall Air Force Medical Center in San Antonio is planning to conduct a cost-benefit analysis of some of its telemedicine efforts. A goal of the analysis is to compare average costs per consultation for certain specialties with and without telemedicine. The project will gather information on referral patterns to the specialties and sites. This information will then be used to calculate an average cost to the government per consultation by site and specialty. The study will examine both active and non-active duty patients. Officials have not developed an approach to coordinate the evaluation with other TRICARE regions. Other federal agencies that are now funding or conducting large-scale, comprehensive evaluations of telemedicine include VA, the National Library of Medicine, HCFA, ORHP, and the Agency for Health Care Policy and Research. However, these evaluations are in the early stages and frequently have not been coordinated among or within agencies. Several civilian agencies have recently required their grantees and contractors to perform evaluations as part of their projects. Because most of these projects have not reached completion, evaluation results have not been reported. Some of these evaluations examine broad issues, and some will have a limited focus. For example, each HCFA telemedicine payment demonstration grantee in Iowa, Georgia, North Carolina, and West Virginia is evaluating the costs and benefits of reimbursing specialists for providing medical services via telemedicine to Medicare patients. Eleven of ORHP’s 25 telemedicine grantees will evaluate the relative effectiveness of their telemedicine project in a rural environment and identify barriers to effective implementation. Similarly, one project involving six rural Texas communities, funded by the Agency for Health Care Policy and Research, includes an analysis of the factors that facilitate or hinder the long-range commitment to telemedicine use for interactive video and continuing education. Each of the 22 contractors involved in the National Library of Medicine’s High Performance Computing and Communications Program will evaluate the impact telemedicine can have on health care access, quality, and cost. For example, a hospital in Boston will use telemedicine to provide educational and emotional support to families of high-risk newborns both during their hospitalization and following discharge. The program will examine the potential of telemedicine to decrease the cost of care for infants with very low birth weights by increasing the efficiency of care. A number of federal civilian agencies are working with the private sector to conduct comprehensive evaluations of telemedicine. For example, in fiscal year 1996, ORHP awarded $200,000 for the Telemedicine Research Center of Portland, Oregon, to develop a standard data set for telemedicine evaluation and conduct an objective and scientific evaluation of telemedicine programs. The project will last 2 years and cost $330,000. The purpose of the project is to collect basic information about the operations, utilization, costs, benefits, and sustainability of the rural telemedicine projects that ORHP funds. This report is expected to be issued in 1998. The evaluations will also develop an evaluation methodology rather than assess the success of a specific telemedicine project. For example, an Institute of Medicine study, titled “A Guide to Assessing Telecommunications in Health Care,” develops a framework for evaluating telemedicine’s effects on the quality, accessibility, costs, and acceptability of health care compared with alternative health services. The framework includes strategies or questions that could be used by anyone planning to perform an evaluation. One question is whether a teledermatology consultation provides the same quality of patient care and therefore the same outcome as a face-to-face consultation. Another question is whether the teleconsultation result provides more timely access to the dermatologist than a scheduled face-to-face consultation. Officials hope that this framework will standardize evaluations enough to promote comparability so that the results from individual studies can be combined to provide the evidence needed to quantify the benefits of telemedicine. JWGT also developed a discussion paper outlining a broad evaluation framework for telemedicine. The goal of this paper was to provide a document for an entity to design its own evaluation to meet its needs but at the same time be comparable to other studies. The Puget Sound VA evaluation will closely follow JWGT’s evaluation framework paper. Other evaluations will be follow-up or more comprehensive views of specific grants that had required their own evaluations. For example, ORHP sponsored a study by Abt Associates to estimate the use of telemedicine in rural hospitals and identify and describe those rural hospitals that are actively involved in telemedicine. The initial screening survey generated valuable information about the extent of telemedicine use in rural communities, but it also raised many new questions that must be addressed through a detailed follow-up survey. The final report, which included an in-depth follow-up survey, was issued in December 1996. Among other issues, the report addressed utilization, technologies employed, infrastructure costs, and accessibility. In another case, HCFA has signed a cooperative agreement with the Center for Health Policy Research at the University of Colorado to evaluate the effects of teleconsultation payments on access to services and quality of care for the five telemedicine projects HCFA supports. Under these projects HCFA will experiment with alternate payment schemes, including separate payments to providers at each end of the network as well as a single “bundled” payment to cover both providers. The center will collect information about diagnoses, health service utilization, patient and provider satisfaction, quality of care, and patient outcomes. This report is expected to be issued in early 2000. Several barriers, in addition to the lack of project evaluation, prevent patients and providers from realizing widespread benefits of telemedicine. Experts in telemedicine generally agree that these barriers can be primarily categorized as legal and regulatory, financial, technical, and cultural. Legal and regulatory barriers involve such issues as interstate licensing, malpractice liability, privacy and security, and regulation of medical devices. Financial barriers relate to reimbursement of providers and high infrastructure costs. Technical barriers are created by lack of standards and equipment incompatibility. Cultural barriers involve physician and patient acceptance. Most U.S. telemedicine networks that are not limited to teleradiology enjoy some financial support from federal grants and contracts for limited periods. Unless these networks can overcome telemedicine barriers, their sustainability is jeopardized once federal support lapses. The private sector, particularly fee-for-service providers, is generally affected by all barriers—legal and regulatory, financial, technical, and cultural. Federal sector agencies that directly deliver health care services, such as VA and DOD, are less affected than the private sector by legal and regulatory barriers, but cultural (particularly physician acceptance) and technical barriers hinder both sectors’ development of telemedicine. However, VA has an extensive telecommunications system that is available for health care applications. As a result, DOD, the Indian Health Service (IHS), BOP, and VA may be better positioned to advance the development of telemedicine. Figure 5.1 shows the segments that are affected by each of the barriers we have identified. Many groups and organizations in the public and private sectors are working individually and as partners to develop strategies and options for overcoming barriers to telemedicine. Legal and regulatory barriers to implementing telemedicine activities are licensure issues, malpractice liability, privacy and security, and regulation of medical devices. These barriers will require federal, state, and private efforts to solve them. Federal and state health policymakers and working groups representing federal and private sector interests (including national organizations and companies) are working individually and collectively on approaches for overcoming these barriers. As a focal point, JWGT is conducting an in-depth review of legal and regulatory barriers, among others, to gain a clearer understanding of the impediments that hinder the advancement of telemedicine. According to individuals we contacted and literature we reviewed, one of the major legal barriers encompasses the licensure of health care professionals providing telemedicine services in multiple states. In the United States, physicians must be licensed in each state in which they practice medicine to protect the health, safety, and welfare of the public. One issue facing many states is whether a physician who provides medical advice to someone in another state via telemedicine is in effect practicing medicine in the patient’s state. Another issue is that obtaining and maintaining licenses in other states can be a time-consuming and expensive effort. For physicians who regularly or frequently engage in the practice of medicine across state lines, the Federation of State Medical Boards of the United States, a private organization, developed a model act in April 1996 that would create a special license for physicians to practice telemedicine in a state where they are not currently licensed. If the model act is adopted by states, this special license could remove the need for physicians to obtain a full license in each state where they practice telemedicine. Physicians who merely consult with other physicians in certain states concerning medical diagnosis and treatment, however, are less likely to encounter licensing barriers than physicians having direct and frequent contact with patients in other states. In opposition to the model act, various national associations, such as the American Medical Association, recommended full and unrestricted licensure by individual states for physicians who wish to practice telemedicine across state lines. In contrast, the National State Board of Nursing has recommended one national license instead of numerous state special licenses. Our review of literature and other reports revealed that some states are beginning to restrict medical practice through telemedicine. At least 12 states have taken specific action regarding licensure of out-of-state physicians. Of the 12 states, 10 require out-of-state physicians to be licensed in their states. In the 11th state, Florida, out-of-state physicians who conduct telemedicine services do not need a Florida license as long as the physician who ordered medical services is authorized to practice medicine in Florida. In the 12th state, California, the state’s medical board is authorized to establish a registration program that would permit a practitioner located outside the state to practice in the state upon registration with the board. Licensing is generally not a barrier for federal agencies. Federally employed physicians who treat patients in government facilities are required to be licensed in only one state, which does not have to be the one in which they are practicing. However, if a federal physician treats a patient not eligible for federal benefits, the physician is required to have a license in the patient’s state. Similarly, licensing would apply if, for example, a VA hospital joined a telemedicine network that included private hospitals and VA physicians were required to see private patients. This licensing requirement would generally apply to all federal physicians. Malpractice exposure is always present in a doctor-patient relationship. The risk of additional malpractice liability constitutes another barrier to the practice of telemedicine in the private sector, particularly in networks that cross state lines. There is uncertainty whether a physician who uses telemedicine to “see” a patient in another state will be subjected to the jurisdiction of the courts in the patient’s state. Fundamental issues regarding telemedicine encounters remain vague. In its March 1996 report, the Council on Competitiveness noted that the issue of malpractice is perhaps the greatest unknown barrier. The Council believes that a key question is whether a distant physician who performs a telemedicine consultation will be held subject to the jurisdiction of the courts in the patient’s judicial district. It is unclear under what circumstances a remote encounter via telemedicine could subject a practitioner to malpractice litigation in the remote state. For example, one report suggests that the risk of malpractice is heightened when the practitioner is in one location and the patient, in another location, is in the presence of only a nurse or physician’s assistant. Even when physicians are at both ends of the telemedicine transmission, the specialist who guides or supervises the less skilled physician performing the procedure could be sued in a distant court for malpractice. Given this uncertainty and the relatively little guidance that the small number of lawsuits throughout the country can offer, the malpractice insurance industry is still considering whether the expansion of telemedicine requires a change in coverage to specifically include telemedicine in rating bases. Thus, if an individual physician believed his or her malpractice coverage was not sufficiently comprehensive to include the many facets of telemedicine, that practitioner’s willingness to engage in telemedicine could pose a barrier. These concerns are also expressed by the American Medical Association, which believes that the law is currently unclear where liability falls when two or more practitioners cooperate on a medical problem using telemedicine. One representative of an association of physician-owned malpractice insurance companies told us that she was aware of only four malpractice suits concerning telemedicine (all of which were settled out of court), but she believed that others might reach the courts soon because of the length of time for a case to come to trial. Medical malpractice issues in the federal sector differ from the private sector. In the federal sector, the controlling law is the Federal Tort Claims Act (FTCA), which for more than 40 years “has been the legal mechanism for compensating persons injured by negligent or wrongful acts of Federal employees committed within the scope of their employment.” FTCA provides that a suit against the United States for a wrongful act or omission by a federal employee or officer shall be the exclusive remedy permitted to a claimant and that no federal employee can be sued. Additionally, parallel provisions pertaining to VA, DOD, and HHS expressly state that malpractice and negligence suits against medical personnel of those agencies are barred and that the exclusive remedy is an action against the United States. Therefore, even though telemedicine is a potential cost to the government, the threat of malpractice suits against individual federal physicians is not a barrier. The protections of FTCA generally extend only to federal employees and officers acting within the scope of their employment and authority. The protections generally do not apply to a contractor of the United States. To date, no suits have been filed against the federal government involving telemedicine. Such suits, which are decided according to the law of the jurisdiction where the act or omission occurred, may help determine the scope of liability of the federal government for the practice of medicine. In the private sector, medical malpractice suits may be vulnerable to “venue shopping,” under which a patient can elect to bring suit against a practitioner in any state where that practitioner does business, regardless of where the act or omission occurred. A physician or institution that practices medicine in multiple states could be sued, therefore, in the state where jury awards are most favorable, even if the particular telemedicine consult being sued upon occurred elsewhere. Another barrier to widespread deployment of telemedicine applications and computer-based patient record systems is the public’s concern that the privacy and security of personally identifiable medical data will be jeopardized. One example that underscores concerns over the handling of medical records involved the leak of a confidential list of Pinellas County, Florida, residents with AIDS (Acquired Immune Deficiency Syndrome). The release of this list, which was on computer disc and had close to 4,000 names, revived concern about the proper handling of sensitive medical records. Among many federal agencies, there is strong interest in the development and use of computer-based patient record systems and other transmission of medical data via telecommunications networks in support of patient care, clinical research, health services research, and public health. An integrated information system (1) allows medical providers to have access to a patient’s medical record, even if the paper record is not available, and quickly assembles patient information from multiple sources (x-rays, pharmacy, and lab). Once this information is assembled, provider organizations, practitioners, payers, and the public sector would be able to move critical information among themselves. Such exchanges may enhance the ability of providers to render services across the continuum of care, reduce duplication, and improve the quality of care. The benefits of an integrated information system come with risks. A 1995 report from the Physicians Payment Review Commission acknowledged that the benefits of data integration capabilities offered by telemedicine systems are accompanied by risks of violating a patient’s right to privacy.The report stated that patients’ data privacy rights should be protected by obtaining a patient’s permission before participating in teleconsultations, including written agreement for recording of sessions and storage of tapes as part of medical records. Further, using data protection techniques during transmission could prevent disclosure. Even when patients are properly informed about the transmission or electronic storage of medical records, concern remains about the protection of such records by telemedicine providers, including security for the computer systems and other media on which they are stored. Several reports indicate an absence of state-to-state uniformity in confidentiality and privacy laws that could have an adverse impact on the transfer of medical data for use in telemedicine encounters. One study by the Office of Technology Assessment expressed concern that a videotaped consultation that becomes part of a patient’s medical record would be treated as the state treats other videotaped information on the patient.Because state laws governing the transmission and retrieval of patient medical records vary, officials are concerned about user verification, access, authentication, security, and data integrity. Efforts are underway to (1) identify the privacy-related issues that arise particularly from the electronic environment of computerized records and network information systems and (2) recommend policies to address those issues. In March 1995, the Vice President asked HHS to lead efforts to develop model institutional privacy policies and model state laws for health information in the context of the National Information Infrastructure. An interdepartmental working group on privacy is currently identifying privacy issues related to transmission of health information and other issues involving electronic communications technology and integrated data systems. The group will make policy recommendation to address these issues. The results of their efforts are being discussed at JWGT meetings. FDA has responsibility for ensuring that medical devices are safe and effective and minimizing exposure from radiation-emitting electronic products. However, FDA has not clarified which telemedicine components fall within its definition of medical devices. Further, some of FDA’s policies are out-of-date, particularly for computer software used in diagnosing patient conditions. Some manufacturers and others believe that these FDA policies and procedures have limited marketing of new products. FDA’s role has generated controversy in the telemedicine community. Some believe that telemedicine systems are medical devices in need of FDA review. Others believe that (1) these systems require FDA review no more than a telephone or fax machine used to communicate information used in patient diagnosis/treatment and (2) FDA regulation of telemedicine equipment may be unwarranted. In some instances, FDA’s review process for medical devices is complicated and lengthy. FDA’s basis for regulating certain software as medical devices is contained in its 1987 draft guidance and a 1989 update. According to the Council on Competitiveness’ March 1996 report, the review process for medical devices—which would also guide review of certain types of software—imposes an unworkable burden on software developers. In its July 1996 report to JWGT, FDA stated that major efforts are underway to define and develop software policy. The policy is expected to clarify the factors that determine which types of software are medical devices and the degree of regulatory scrutiny required. As a first step in developing a policy, FDA conducted a forum in September 1996 to address its role in regulating software for clinical decision-making and proposed future directions related to software distribution issues, risk categories, and notification requirements. Further FDA efforts will be subject to comment by relevant public and private sector interests to ensure broad input into future decisions. As of November 1996, FDA had not yet revised its policy. The lack of reimbursement for consulting physicians’ services and the prohibitive high cost of telecommunication transmission services have deterred the expansion of telemedicine. Without good management plans to ensure future sources of funds, some telemedicine networks may not be sustained after federal funding subsidies lapse. Currently, HCFA does not reimburse for telemedicine consultations for Medicare patients. One report indicated that HCFA’s current position is one of the major obstacles to telemedicine’s current use and future development. Fee-for-service providers who treat Medicare patients are affected by this obstacle, as well as those providers who are paid by insurers that follow HCFA’s lead when deciding what costs to reimburse. HCFA is concerned that reimbursing consultant services via telemedicine could significantly increase expenditures from Medicare trust funds, which are already facing threats to their solvency. A HCFA official stated that Medicare does not pay for telemedicine because it believes the standard practice of medicine requires an “in-person, face-to-face consultation” between the patient and practitioner for most medical specialties. In contrast, HCFA pays for telemedicine involving radiology and pathology because these specialties do not typically require face-to-face contact with the patient. HCFA also notes that with the exception of the American College of Radiology, the medical community has not developed practice guidelines for telemedicine. In the area of Medicaid, a recent JWGT report indicates that at least 12 states now cover some aspect of telemedicine under Medicaid, and other Medicaid programs are pursuing coverage. Since Medicaid does not mandate a face-to-face encounter, a waiver is not needed for states to add telemedicine as an optional covered service. In October 1996, HCFA announced that it will begin limited Medicare payments for telemedicine consultations in four states under a demonstration project. HCFA will evaluate those ongoing projects to (1) demonstrate the effectiveness of rural telemedicine systems and (2) develop, test, and evaluate payment methodologies for telemedicine consultations. Project evaluations are focused on the effects of telemedicine systems on accessibility, quality, and cost of health care. However, HCFA reports that until the analyses of the demonstration projects are completed, Medicare will not reimburse for video consults beyond the demonstration projects. Without proper research results and guidelines, HCFA, as well as other insurers, are concerned that reimbursement for these services will further increase the cost of medical services. An official from a managed care organization agrees with HCFA’s concern that increased access may result in increased utilization and thus increased cost. However, that official believes that expanded use of capitated managed care systems will enhance the appeal of telemedicine and reduce the need for HCFA reimbursement. Another frequently cited barrier to implementing telemedicine is lack of infrastructure in rural areas due to the prohibitive cost of running fiber optics or providing satellite, T-1, or Integrated Services Digital Network transmission service to a small end-user population. According to a 1995 HHS report, supporting the high fixed costs of maintaining a telecommunications infrastructure is clearly beyond the capability of small hospitals, particularly without subsidies or cost-sharing arrangements among multiple users. Small disparate rural telemedicine networks and other users do not have sufficient market power to negotiate favorable rates and service from telecommunications providers. Some states, including Texas, have intervened and directed utility companies to limit charges to nonprofit health and education organizations. An official of one network told us that, after state intervention, the long distance carrier reduced its monthly charge for T-1 lines from $2,500 to $250 a month. Our Georgia case study revealed that officials were concerned about the high costs of recurring line charges. VA, DOD, state, and private sector officials told us their recurring line charges ranged from $1,100 to $1,500 a month. In Georgia, the state temporarily subsidized line charges for remote sites on the state network. Some public officials, as well as private organizations within the state, worry that some smaller rural communities might have to close their centers once state funding is exhausted because they may not be able to afford the recurring monthly communication charge. Universal service and advanced telecommunications service provisions of the Telecommunications Act of 1996 are intended to reduce costs in two ways. First, it will promote competition among local access and long-distance providers to make the National Information Infrastructure affordable and widespread. Therefore, a larger array of services may be available to select from at competitive prices. Second, the act will require utility companies to equalize rates between urban and rural users. Strategic partnerships between the health care industry and infrastructure providers may also speed the development of advanced telemedicine systems. The Federal Communications Commission is implementing these provisions of the act but has not made official recommendations in this area. Local end users need a continuing source of revenue to support telemedicine programs once demonstration grant funds have lapsed, and some supporting programs have addressed that need. For example, the Department of Agriculture’s Distance Learning and Medical Link Grant Program requires applicants to demonstrate local financial support by providing evidence that their projects will be self-sustaining. The Institute of Medicine’s 1996 report acknowledges that few projects appeared to be guided by a business plan or the project features and results necessary for a sustainable program. In contrast, federal agencies are not required to earn a profit on their telemedicine networks, but substantial usage is necessary to achieve their goals of access to quality care. The Council on Competitiveness’ March 1996 report points out that those who do not have access or have limited access to quality care may stand to benefit the most from telemedicine, but they also may be the least able to pay for these services. Without some payment support mechanism, infrastructure or health care providers may not consider telemedicine alone to be capable of delivering a sufficient return to justify their investment. However, if multiple applications are available to use the infrastructure, such as those related to education or entertainment, the infrastructure costs can be shared, and the overall return on investment can be increased. The lack of clinical and technical standards for transmitting data is a major inhibitor to networking information systems. Many agencies and organizations will need to work together to resolve this problem. Radiology is the only medical specialty to develop technical standards, which are still being revised. Also, federal and other users experienced another barrier—difficulties with telemedicine equipment compatibility. Many challenges will be encountered in overcoming this obstacle. Another issue complicating telemedicine is the general lack of standards. These standards relate to data definitions, coding or content, and transmission of diagnostic images (e.g., speed, resolution, and image size). The general lack of documented record formatting standards has been a major inhibitor to networking information systems within and across managed care organizations and for other players in the health care system. Today, much of the data content exchanged, such as the patient’s relationship to the member, is left to the interpretation of individual managed care organizations; providers must make assumptions when coding claim data elements and frequently use coding standards employed by the provider’s system. According to our 1993 and 1994 reports, these distinctions are very important to the payor and provider, since they can affect which insurance company will be liable for a claim. Also, the Council on Competitiveness’ March 1996 report states that data requirements should be clearly articulated by health care entities, including (1) definitions of the data they need, (2) the format in which they expect to receive such data, (3) the way in which data should be submitted (e.g., electronically), and (4) the frequency with which data should be submitted. The standard that allows formatting and exchanging of images and associated information is known as the Digital Imaging and Communications in Medicine. This standard was developed by the American College of Radiology, the first to publish standards for any application for telemedicine, and the National Electrical Manufacturers Association, which represents companies that manufacture medical equipment. Numerous government agencies and other national organizations are involved in the health care information standards process. A number of other medical specialty organizations are working on standards for clinical practice for their profession, such as the American Academy of Dermatology and American College of Cardiology. Technology limitations, as well as equipment incompatibility, present challenges for both the public and private sectors. To successfully implement telemedicine within the framework of the National Information Infrastructure, interconnectivity and interoperability of multiple systems need to be ensured. For example, after purchasing one manufacturer’s telecommunication system, an Alabama VA hospital learned that its equipment could not fully interface with another manufacturer’s equipment purchased by another VA hospital. Worried that this incompatibility problem could surface again, one of the VA’s Veteran’s Integrated Service Network offices appointed a special committee to handle the procurement needs for all facilities in Alabama. As health care providers increase use of telemedicine, they will face increased challenges to coordinate equipment, hardware, and software components. The military has also experienced equipment incompatibility problems. In 1994 and 1995, the battle lab at Fort Gordon, Georgia, sponsored a Joint Warfighter Interoperability Demonstration in which industry, academia, and others were given an opportunity to demonstrate medical communication products with war-fighter applicability. Several officials associated with the demonstration told us that, during the exercises, some demonstrations were less than successful due to equipment incompatibility. In one demonstration, the Army found that its telemedicine equipment was not compatible with other Army command, control, and communication systems. In another exercise, a joint service demonstration failed because one service’s medical communications equipment could not “talk” to the others. From the perspective of the Army Signal Corps community, these sorts of impediments could pose serious problems on the battlefield. The Director of Combat Developments at Fort Gordon stated that, during an armed conflict, the Signal Corps assumes command and control over all communication systems, including medical communications. The Signal Corps worries that telemedicine equipment brought to the front will not be able to successfully integrate with the established battlefield communication infrastructures and therefore not be functional during a conflict. Also, the emphasis placed on high-technology systems without sufficient consideration of the specific clinical and health care requirements and infrastructure capabilities in each setting has created a poor fit between telemedicine system design and end-user needs. Given the constraints on financial resources in most communities in need of telemedicine services, every effort should be made to design scaleable systems that can serve the immediate and essential clinical and health care needs at minimal cost. Upgrading can follow as further needs are identified and the financial capabilities of communities increase. As the technology expands and the cost of equipment becomes more competitive, telemedicine systems will be able to increase their technical capabilities. In discussing telemedicine and deployed scenarios with service officials, we learned of circumstances that present unique challenges for the military. Traditionally, communications within the military have been used to enable command and control. Telemedicine requires communications that are provided in a functional manner and cross lines of command. In addition to new linkages, more sophisticated telemedicine technologies require the transmission of image data, which places considerable demands on bandwidth communications. DOD does not have a dedicated medical communications network. Therefore, telemedicine communications transmissions have to compete with other critical transmissions. In time of war, these requests could be for enemy coordinates or attack and defend commands. An Army official stated that if a medical facility used a secure military satellite to transmit medical information to and from the battlefield during an armed conflict, that facility would lose its neutral zone classification. Under the Geneva Rules of Conduct for Warfare, the enemy can engage any facility transmitting communication data over secured lines. This rule makes medical facilities in theater, normally protected from attack, open to enemy assault. Today, the combat medic does not have adequate means for video communication, and military medical treatment facilities have limited bandwidth available for telemedicine communications, both within the theater of operations and with connections to the sustaining base. Further, the Navy has an extremely challenging problem, since all data used must be transmitted and received using data links that are already used to capacity on most ships. Navy ships are deployed every day, regardless of national security posture. Our study revealed that military personnel are concerned about technical limitations associated with size and weight in relation to deploying telemedicine to the battlefield. For example, the Army’s prototype battlefield telemedicine unit in Bosnia, the Deployable Telepresence Unit, weighs about 3 tons and takes up about 400 square feet of space. Until the unit’s size and weight constraints can be overcome, advancing telemedicine to the front, where the majority of casualties occur, is not feasible. The Army is currently using data communications provided by the Defense Information Systems Agency for both Primetime III deployment to Hungary and Bosnia as well as peacetime regional telemedicine in Region 6 (Fort Hood, Brooke Army Medical Center, and Wilford Hall Air Force Medical Center). This agency is leasing commercial circuits. Future telemedicine requirements supported by this agency will be provided to the services as part of the agency’s Global Combat Service Support System, which is the unclassified part of the Global Command and Control System. According to Army Medical Command officials, the Warfighter Information Network, which embraces developing technologies, such as asynchronous transfer mode, fiber optic connectivity, and personal communications system cell phones, is expected to satisfy telemedicine bandwidth requirements on the battlefield and provide the needed link to the combat medic serving the combat arms. Cultural barriers must be overcome to sustain telemedicine networks with little usage after government subsidies lapse. These barriers fall into two categories: physician acceptance (which includes their discomfort with using high-technology equipment and their skepticism about diagnosing and treating patients at a distance) and patient satisfaction with using telemedicine. One way to increase utilization of telemedicine networks is to foster higher physician acceptance. Some telemedicine projects that experienced high usage have factors that may help other users. For example, officials from the Texas Department of Corrections believe they have alleviated physician acceptance concerns through the following actions: (1) caregivers from referring facilities visit the consulting physicians to discuss how consultations should be conducted; (2) technicians at both ends of the consultation operate the telecommunications equipment, thus freeing caregivers to perform clinical procedures; and (3) consultants seek clinicians’ advice on how to provide better care to patients. The findings of the Texas study are supported by the 1995 annual report to Congress by the Physicians’ Payment Review Commission, which concluded that physician acceptance issues may become less important as physicians gain experience and familiarity with telemedicine services. However, physician acceptance continues to be an issue, according to expert opinion and our data. According to an American Medical News article, among the many obstacles facing telemedicine, proponents say “people issues” worry them the most. Literature reveals that the reluctance of physicians to use telemedicine services may be influenced by their attitudes about quality, control of patient care and referral relationships, convenience, and fear that urban medical centers would steal rural patients. For example, some uninterested doctors reported scheduling difficulties, inability to actually examine patients, and unfamiliarity with the technology as reasons that have deterred them from participating in telemedicine activities. During our Georgia case study, various telemedicine officials often spoke about resistance to change. In one instance, medical personnel at a military clinic stated they were reluctant to use the teleradiology system primarily because they preferred having a radiologist on hand that they knew, trusted, and could rely on. In addition, the radiologists at the consulting facility were occasionally slow to respond to requests for consultations. Some physician resistance is due in part to the relative complexity of the systems currently in use. The equipment is not user-friendly; therefore, additional training is required to learn how to operate the equipment. Some VA telemedicine projects have also experienced low utilization because of physician reluctance. A 1995 journal article by HHS and the Telemedicine Center, Medical College of Georgia, states that the designs of current systems are driven more by technology than by the needs of physicians. To be successful, the article noted that telemedicine technologies may need to adapt to the needs of physicians and patients, not vice versa. Training was cited as a key component of any successful telemedicine system to help physicians with limited experience and comfort with computers. A June 1994 report of the Council on Medical Service, part of the American Medical Association, cited a need for physician education as it relates to instruction covering the spectrum from basic computer literacy to familiarity with expert diagnostic systems and knowledge databases. The association’s policy recommends that designers of clinical information systems involve physicians in all phases of system design and select technologies that are easily mastered, flexible, and acceptable to physician users. Patient acceptance with using telemedicine for consultations may be less of a barrier than physician acceptance, particularly in rural settings. A few limited patient satisfaction surveys found that the convenience of not needing to drive hundreds of miles to an appointment with a specialist outweighs any uneasiness of not seeing that specialist face to face. According to one researcher, patients in South Dakota and Florida have uniformly shown acceptance to telemedicine. An evaluation of the Texas criminal justice telemedicine project found that about 70 percent of the patients preferred telemedicine consultations to transportation to the tertiary care hospital and another 14 percent were neutral. A project sponsored by the University of Kansas found that patients were happy not to have to drive 300 or 400 miles just to see their physician. They also appreciated receiving a videotape of their visits. On the negative side, the Kansas patients found being candid on video to be difficult and were not eager to repeat their experiences. In commenting on a draft of this report, HHS said that a clearer depiction of the role of FDA in telemedicine was needed. Accordingly, we clarified this information. Telemedicine has the potential to revolutionize the way health care is delivered. The recent increased interest in telemedicine technology has resulted in widespread applications throughout the United States. Collectively, DOD, other federal agencies, state governments, and the private sector have already invested hundreds of millions of dollars on numerous telemedicine projects, sometimes in collaboration with each other. However, it is impossible to determine the full scope of these initiatives. They range from long-term research efforts exploring robotic or telepresence surgery to pilot programs at medical facilities where some clinical application, such as teledentistry, is actually practiced. The most common current clinical application is teleradiology. DOD and other federal agencies are actively sponsoring telemedicine projects that individually seem justifiable and fall under the purview of the sponsoring agency’s mission. However, not enough comprehensive, accurate information exists to determine the collective value of these projects. For example, it is difficult to tell whether DOD’s investment is commensurate with the potential benefits it stands to gain. DOD is currently the largest federal investor with $262 million. On a case-by-case basis, many projects seem justifiable, but the collective value of the DOD telemedicine program cannot be easily assessed. In fact, DOD’s telemedicine program is actually the sum of many individual parts and not an interrelated group of projects prioritized to accomplish specific goals. Some agencies, including DOD and VA, have recognized the need for a telemedicine strategy to define their programs but have not moved beyond the conceptual stage. Private sector organizations are reluctant to share their market observations and data for fear of revealing helpful information to their competition. Further, because priorities differ among the public and private sectors, working together is even more difficult without clear and common goals. Successful expansion and sustainment of telemedicine will require resolution of many legal and regulatory, financial, technical, and cultural barriers. Some of the more critical barriers, such as licensure, privacy, and infrastructure costs, are too broad and have implications too far-reaching for any single sector to address. On the other hand, some barriers, such as physician acceptance, can be overcome at the local level with proper planning and management. Because federal agencies that directly deliver health care, such as DOD, VA, IHS, and BOP, are less affected by licensure and reimbursement barriers, they are better placed to provide comprehensive information to help determine the course of telemedicine. The numerous telemedicine initiatives funded by the public and private sectors could be more productive if they were linked by common goals, such as interdependent utilization of the information superhighway to provide cost-effective and quality health care. Such a goal should complement, not supplant, individual missions, such as improving rural or remote health care delivery, by serving as a vehicle for sharing technical progress and avoiding duplication. The challenge is how to find such a link without impeding progress of an emerging technology so difficult to define. By nature, telemedicine issues cut across public and private sectors and across agencies within the federal sector. Although there is a need to develop national goals and objectives to guide federal telemedicine investments, it would be difficult for an individual department or agency to be the architect of a governmentwide strategy. JWGT is already performing some interagency coordination associated with carrying out the Vice President’s charge to the Secretary of HHS to prepare a comprehensive report on telemedicine issues. Therefore, JWGT is in a good position to expand its work and take the lead in proposing a coordinated federal approach for investing in telemedicine. Such efforts should provide a framework to optimize the value of federal telemedicine investments with activities sponsored by the states and private sector. Accordingly, we recommend that the Vice President direct JWGT, in consultation with the heads of federal departments and agencies that sponsor telemedicine projects, to propose a federal strategy that would establish near- and long-term national goals and objectives to ensure the cost-effective development and use of telemedicine. In addition, the proposed strategy should include approaches and actions needed to establish a means to formally exchange information or technology among the federal government, state organizations, and private sector; foster collaborative partnerships to take advantage of other telemedicine investments; identify needed technologies that are not being developed by the public or private sector; promote interoperable system designs that would enable telemedicine technologies to be compatible, regardless of where they are developed; encourage adoption of appropriate standardized medical records and data systems so that information may be exchanged among sectors; overcome barriers so that investments can lead to better health care; and encourage federal agencies and departments to develop and implement individual strategic plans to support national goals and objectives. Further, because DOD is the major federal telemedicine investor and manages one of the nation’s largest health care systems, it is in a good position to help forge an overall telemedicine strategy. A first step is to develop a departmentwide strategy. Therefore, we recommend that the Secretary of Defense develop and submit to the Congress by February 14, 1998, an overarching telemedicine research and development and operational strategy. The strategy should clearly define the scope of telemedicine in DOD; establish DOD-wide goals and objectives and identify actions and appropriate milestones for achieving them; prioritize and target near- and long-term investments, especially for goals related to combat casualty care and operations other than war; and clarify roles of DOD oversight organizations. We provided a draft of this report to DOD, VA, HHS, and the Office of the Vice President. Both DOD and VA concurred with our recommendations. DOD stated that it “. . . is not alone in finding itself behind the technological bow wave of telemedicine” (see app. III). DOD said that one of its first priorities will be the development of a definition and scope of DOD telemedicine activities. DOD also agreed to establish departmentwide goals and objectives and prioritize investments as part of its strategic telemedicine plan. According to DOD, many pieces of this plan are already in place. VA commented that it would be beneficial for DOD to include VA in its development of an operational strategy for telemedicine activities (see app. IV). After subsequent discussions with HHS officials regarding agency comments, HHS generally agreed with the concept of our recommendation for JWGT to play a leadership role in proposing national goals and objectives (see app. V). HHS was concerned that a governmentwide strategy could be overly prescriptive. Our recommendation was not intended to imply that JWGT direct federal agencies investments in telemedicine initiatives but rather that JWGT develop a roadmap for federal agencies to use as a guide for their investments. HHS also stated that it might be better to require individual departments to develop their own strategies before an overarching federal strategy is proposed. We believe that individual strategies should be developed but that these strategies would not ensure an interagency commitment to common goals and objectives or serve as a guide to prevent duplicative investment efforts. We further believe that some agencies, such as DOD and VA, might be in a better position than others to move forward with individual strategies, whereas other agencies would benefit from an overall federal plan to help develop their individual strategies. HHS commented that JWGT had accomplished much of what we were recommending. We believe that JWGT should be commended for its efforts toward fulfilling the reporting requirements to the Vice President and the Congress. Many indirect benefits toward informal coordination of federal telemedicine activities are occurring. However, drafts of JWGT reports to the Vice President and the Congress provided to us do not reflect a proposal for the type of governmentwide strategy we are recommending for agencies to maximize their telemedicine investments. Rather, these draft reports mostly reflect information on issues to be pursued related to barriers, such as physician licensure, that may prevent the widespread application of telemedicine. Our draft report recommended that JWGT membership be expanded to include private and state representation. HHS expressed concerns about implementing this portion of the recommendation due to requirements in the Federal Advisory Committee Act. According to HHS, the act would require reimbursement for expenses of any state or private sector representative to attend the group’s bimonthly meetings and could otherwise impair JWGT’s operations. As an alternative, HHS suggested the addition of an annual telemedicine summit with state and private participation to JWGT’s activities. We believe the specific vehicle chosen is not important as long as it improves the interaction of federal, state, and private sectors along the lines noted in our recommendations. Accordingly, we modified our recommendation by deleting suggestions to expand JWGT beyond federal agency membership. For the same reasons, the merits of HHS’ proposal for an annual summit—certainly a constructive step—would have to be judged against the summit’s ability to foster the actions sought by our recommendation. We believe that JWGT should have the flexibility to make this determination. Within the Office of the Vice President, the Chief Domestic Policy Advisor and the Senior Director for the National Economic Council did not provide us with written comments. The Senior Director for the National Economic Council, however, raised questions regarding the impact of the Federal Advisory Committee Act on expanding the membership of JWGT to include state and private membership. Further, DOD and HHS provided specific technical clarifications that we incorporated in the report as appropriate. | Pursuant to a congressional request, GAO reviewed the steps that the federal government needs to take to realize the full potential of telemedicine and achieve cooperation with the private sector, focusing on: (1) the scope of public and private telemedicine investments; (2) telemedicine strategies among the Department of Defense (DOD), other federal agencies, and the private sector; (3) potential benefits that the public and private sectors may yield from telemedicine initiatives; and (4) barriers facing telemedicine implementation. GAO found that: (1) collectively, the public and private sectors have funded hundreds of telemedicine projects that could improve, and perhaps change significantly, how health care is provided in the future; (2) however, the amount of the total investment is unknown; (3) 9 federal departments and independent agencies invested at least $646 million in telemedicine projects from fiscal years 1994 to 1996; (4) DOD is the largest federal investor with $262 million and considered a leader in developing this technology; (5) state-supported telemedicine initiatives are growing; (6) estimates of private sector involvement are impossible to quantify because most cost data are proprietary and difficult to separate from health care delivery costs; (7) opportunities exist for federal agencies to share lessons learned and exchange technology, but no governmentwide strategy exists to ensure that the maximum benefits are gained from the numerous federal telemedicine efforts; (8) the Joint Working Group on Telemedicine (JWGT) is the first mechanism structured to help coordinate federal programs; (9) however, its efforts to develop a federal inventory, a critical starting point for coordination, have been hampered by definitional issues and inconsistent data; (10) in addition, DOD and other federal departments do not have strategic plans to help guide their telemedicine investments, assess benefits, and foster partnerships; (11) telemedicine is an area in which public and private benefits converge; (12) many anecdotal examples demonstrate how telemedicine could improve access and quality to medical care and reduce health care costs; (13) however, comprehensive, scientific evaluations have not been completed to demonstrate the cost benefits of telemedicine; (14) the expansion of telemedicine is hampered by legal and regulatory, financial, technical, and cultural barriers facing health care providers; (15) some barriers are too broad and have implications too far-reaching for any single sector to address; (16) telemedicine technology today is not only better than it was decades ago, it is becoming cheaper; (17) consequently, the questions facing telemedicine today involve not so much whether it can be done but rather where investments should be made and who should make them; (18) the solution lies in the public and private sectors' ability to jointly devise a means to share information and overcome barriers; and (19) the goal is to ensure that an affordable telecommunications infrastructure is in place and that the true merits and cost benefits of telemedicine are attained in the most appropriate manner. |
As has been the case for the previous 11 fiscal years, the federal government did not maintain adequate systems or have sufficient, reliable evidence to support certain material information reported in the U.S. government’s accrual basis consolidated financial statements. The underlying material weaknesses in internal control, as summarized on the following page, which generally have existed for years, contributed to our disclaimer of opinion on the U.S. government’s accrual basis consolidated financial statements for the fiscal years ended 2008 and 2007. In summary, the material weaknesses that contributed to our disclaimer of opinion on the accrual basis consolidated financial statements were the federal government’s inability to: satisfactorily determine that property, plant, and equipment and inventories and related property, primarily held by the DOD, were properly reported in the accrual basis consolidated financial statements; reasonably estimate or adequately support amounts reported for certain liabilities, such as environmental and disposal liabilities, or determine whether commitments and contingencies were complete and properly reported; support significant portions of the total net cost of operations, most notably related to DOD, and adequately reconcile disbursement activity at certain agencies; adequately account for and reconcile intragovernmental activity and balances ensure that the federal government’s accrual basis consolidated financial statements were (1) consistent with the underlying audited agency financial statements, (2) properly balanced, and (3) in conformity with generally accepted accounting principles (GAAP); and identify and either resolve or explain material differences that exist between certain components of the budget deficit reported in Treasury’s records, which are used to prepare the Reconciliation of Net Operating Cost and Unified Budget Deficit and Statement of Changes in Cash Balance from Unified Budget and Other Activities, and related amounts reported in federal agencies’ financial statements and underlying financial information and records. Due to the material weaknesses and the additional limitations on the scope of our work, as discussed in our audit report, there may also be additional issues that could affect the accrual basis consolidated financial statements that have not been identified. In addition to the material weaknesses that contributed to our disclaimer of opinion, which are discussed above, we found three other material weaknesses in internal control as of September 30, 2008. These other material weaknesses were the federal government’s inability to: determine the full extent to which improper payments occur and reasonably assure that appropriate actions are taken to cost-effectively reduce improper payments, identify and resolve information security control weaknesses and manage information security risks on an ongoing basis, and effectively manage its tax collection activities. Further, our audit report discusses certain significant deficiencies in internal control at the governmentwide level. These significant deficiencies involve the following areas: implementing effective credit reform estimation and related financial reporting processes for loans receivable and loan guarantee liabilities at certain federal credit agencies, and preparing the Statement of Social Insurance for certain programs. Individual federal agency financial statement audit reports identify additional control deficiencies, which were reported by agency auditors as either material weaknesses or significant deficiencies at the individual agency level. We do not consider these additional control deficiencies to represent material weaknesses or significant deficiencies at the governmentwide level. Also, due to the issues noted throughout our audit report, additional material weaknesses and significant deficiencies may exist that were not identified and reported. Three major impediments to our ability to render an opinion on the U.S. government’s accrual basis consolidated financial statements continued to be: (1) serious financial management problems at DOD, (2) the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government’s ineffective process for preparing the consolidated financial statements. Extensive efforts by DOD officials and cooperative efforts between agency chief financial officers, Treasury officials, and OMB officials will be needed to resolve these serious obstacles to achieving an opinion on the U.S. government’s accrual basis consolidated financial statements. Essential to further improving financial management governmentwide and ultimately to achieving an opinion on the U.S. government’s consolidated financial statements is the resolution of serious weaknesses in DOD’s business operations. Reported weaknesses in DOD’s business operations, including financial management, adversely affect the reliability of financial data, and the economy, efficiency, and effectiveness of its operations, and prevent DOD from producing auditable financial statements. DOD continues to dominate GAO’s list of high-risk programs designated as vulnerable to waste, fraud, abuse, and mismanagement, bearing responsibility, in whole or in part, for 15 of 30 high-risk areas. Eight of these areas are specific to DOD and include DOD’s overall approach to business transformation, as well as business systems modernization and financial management. The National Defense Authorization Act (NDAA) for Fiscal Year 2008, codified Chief Management Officer (CMO) responsibilities at a high level in the department—assigning them to the Deputy Secretary of Defense— and establishing a full-time Deputy CMO (DCMO) and designating CMO responsibilities within the military services. While both of these positions are now in place at DOD, the CMO is not a separate, full-time position, and the DCMO, although full-time, does not have decision-making authority. Importantly, DOD has taken steps toward developing and implementing a framework for addressing the department’s long-standing financial management weaknesses with the goals of enabling the department to (a) provide timely, reliable, and accurate financial management information to decisionmakers; (b) sustain improvements; and (c) achieve financial statement auditability. Specifically, this framework, which is discussed in both the department’s Enterprise Transition Plan (ETP) and the Financial Improvement and Audit Readiness (FIAR) Plan, includes the department’s Standard Financial Information Structure (SFIS) and Business Enterprise Information System (BEIS). DOD intends this framework to define and put into practice a standard DOD-wide financial management data structure as well as enterprise-level capabilities to facilitate reporting and comparison of financial data across the department. DOD’s most recent FIAR plan update indicates that it has implemented SFIS in legacy accounting systems for several components, including the Air Force and Marine Corps. We recently analyzed DOD’s FIAR Plan, and found the plan does not yet provide the department or its components with clear, consistent, and specific guidance for implementing, measuring, and sustaining corrective actions, and for reporting incremental progress. Our report made several recommendations designed to increase the FIAR Plan’s effectiveness as a strategic and management tool for guiding, monitoring, and reporting on financial management improvement efforts and increasing the likelihood of meeting the department’s goal of financial statement auditability. DOD management concurred with our recommendations and has begun initiatives to address our concerns. While further improvement is needed, DOD’s recent FIAR plans indicate many continuing efforts to achieve financial statement auditability, as well as new initiatives, including the following: Focusing on improvements in end-to-end business processes, or segments, that underlie the amounts reported on the financial statements. Updating auditability assertion criteria to require that only personnel with sufficient objectivity assess the readiness of a segment for audit. Ensuring sustainability of corrective actions and auditability by fully implementing the requirements of OMB Circular No. A-123, Appendix A, which requires an annual assessment and statement of assurance regarding the continued effectiveness of internal control over financial reporting. Forming working groups to address issues in areas such as real property cost management and imputed cost, and Fund Balance with Treasury. Implementing the Defense Agencies Initiative, with the goal of achieving an auditable standardized system for smaller other defense organizations. A recent notable success for the department was the U.S. Army Corps of Engineers (USACE), Civil Works’ ability to achieve an unqualified audit opinion for fiscal year 2008. This accomplishment was the result of a sustained commitment on the part of management to improve USACE’s business systems, processes, and controls. In contrast to this success, however, other DOD components’ recent assertions of audit readiness have failed to withstand auditor scrutiny. We are encouraged by DOD’s efforts and will continue to monitor DOD’s efforts to transform its business operations and address its financial management challenges. In the near future, we plan to review DOD’s: process and controls over budgetary execution and accounting; component enterprise resource planning efforts for adherence to budget and schedule and the identification of common issues among these efforts that have impeded successful implementation; integration of strategic plans within the department that are intended to address, monitor, and report progress and status of financial management weaknesses; component design and implementation of financial improvement plans; and component corrective plans and actions designed to bring financial reporting segments to audit readiness. Federal agencies are unable to adequately account for and reconcile intragovernmental activity and balances. OMB and Treasury require the CFOs of 35 executive departments and agencies to reconcile, on a quarterly basis, selected intragovernmental activity and balances with their trading partners. In addition, these agencies are required to report to Treasury, the agency’s inspector general, and GAO on the extent and results of intragovernmental activity and balances reconciliation efforts as of the end of the fiscal year. GAO has identified and reported on numerous intragovernmental activities and balances issues and has made several recommendations to Treasury and OMB to address those issues. Treasury and OMB have generally taken or plan to take actions to address these recommendations. A substantial number of the agencies did not adequately perform the required reconciliations for fiscal years 2008 and 2007. For these fiscal years, based on trading partner information provided to Treasury through agencies’ closing packages, Treasury produced a “Material Difference Report” for each agency showing amounts for certain intragovernmental activity and balances that significantly differed from those of its corresponding trading partners as of the end of the fiscal year. Based on our analysis of the “Material Difference Reports” for fiscal year 2008, we noted that a significant number of CFOs were unable to adequately explain the differences with their trading partners or did not provide adequate documentation to support responses on the CFO Representations. For both fiscal years 2008 and 2007, amounts reported by federal agency trading partners for certain intragovernmental accounts were not in agreement by significant amounts. In addition, there are hundreds of billions of dollars of unreconciled differences between the General Fund and federal agencies related to appropriation and other intragovernmental transactions. The ability to reconcile such transactions is hampered because only some of the General Fund is reported in the Department of the Treasury’s financial statements. As a result of the above, the federal government’s ability to determine the impact of these differences on the amounts reported in the accrual basis consolidated financial statements is significantly impaired. In 2006, OMB issued Memorandum No. M-07-03, Business Rules for Intragovernmental Transactions (Nov. 13, 2006), and Treasury issued the Treasury Financial Manual Bulletin No. 2007-03, Intragovernmental Business Rules (Nov. 15, 2006). This guidance added criteria for resolving intragovernmental disputes and major differences between trading partners for certain intragovernmental transactions and called for the establishment of an Intragovernmental Dispute Resolution Committee. OMB is currently working with the Chief Financial Officers Council to create the Intragovernmental Dispute Resolution Committee. OMB is also using a “Watch List” that lists federal agencies with large intragovernmental imbalances. The Watch List was developed to facilitate reductions in some of the largest intragovernmental imbalances, bring federal agency reporting into alignment with the Intragovernmental Business Rules, bring the appropriate representatives together from the respective agencies, and document the issues and resolutions. Treasury is also taking steps to help resolve material differences in intragovernmental activity and balances. For example, Treasury is requiring federal agencies to provide documentation on how and when the agencies are resolving certain of their unresolved material differences. Resolving the intragovernmental transactions problem remains a difficult challenge and will require a strong commitment by federal agency leadership to fully implement the required business rules and continued strong leadership by OMB and Treasury. While further progress was demonstrated in fiscal year 2008, the federal government continued to have inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited agency financial statements, properly balanced, and in conformity with U.S. GAAP. Treasury’s process for compiling the consolidated financial statements demonstrated that amounts in the Statement of Social Insurance were consistent with the underlying federal agencies’ audited financial statements and that the Balance Sheet and the Statement of Net Cost were also consistent with federal agencies’ financial statements prior to eliminating intragovernmental activity and balances. However, Treasury’s process did not ensure that the information in the remaining three principal financial statements was fully consistent with the underlying information in federal agencies’ audited financial statements and other financial data. During fiscal year 2008, Treasury, in coordination with OMB, continued implementing corrective action plans and made progress in addressing certain internal control deficiencies we have previously reported regarding the process for preparing the consolidated financial statements. Resolving some of these internal control deficiencies will be a difficult challenge and will require a strong commitment from Treasury and OMB as they continue to implement their corrective action plans. Under the Federal Financial Management Improvement Act of 1996 (FFMIA), as a part of the CFO Act agencies’ financial statement audits, auditors are required to report whether agencies’ financial management systems comply substantially with (1) federal financial management systems requirements, (2) applicable federal accounting standards, and (3) the U.S. Government Standard General Ledger (SGL) at the transaction level. These factors, if implemented successfully, help provide a solid foundation for improving accountability over federal government operations and routinely producing sound cost and operating performance information. Over a decade has passed since FFMIA was enacted and the majority of agencies still do not have reliable, useful, and timely financial information with which to make informed decisions and ensure accountability on an ongoing basis. In fiscal year 2008, auditors reported 14 out of 24 CFO Act agencies’ financial management systems were not in substantial compliance with one or more of the three FFMIA requirements and the lack of compliance with federal financial management systems requirements was the most frequently cited deficiency of the three FFMIA requirements. In addition, on January 9, 2009, OMB issued a revised Circular No. A-127, Financial Management Systems, which redefines federal financial management systems requirements. We are concerned that the revised circular substantially reduces the scope and rigor of compliance testing for agency financial management systems, omits compliance with the SGL from the compliance indicators, and eliminates existing federal financial management systems requirements for the financial portion of mixed systems. Without independent auditor assessments of the financial portion of mixed systems’ capabilities and compliance with these requirements, the Congress and agency management cannot be assured that data in these systems and not included in agency financial statements are reliable, resulting in increased risk of making operating, budget, and policy decisions based on faulty data reported in the financial portion of mixed systems—such as benefit payment, logistics, and acquisition systems— which are the source of data for the core financial system. Because of the importance of such data to routinely providing reliable, useful, and timely financial information for managing day-to-day operations, we believe it is important to retain financial management systems requirements for the financial portion of mixed systems and require auditors to assess compliance against such requirements. Further, the revised circular raised additional concerns because it does not definitively establish responsibilities for the agency, service provider, and auditor for assessing compliance with FFMIA when utilizing a shared service provider under OMB’s financial management line of business (line of business) initiative. To reduce the cost and improve the outcome of federal financial management systems implementations, OMB continues to move forward on the line of business initiative, by leveraging common standards and shared solutions. OMB anticipates that the line of business initiative will help achieve the goals of improving the cost, quality, and performance of financial management operations. As we reported in May 2009, although OMB has made progress in implementing the line of business initiative, the initiative focuses mainly on core financial systems and extensive work remains before the goals of the initiative are achieved. For example, as we previously recommended in 2006, OMB has yet to finalize a financial management system concept of operations, which provides the foundation to guide line of business-related activities. In addition, development of a migration timeline reflecting agencies’ commitment for migrating to shared service providers has not yet been completed. Consistent and effective implementation of FFMIA will be needed to improve the capability of agencies’ financial management systems to produce reliable, useful, and timely information for management to efficiently and effectively manage the day-to-day operations of the federal government and ultimately provide accountability to taxpayers and the Congress—a key goal of the CFO Act and FFMIA. The Emergency Economic Stabilization Act of 2009 (EESA), which authorized the Troubled Asset Relief Program (TARP); the Housing and Economic Recovery Act of 2008 (HERA); and the American Recovery and Reinvestment Act of 2009 (Recovery Act), enabled the federal government to take certain unprecedented actions involving hundreds of billions of dollars to stabilize the financial markets and promote economic recovery. The nature and magnitude of these actions have created new challenges for federal accountability, financial reporting, and debt management. Such challenges will require utmost attention to ensure (1) that sufficient internal controls and transparency are established and maintained for all stabilization and recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. According to data provided by Treasury, as of June 26, 2009, the federal government had disbursed about $339 billion of the approximate $700 billion limit on TARP funds for a number of initiatives, which included among other things, preferred stock purchases of certain financial institutions, loans to automotive companies, and funding to certain financial institutions to facilitate home loan modifications. Under HERA, the federal government placed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship. As of July 2, 2009, the Federal Housing Finance Agency had reported that the federal government had provided about $85 billion of capital to the entities through the first quarter of calendar year 2009 under senior preferred stock purchase agreements. In addition, according to Treasury, the federal government held about $146 billion of the entities’ mortgage-backed securities as of May 31, 2009. Regarding TARP, we have reported on actions needed and the status of efforts to address transparency and accountability issues, and have made related recommendations to help ensure these issues are adequately addressed. In our most recent report on TARP, we acknowledged Treasury’s efforts to continue to improve the integrity, accountability, and transparency of TARP transactions; however, we concluded that some areas require ongoing attention. Among the challenges is the need to properly measure and report each related purchase and loan transaction. The challenges of estimating and managing costs and measuring and reporting asset and liability values under TARP and other recent initiatives are likely to be even greater than those associated with more traditional federal lending activities given the fact that little, if any, historical information is available for certain transactions from which to base expected future cash flows. While contractual provisions may set forth required payments for certain transactions such as preferred stock purchases and debt obligations, for a substantial number of federal transactions under TARP and HERA there is a significant amount of uncertainty regarding the extent to which actual repayments to the federal government will be made. There is simply little or no history for certain of these large and unprecedented transactions. Moreover, the instability and dramatic changes in financial markets, such as occurred within the last year, make it very difficult to estimate the values of these assets and liabilities with any level of certainty. Therefore, it is critically important for adequate internal controls to be in place to help ensure that the cost of all TARP and other loans and loan guarantees are properly measured and reported and losses to the federal government minimized. Regarding Recovery Act programs, major accountability and reporting challenges stem from the fact that nearly half of the approximate $580 billion of additional federal spending associated with the Recovery Act will flow to nonfederal entities. In our April 2009 report on the Recovery Act, we reported that certain states and the District of Columbia are taking various approaches to ensure that internal controls exist to manage risk including assessing known risks associated with spending under the Recovery Act and developing plans to address those risks. However, officials in most of the states we reviewed and the District of Columbia expressed concerns about the lack of Recovery Act funding provided for accountability and oversight. Such concerns are important given that the Recovery Act includes many programs that are new or new to the recipient and, even for existing programs, the sudden increase in funds is outside of normal cycles and processes. Given that the majority of Recovery Act funding was initially projected to be made available to states and localities in 2009, 2010, and 2011, with lesser amounts available beyond that, actions taken now would significantly improve the ability of nonfederal entities to provide effective accountability over federal funding under the Recovery Act. We made several recommendations to OMB in April 2009 to help improve accountability and oversight of Recovery Act spending, including modifying the single audit process to be a more timely and effective audit and oversight tool for the Recovery Act. We are also issuing our July 2009 report on the Recovery Act today. Going forward, it will be important for qualified personnel at all levels of government to implement proper controls and accountability measures to help ensure separate tracking and clear reporting of this spending from the federal level to the nonfederal recipients. Over $200 billion of the Recovery Act stimulus effort takes the form of tax expenditures—reductions in tax liabilities that result from preferential tax provisions such as tax exclusions, credits, and deductions. GAO has long been concerned that tax expenditures represent a substantial federal commitment yet lack the level of transparency and accountability associated with federal outlays. As we move forward, the federal government needs to ensure that adequate information is obtained and analyzed about these provisions to inform judgments about the success of the entire stimulus package. The nature and magnitude of the aforementioned actions to stabilize the financial markets and promote economic recovery have also created debt management challenges. As this Subcommittee knows, the Congress has assigned to Treasury the primary responsibility to borrow funds needed to finance any gap between cash in and cash out subject to a statutory limit. Since the onset of the current recession in December 2007, the gap between revenues and outlays has grown—even before any policy response. Because Treasury must borrow the funds disbursed, actions taken to stabilize financial markets—including aid to the auto industry— increase borrowing and so add to the federal debt. In addition, the revenue decreases and spending increases enacted in the Recovery Act also add to borrowing. Further, all of this takes place in the context of the longer-term fiscal outlook, which will present Treasury with continued management challenges even after the return of financial stability and economic growth. The federal government faced large and growing structural deficits—and hence rising debt—even before the instability in financial markets and the economic downturn. The current debt limit, which has been raised 8 times since 2001, is at $12.1 trillion. As you can see from table 1 below, it likely will have to be raised again this year. These immediate challenges, however, have eliminated the window for planning before the impending further ramp up in debt. As shown in figure 1, the President’s budget projects debt held by the public growing from 40.8 percent of gross domestic product (GDP) in fiscal year 2008 to 60 percent by the end of fiscal year 2009 and 67 percent by the end of fiscal year 2010. The near-term debt management challenge can be seen through several measures. At the end of May 2009, Treasury’s outstanding marketable securities stood at $6,454 billion—an increase of $657 billion since December 31, 2008, and an increase of $1,918 billion since December 2007. Interest rates have dropped dramatically since the start of the financial crisis, particularly for short-term debt. Although these relatively low interest rates have reduced Treasury’s borrowing costs to date, the amount of debt that must be rolled over in the short-term presents challenges. As shown in figure 2, as of May 31, 2009, approximately $3,137 billion will mature in 2009 and 2010 and will have to be refinanced; this is 49 percent of the total outstanding marketable securities. Another 29 percent matures in 2011 through 2015. If the economy improves, Treasury may have to refinance significant amounts of debt at higher rates. Treasury’s primary debt management goal is to finance the federal government’s borrowing needs at the lowest cost over time. Issuing debt through regular and predictable offerings lowers borrowing costs because investors and dealers value liquidity and certainty of supply. The mix of securities, which changes regularly as new debt is issued, is important because it can have a significant influence on the government’s interest payments. Longer-term securities typically carry higher interest rates—or cost to the government—primarily due to concerns about future inflation. However, they can also offer the Treasury certainty about what its payments will be. We believe the large share of the debt that must be rolled over in the next few years is cause for concern. Market experts generally believe that Treasury needs to increase the average maturity of its debt portfolio. Large and growing borrowing needs put a premium on understanding both current and future demand for U.S. Treasury securities. To support Congress’ oversight of the use of TARP funds, we have work under way looking at how Treasury has financed borrowing associated with the financial market instability and analyzing additional ideas for debt management that might assist Treasury going forward. We encourage Treasury to explore a range of borrowing options that could support its lowest-cost-over-time borrowing objective and to take a strategic approach to the analysis of various options—recognizing that the federal government faces a long-term sustained increase in borrowing needs. As I noted, the actions to restore financial market stability and economic growth take place within the context of the already serious longer-term fiscal condition of the federal government. While policymakers have been understandably focused on dealing with these financial market and economic growth challenges, attention also needs to be given to the long- term challenges of addressing the federal government’s large and growing structural deficits and debt. As discussed in the Financial Report, the federal government is on an unsustainable long-term fiscal path. The Statement of Social Insurance, for example, shows that projected scheduled benefits exceed earmarked revenues for social insurance programs (e.g., Social Security and Medicare) by approximately $43 trillion in present value terms over the 75-year projection period. GAO also prepares long-term fiscal simulations that are based on the Social Security and Medicare Trustees’ projections, but provide a more comprehensive analysis of fiscal sustainability because they include revenue and expenditure projections for all other government programs. Our most recent long-term fiscal simulation was issued in March 2009. Figures 3, 4, and 5 below show the results of GAO’s March 2009 simulations. A quantitative measure of the long-term fiscal challenge measure is called the “fiscal gap.” The fiscal gap is the amount of spending reduction or tax increases that would be needed today to keep debt as a share of GDP at or below today’s ratio. The fiscal gap is an estimate of the action needed to achieve fiscal balance over a certain time period such as 75 years. Another way to say this is that the fiscal gap is the amount of change needed to prevent the kind of debt explosion implicit in figure 5. The fiscal gap can be expressed as a share of the economy or in present value dollars. Under GAO’s alternative simulation, closing the fiscal gap would require spending cuts or tax increases, or some combination of the two, equal to 8.1 percent of the entire economy over the next 75 years, or about $63 trillion in present value terms. To put this in perspective, closing the gap solely through revenue increases would require an increase in today’s federal tax revenues of about 44 percent, or to do it solely through spending reductions would require a reduction in today’s federal program spending (i.e., in all spending except for interest on the debt held by the public, which cannot be directly controlled) of about 31 percent to be maintained over the entire 75-year period. The Financial Report provides useful information on the government’s financial position at the end of the fiscal year and changes that have occurred over the course of the year. However, in evaluating the nation’s fiscal condition, it is critical to look beyond the short-term results and consider the overall long-term financial condition and long-term fiscal challenge of the government—that is, the sustainability of the federal government’s programs, commitments, and responsibilities in relation to the resources expected to be available. Accounting and financial reporting standards have continued to evolve to provide greater transparency and accountability over the federal government’s operations, financial condition, and fiscal outlook. However, it is appropriate to consider the need for further revisions to the current federal financial reporting model, which could affect both consolidated and agency reporting. While the current reporting model recognizes some of the unique needs of the federal government, a broad reconsideration of the federal financial reporting model could address the following types of questions: Do traditional financial statements convey information transparently? What is the role of the balance sheet in the federal government reporting model? What kind of information is most relevant and useful for a sovereign nation? How should items that are unique to the federal government, such as social insurance commitments and the power to tax, be reported? In addition, further enhancements to accounting and financial reporting standards are needed to effectively convey the long-term financial condition of the U.S. government and annual changes therein. For example, the federal government’s financial reporting should be expanded to disclose the reasons for significant changes during the year in scheduled social insurance benefits and funding. It should also include (1) a Statement of Fiscal Sustainability that provides a long-term look at the fiscal sustainability of all federal programs including social insurance programs, and (2) other sustainability information, including intergenerational equity and an analysis of changes in sustainability during the year. Recently, the Federal Accounting Standards Advisory Board (FASAB) unanimously approved a proposed new standard on fiscal sustainability reporting. Also, FASAB is currently considering possible changes to accounting for social insurance. In addition, there is a need for a combined report on the performance and financial accountability of the federal government as a whole. This report would include, among other things, key outcome-based national indicators (e.g., economic, security, social, and environmental), which could be used to help assess the nation’s and other governmental jurisdictions’ position and progress. Engaging in a reevaluation of the federal financial reporting model could stimulate discussion that would bring about a new way of thinking about the federal government’s financial and performance reporting needs. To understand various perceptions and needs of the stakeholders for federal financial reporting, a wide variety of stakeholders from the public and private sector should be consulted. Ultimately, the goal of such a reevaluation would be reporting enhancements that can help the Congress deliberate on strategies to address the federal government’s challenges, including its long-term fiscal challenge. In closing, it is important that the progress that has been made in improving federal financial management activities and practices be sustained by the new administration. Across government, financial management improvement initiatives are under way, and if effectively implemented, they have the potential to greatly improve the quality of financial management information as well as the efficiency and effectiveness of agency operations. However, the federal government still has a long way to go before realizing strong federal financial management. For DOD, the challenges are many. We are encouraged by DOD’s efforts toward addressing its long-standing financial management weaknesses and its efforts to achieve auditability. Consistent and diligent top management oversight toward achieving financial management capabilities, including audit readiness, will be needed. The civilian CFO Act agencies must continue to strive toward routinely producing not only annual financial statements that can pass the scrutiny of a financial audit, but also quarterly financial statements and other meaningful financial and performance data to help guide decision makers on a day-to-day basis. Federal agencies need to improve the government’s financial management systems to achieve this goal. The nature and magnitude of actions the federal government has taken to stabilize the financial markets and promote economic recovery have created new challenges involving accountability, financial reporting, and debt management. A great amount of attention will need to be devoted to ensuring (1) that sufficient internal controls and transparency are established and maintained for all stabilization and recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. Importantly, the recent increase in federal debt that has resulted largely from the federal government’s response to the crisis in financial markets and the economic downturn must be viewed within the context of the nation’s unsustainable long-term fiscal path. The longer action is delayed to address long-term fundamental fiscal problems, the greater the likelihood that actions to address such problems will be disruptive and destabilizing. The federal government faces increasing pressures to address the fiscal problems of Social Security and Medicare, yet a shrinking window of opportunity for phasing in adjustments. GAO is committed to sustained attention to this critically important matter. Given the federal government’s current financial condition and the nation’s serious long-term fiscal challenge, the need for the Congress and federal policymakers and management to have reliable, useful, and timely financial and performance information is greater than ever. Sound decisions on the current and future direction of vital federal government programs and policies are more difficult without such information. We also will continue to stress the need for development of more meaningful financial and performance reporting on the federal government. Finally, I want to emphasize the value of sustained congressional interest in these issues, as demonstrated by this Subcommittee’s leadership. It will be key that, going forward, the appropriations, budget, authorizing, and oversight committees hold agency top leadership accountable for resolving the remaining problems and that they support improvement efforts. Madam Chairwoman and Ranking Member Bilbray, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Subcommittee may have at this time. For further information regarding this testimony, please contact Jeanette M. Franzel, Managing Director, and Gary T. Engel, Director, Financial Management and Assurance, at (202) 512-2600, as well as Susan J. Irving, Director, Federal Budget Analysis, Strategic Issues, at (202) 512-6806. Key contributions to this testimony were also made by staff on the Consolidated Financial Statement audit team. Ernst & Young, LLP Urbach Kahn & Werlin LLP Leonard G. Birnbaum and Company, LLP For fiscal year 2008, only the Consolidated Balance Sheet and the related Statement of Custodial Activity of the Department of Homeland Security were subject to audit; the auditor was unable to express an opinion on these two financial statements. The auditors reported no material weaknesses, no noncompliance with FFMIA, and no noncompliance with laws and regulations, except for a potential matter of noncompliance with respect to the Anti-Deficiency Act. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | GAO annually audits the consolidated financial statements of the U.S. government (CFS). The Congress and the President need reliable, useful, and timely financial and performance information to make sound decisions and conduct effective oversight of federal government programs and policies. Except for the 2008 and 2007 Statements of Social Insurance, GAO has been unable to provide assurance on the reliability of the CFS due primarily to inadequate systems and lack of sufficient, reliable evidence to support certain material information in the CFS. Unless these weaknesses are adequately addressed, they will, among other things, (1) hamper the federal government's ability to reliably report a significant portion of its assets, liabilities, costs, and other related information; and (2) affect the federal government's ability to reliably measure the full cost as well as the financial and nonfinancial performance of certain programs and activities. This testimony presents the results of GAO's audit of the CFS for fiscal year 2008 and discusses federal financial management challenges and the long-term fiscal outloo For the second consecutive year, GAO rendered an unqualified opinion on the Statement of Social Insurance; however, three major impediments continued to prevent GAO from rendering an opinion on the federal government's accrual basis consolidated financial statements: (1) serious financial management problems at the Department of Defense, (2) the federal government's inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and (3) the federal government's ineffective process for preparing the consolidated financial statements. In addition, as of September 30, 2008, the federal government did not maintain effective internal controls over financial reporting and compliance with significant laws and regulations due to numerous material weaknesses. Moreover, financial management system problems continue to hinder federal agency accountability. The federal government still has a long way to go, but over the years, progress has been made in improving federal financial management. For example, audit results for many federal agencies have improved; federal financial system requirements have been developed; and accounting and reporting standards have continued to evolve to provide greater transparency and accountability over the federal government's operations, financial condition, and fiscal outlook. In addition, the federal government issued a summary financial report which is intended to make the information in the Financial Report of the U.S. Government more understandable and accessible to a broader audience. The federal government's response to the financial markets crisis and economic downturn has created new federal accountability, financial reporting, and debt management challenges. Such challenges will require utmost attention to ensure (1) that sufficient internal controls and transparency are established and maintained for all market stabilization and economic recovery initiatives; (2) that all related financial transactions are reported on time, accurately, and completely; and (3) these initiatives are effectively and efficiently financed. Moreover, while policymakers are currently understandably focused on efforts directed toward market stabilization and economic growth, once stability in financial markets and the economic downturn are addressed, attention will have to be turned with the same level of intensity to the serious longer-term challenges of addressing the federal government's large and growing structural deficits and debt. Finally, the federal government should consider the need for further revisions to the current federal financial reporting model to recognize its unique needs. A broad reconsideration of issues, such as the kind of information that may be relevant and useful for a sovereign nation, could lead to reporting enhancements that might help provide the Congress and the President with more useful financial information to deliberate and monitor strategies to address the nation's long-term fiscal challenges. |
Traditionally, drug compounding is the process of combining, mixing, or altering ingredients to create a customized medication for an individual patient. For example, a pharmacist may tailor a medication for a patient who is allergic to an ingredient in a conventionally manufactured drug or prepare a liquid formulation for a patient who has difficulty swallowing pills. Pharmacies sometimes compound drugs in advance of receiving individual patient prescriptions in anticipation of receiving prescriptions based on historical prescribing patterns—a practice referred to as anticipatory compounding. Drugs are also sometimes compounded to be kept in stock by a hospital, clinic, or physician’s office to administer to patients, such as patients with an immediate need for the compounded drug—a practice referred to as office-use compounding. In addition to pharmacists, other health care practitioners, such as physicians, may also compound drugs. Compounded drugs include nonsterile preparations— such as capsules, ointments, creams, gels, and suppositories—and sterile preparations, including intravenously administered fluids, ophthalmic products, and other injectable drugs. Compounded sterile drugs pose special risks of contamination if not made properly, and require special safeguards to prevent injury or death to patients receiving them. In addition, nonsterile drugs that are compounded improperly (e.g., if they contain too much active ingredient) can also cause serious harm. An outbreak of fungal meningitis in 2012 linked to contaminated compounded drugs led to questions about the safety and quality of compounded drugs, and raised concerns about state and federal oversight of drug compounding. At the time, concerns were raised by FDA and others—including members of Congress and public health advocates—that some pharmacies were going beyond traditional drug compounding by producing large quantities of compounded drugs without prescriptions for individual patients, and selling those compounded drugs to facilities in multiple states. Many believed that these types of pharmacies were engaging in conventional manufacturing under the guise of compounding without meeting safety and other requirements with which conventional drug manufacturers must comply. In July 2013, we found that the authority of FDA to oversee drug compounding was unclear and this lack of clarity had resulted in gaps in oversight of drug compounding. Specifically, two federal circuit court decisions had resulted in differing FDA authority in different parts of the country, and these inconsistent decisions contributed to challenges in FDA’s ability to inspect and take enforcement action against entities engaging in drug compounding. In November 2013, the DQSA was enacted to help clarify FDA’s authority to oversee drug compounding. The act established a new type of facility, an outsourcing facility, that prepares sterile compounded drugs and which may compound drugs without patient-specific prescriptions. These outsourcing facilities differ from drug compounders operating under section 503A of the FDCA, which exempts drugs compounded by a licensed pharmacist or licensed physician based on the receipt of a valid prescription, for an identified individual patient, and in accordance with certain other conditions, from three key provisions of the FDCA that are otherwise applicable. The DQSA also removed certain provisions from section 503A of the FDCA that were found to be unconstitutional by the U.S. Supreme Court in 2002, and affirmed the validity of the remaining provisions in section 503A. Table 1 outlines some of the requirements under section 503A, applicable to 503A compounders, and section 503B, applicable to outsourcing facilities. While FDA is required to inspect outsourcing facilities, it does not routinely inspect 503A compounders, although it may in certain instances (e.g., in response to complaints). In general, states regulate compounding as part of the practice of pharmacy and the state pharmacy regulatory bodies (e.g., boards of pharmacy) are responsible for oversight of the practice of pharmacy, which may include inspections of pharmacies that are 503A compounders. For example, a state board of pharmacy may inspect pharmacies that compound drugs for compliance with the U.S. Pharmacopeial Convention’s (USP) compounding standards. Our survey of state pharmacy regulatory bodies found that drugs are compounded in a variety of pharmacy and other health care settings, including outsourcing facilities. While FDA and some states collect data on drug compounders, nearly all of the states reported that they did not collect data on the volume of compounded drugs. Our survey of state pharmacy regulatory bodies found that drugs, including sterile drugs, are compounded in a variety of pharmacy and other health care settings. Respondents in almost all of the states we surveyed reported that different types of pharmacies, such as retail and hospital pharmacies, were authorized to prepare sterile compounded drugs in their state. Respondents in most states also reported that FDA- registered outsourcing facilities were authorized to compound sterile drugs in their states; however, respondents in 5 states reported that these entities were not authorized to do so for reasons including that the state was still in the process of developing a state license for these entities. In addition, respondents in over half of the states reported that physicians’ offices—both general practitioners’ offices and medical specialty offices (e.g., dermatologists and pediatricians)—were authorized to prepare sterile compounded drugs in their states; however, respondents in several other states reported that they did not know if certain medical settings were authorized to do so. For example, respondents in 18 states reported that they did not know if general practitioners’ offices were authorized. See table 2 for information on the types of entities authorized to prepare sterile compounded drugs. Respondents in several states reported that any licensed or registered pharmacy could potentially compound nonsterile drugs. For example, respondents in two states commented that almost all pharmacies compound or have the potential to compound nonsterile drugs, such as simple creams. A respondent in one state commented that they are under the assumption that any licensed pharmacy can perform nonsterile compounding without a special authorization to do so, and a respondent in another state reported that nearly all community and hospital pharmacies do at least some nonsterile compounding. In addition, officials from some of the stakeholder organizations we interviewed said that certain medical specialists, such as dermatologists, pediatricians, and allergists, prepare compound drugs. They explained that, for example, some medical specialists mix nonsterile topical creams or sterile preparations, such as lidocaine (a local anesthetic agent that can be administered by injection), as part of their medical practice. However, some of these officials said that whether health care practitioners compounded drugs depended on what was considered compounding, and that some medical specialists generally use compounded drugs provided by a pharmacy or outsourcing facility and do not compound the drugs themselves. According to FDA officials, there is no good source for data on the extent of drug compounding and who is doing it except for data on outsourcing facilities. Although outsourcing facilities are required to provide FDA with a report of the drugs they compounded during the previous 6-month period, including the number of units they produced, aggregate data on the listed drugs were not available at the time of our review. According to FDA officials, not all outsourcing facilities provided these reports and the data provided were not yet collected and maintained in a standard format. Therefore, the officials said that FDA does not input the data into a single database, but instead maintains this information on the individual spreadsheets that the outsourcing facilities provided. According to FDA, the agency plans to makes necessary modifications to its electronic reporting system to accommodate the information outsourcing facilities must provide in the future so that outsourcing facilities will be able to electronically submit drug product reports into a single standardized format. In addition, even though the compounded drugs are reported— and some outsourcing facilities report thousands of compounded drugs— FDA has not received data on the quantity of each drug listed in the reports in some cases, according to the officials. Further, while all outsourcing facilities are required to submit drug product reports to FDA, the officials we interviewed said that there are some facilities that have not provided it. As of April 22, 2016, 40 of the 59 outsourcing facilities had not provided some or all required reports. One FDA official said that to date, FDA has not taken regulatory action against outsourcing facilities that have not provided the reports of the drugs they compounded unless FDA was already taking steps to address some other violation of statute by the outsourcing facility, including through the issuance of a warning letter. According to the FDA officials, this is because addressing all of the firm’s violations that FDA has identified in a single action is a more effective mechanism to bring the firm into compliance and a more efficient use of agency resources than pursuing separate actions for discrete violations of the FDCA. While respondents in almost all of the states we surveyed reported having license categories for resident and nonresident pharmacies, respondents in some states reported having other license categories, including those specific to sterile drug compounding. For example, 12 states reported having a separate license category for resident pharmacies that compound sterile drugs and 12 states reported having a sterile compounding license category for nonresident pharmacies. Other respondents reported licensing categories for pharmacies that included nuclear pharmacies, home infusion pharmacies, and Internet/mail order pharmacies; and entities that distribute compounded drugs. (See table 3.) In addition, respondents in some states reported that they do not have separate license categories for specific types of practice settings; however, they are aware of pharmacies and other entities in their state that engage in certain practice areas (e.g., pharmacies that engage in sterile compounding). In addition, respondents in half of the states we surveyed reported collecting data on licensed or registered pharmacies that compound sterile drugs, but not all of these states reported data. For example, 16 states reported data for 2015, ranging from 31 pharmacies in Nevada to 1,024 in California. Respondents in most of the states that reported data on pharmacies that compound sterile drugs reported collecting this information yearly. (See table 4.) National data on the extent of drug compounding, as measured by the number of prescriptions or the volume of compounded drugs (e.g., number of units), were not available from our survey, as only one state reported collecting these data, and its data were limited to sterile compounded drugs. That state reported that 658,128 total prescriptions for sterile compounded drugs were dispensed by pharmacies in the state in 2014, and 708,142 total prescriptions were dispensed in 2015. In addition, the state reported that close to 2.5 million units of sterile compounded drugs were dispensed by pharmacies in the state in 2014, and almost 2 million units were dispensed in 2015. Staff from the state’s board of pharmacy said that the state does not collect data on the total number of all prescriptions dispensed by pharmacies; therefore, they could not calculate the percentage of prescriptions for sterile compounded drugs to all prescription drugs. Board staff also noted that the source of the state’s data was based on self-reporting from pharmacies; as such, pharmacies’ methods for identifying and reporting numbers of prescriptions and units of sterile compounded drugs may differ, and the state cannot confirm the validity or accuracy of the data. When asked if collecting data on the number of prescriptions for compounded drugs or the volume of compounded drugs would have any effect on their oversight of drug compounding activities, officials from the state boards of pharmacy in our three selected states said that collecting such data could be burdensome and costly. For example, the official from Texas said that because they have thousands of licensed pharmacies in their state, the volume of such data would be overwhelming and they do not know what they would do with all of that data. The official from North Carolina said that there would be a significant cost to collecting these data and the ultimate benefit is unclear. In addition, the official from Minnesota said that it seemed like there could be a sizable amount of data to collect, and the pharmacy board would have to work out details, including whether the data would be collected in aggregate or much more specifically by patient, how the data would be collated and stored (such as in a database), and how the board would pay for such data collection and management. Officials in almost all of the stakeholder organizations we interviewed had not conducted or were not aware of any studies or reviews on the extent of drug compounding or the settings in which compounding occurs in each state. However, one stakeholder organization, the Pew Charitable Trusts, conducted a survey of the state boards of pharmacy in the 50 states and the District of Columbia (43 of the 51 states responded) on state oversight of sterile drug compounding. Among its findings, the Pew Charitable Trusts reported that from 3 percent to 24 percent of pharmacies in the 43 responding states were performing sterile compounding. In June 2016, HHS’s Office of Inspector General reviewed spending for compounded drugs under Part D, the Medicare program’s prescription drug benefit. This review found that Medicare Part D spending for compounded drugs rose from $70.2 million in 2006 to $508.7 million in 2015, particularly for topical compounded drugs which include creams and ointments. The HHS Office of Inspector General attributed this increase to both an increase in the average cost of prescriptions and an increase in the number of beneficiaries receiving these compounded drugs. While respondents in 26 states reported that providers in general practitioners’ and medical specialty offices were authorized to compound drugs in their state, we did not find any sources of data specific to the extent to which this occurs. In one of our selected states, the state medical board official said that the extent of drug compounding by physicians and nonpharmacist health care practitioners is likely minimal because their board has not heard about it; however, because the board is complaint driven (i.e., they only inspect or investigate practitioners if a complaint has been submitted) it could be that such compounding activity has not led to any complaints. Another state’s medical board official told us that it is not known whether the scale of compounding by physicians is small and specific to certain medical specialties, or whether it is widespread. This official speculated that it is not widespread, except within particular medical specialties. Further, officials from one stakeholder organization—a national medical association—said that they were not sure how extensive compounding by physicians is or the amount of compounding that is being conducted; and officials from another stakeholder organization—a different national medical association—told us that they would not know how to go about gathering information on the extent of compounding by physicians. Finally, an official from another stakeholder organization—a national pharmacy association—told us the extent of physician compounding varies dramatically depending on the practice environment or physician specialty, in that almost every patient receives compounded drugs from physicians in outpatient surgery and cancer centers, but general practitioners do not usually perform much compounding otherwise. Respondents in almost all of the states we surveyed reported having laws, regulations, or policies specific to the practice of drug compounding. However, few apply to physicians and other nonpharmacists. To help ensure compliance with state laws, regulations, or policies specific to drug compounding, respondents in most states reported inspecting pharmacies and other drug compounders, and most reported their state can take several types of actions against noncompliant pharmacies or other drug compounders. Respondents in 48 of the states we surveyed reported having laws, regulations, or policies specific to the practice of drug compounding; however, these generally only apply to pharmacies and pharmacists. A respondent in one of the remaining states—Pennsylvania—reported that its state had proposed rules and regulations governing compounding practices. The respondent in the other remaining state—New York— reported that the state did not have any laws specific to compounding; however, the state had laws regarding outsourcing facilities operating under section 503B of the FDCA. Respondents in over half the states (26) reported enacting laws or adopting regulations or policies specific to drug compounding in response to the DQSA. Table 5 shows the number of states that reported having laws, regulations, or policies specific to drug compounding, including pending or proposed laws, regulations, or policies, and those specific to nonpharmacist health care practitioners and FDA-registered outsourcing facilities. In addition, respondents in 39 states reported that anticipatory compounding for both sterile and nonsterile compounded drugs is authorized or allowed in their state, and respondents in 27 states reported that compounding for office use is authorized or allowed in their state. However, respondents in 4 of the 27 states commented that only FDA- registered outsourcing facilities may compound drugs for office use and a respondent in 1 state reported that their state was working on regulations to prohibit this practice to align with federal restrictions on pharmacies under section 503A. In our three selected states, compounding for office use is allowed in Texas, but not in North Carolina or Minnesota. The Texas board of pharmacy official said that the state enacted legislation to allow compounding for office use in 2005, but noted that the volume of office-use compounding in pharmacies appears to have dropped dramatically because outsourcing facilities registered with FDA are now providing this service. The North Carolina board of pharmacy official told us that North Carolina revised its laws regarding compounding for office use following enactment of the DQSA and this practice is no longer allowed in the state. This official said that there is no such thing as office- use compounding in North Carolina unless a facility is registered with FDA as an outsourcing facility. According to the Minnesota board of pharmacy official, compounding by licensed pharmacies for office use has not been allowed in the state for decades, and an exemption that had been provided for some large health care systems and specialty pharmacies to compound products to use within their system is no longer available. State laws, regulations, and policies related to licensing for sterile drug compounding, labeling and testing of compounded drugs, compounding qualifications and standards, and reporting of compounded drug products varied across states. For example, respondents in 12 states reported requiring a license or registration for sterile compounding facilities, and respondents in 24 states reported requiring labeling for compounded drugs, as of January 1, 2016. Table 6 provides a summary of select provisions related to drug compounding and the number of states that reported having each provision. Further, respondents in 40 states reported that they require FDA- registered outsourcing facilities that conduct business within their state to have a license in their state, and some states require more than one license type for FDA-registered outsourcing facilities. (See table 7.) For example, one state reported that an FDA-registered outsourcing facility is required to register with the state as a manufacturer, but if the facility is also providing compounded drugs for patient-specific prescriptions the facility must also register as a pharmacy. Some states also have different licensing categories for resident (in-state) and nonresident (out-of-state) FDA-registered outsourcing facilities, and oversight of these facilities varies by state. For example, in our three selected states: Minnesota. The Minnesota Board of Pharmacy has oversight responsibility for outsourcing facilities in Minnesota. The board of pharmacy official said that under Minnesota law, outsourcing facilities are considered to be a subtype of manufacturer and are required to follow CGMP requirements. This law also specifies that no license shall be issued or renewed for an outsourcing facility unless the applicant provides proof of registration with FDA as an outsourcing facility, according to the official. North Carolina. The North Carolina Department of Agriculture and Consumer Services, Food and Drug Protection Division, has oversight responsibility for outsourcing facilities in North Carolina. According to an official from this department, a state statute specifically refers to outsourcing facilities and applies the same requirements applicable to conventional drug manufacturers to these facilities, including the requirement to register with the department. As with conventional drug manufacturers, the department has oversight responsibility for the storage and distribution of outsourcing facilities’ finished products. Texas. The Texas Department of State Health Services, Drugs and Medical Devices Group, has oversight responsibility for outsourcing facilities in Texas. Officials from this department told us that in-state facilities are licensed as manufacturers of prescription drugs, and out- of-state facilities are licensed as prescription drug distributors. The officials said that Texas law does not specifically address outsourcing facilities; therefore, they regulate these entities as manufacturers and apply federal regulations and FDA guidelines and policies in their oversight of these entities, including inspecting them under CGMP requirements. Respondents in less than 20 percent of states (9 states) reported having laws, regulations, or policies specific to compounding by physicians or other nonpharmacist health care practitioners (e.g., physician assistants), and these laws varied by state. For example, one state reported that its state statute requires pharmacy board licensure of all entities that compound drugs and possess compounded drugs, including physicians; and another state reported having a law that specifically allows a medical practitioner to compound drugs for patients under the practitioner’s care. Officials in one of our three selected states—Minnesota—reported having a law specific to compounding by physicians and other nonpharmacist health care practitioners. Officials in the two other states reported that they did not have any laws, regulations, or policies specific to such compounding. Minnesota. Minnesota’s statute on compounding applies to both health care practitioners and pharmacies. The Minnesota statute requires practitioners and pharmacists to comply with USP compounding standards, among other things. However, an official from the Minnesota Board of Pharmacy told us that the pharmacy board relies on the state’s Board of Medical Practice to inform physicians that compounding by physicians should be compliant with the USP chapters related to nonsterile and sterile compounding (USP chapters 795 and 797, respectively) depending on what they are compounding. This official said that the board of pharmacy does not know which physicians may be compounding, and while the pharmacy board has the authority to inspect any place in the state in which drugs are held to be distributed, they need to give advance notice of inspection to physicians. An official from the Minnesota Board of Medical Practice said that the medical board has a complaint-driven process and that if there are allegations that a physician has violated medical or pharmacy statutes that regulate the practice of medicine, including compounding, the board has the authority to investigate. North Carolina. A state statute in North Carolina requires that a physician who dispenses prescription drugs, for a fee or other charge, register with the board of pharmacy and comply with relevant laws and regulations governing distribution of drugs that apply to pharmacists; however, this statute does not specifically address compounding by physicians. According to the board of pharmacy official we interviewed, disciplinary authority over these physicians lies solely with the state’s medical board. The North Carolina Medical Board official explained that the board has the authority to discipline a physician for violating any law involving the practice of medicine and that compounding drugs is included in the practice of medicine. This official further explained that the board’s role in overseeing physicians has historically been complaint driven and the board had not had any complaints or issues brought to its attention related to compounding by physicians until a recent case referred to them by the board of pharmacy. This official said that the board is currently developing its role in overseeing compounding by physicians. Texas. The Texas medical board official told us that there was no specific mention of compounding by physicians in the Texas state statute. The official said, however, that if the medical board received a complaint that involved one of their licensees (i.e., practitioner) violating the state’s drug compounding laws, then the board could take enforcement actions. Respondents in 21 states reported that their office had heard concerns about the practice of compounding by physicians and other nonpharmacists. Some of the concerns respondents in these states reported were about a lack of regulation and oversight of compounding by physicians and other nonpharmacists, and whether physicians were complying with compounding standards, such as USP standards. Further, respondents in some states were unsure which entity, if any, in their state had oversight responsibility for compounding by physicians and other nonpharmacists. For example, respondents in 17 states reported that they did not know if their state had any laws, regulations, or policies specific to drug compounding by nonpharmacists. A respondent in one state commented that they do not believe that the medical, nursing, and naturopath practitioners are subject to any laws, regulations, or policies related to compounding. Some of the stakeholder organizations we interviewed also expressed concerns about compounding by physicians and other nonpharmacists. Officials from one stakeholder organization said that drug compounding conducted in standalone physician practices does not generally fall under medical licensing requirements of state medical boards; therefore, there are gaps in oversight of compounding by physicians. Officials from another stakeholder organization told us that there are an increasing number of companies that are targeting physicians, offering to establish compounding labs within the physicians’ offices. The officials said that the market has been responding to DQSA by targeting physicians because FDA’s oversight of drug compounding has focused on pharmacists, and the market sees an opportunity for physicians to profit off of compounding rather than see the prescriptions they write leave their offices. An official from another stakeholder organization said that there is an enormous amount of compounding in physician offices, but few state boards of pharmacy have oversight over this practice. This official said that boards of pharmacy oversee pharmacists and pharmacies, but do not oversee compounding by physicians. According to this official, the state boards of pharmacy have tried to bring physician-compounded drugs under their oversight, but it has been difficult. Officials from one stakeholder organization, the Federation of State Medical Boards, told us that they conducted an informal review of state laws regarding compounding by physicians (i.e., state medical practice acts) and found that few states have laws specifically regulating compounding by physicians; however, most medical boards consider compounding as part of the practice of medicine. The officials said that they plan to further study this issue to determine whether to develop guidelines for their members. In addition, FDA officials told us that the agency has not taken a proactive role in compounding by physicians and there is not much oversight of physician compounding by state medical boards. FDA officials noted that they did inspect one physician who was compounding after receiving complaints, and that they planned to discuss oversight of physician compounding at FDA’s intergovernmental meeting with state officials in September 2016. To help ensure compliance with state laws, regulations, or policies related to drug compounding, respondents in most states reported inspecting resident pharmacies and relying on inspections by the home state of nonresident pharmacies. Specifically, respondents in 42 states reported inspecting all licensed resident pharmacies, respondents in 6 states reported inspecting some of these pharmacies, and respondents in 29 states reported relying on a home state’s inspection report for nonresident pharmacy inspections. Specific to entities that compound or distribute sterile compounded drugs, table 8 shows the number of states that reported conducting inspections for sterile compounding pharmacies, wholesale distributors, and outsourcing facilities. Types of state inspections include prelicensure, for cause (e.g., in response to a complaint), and recurring (e.g., every 1 to 2 years). Respondents in most states reported conducting these types of inspections for resident pharmacies, resident sterile compounding pharmacies, and resident wholesale distributors; however, few states reported conducting any of these types of inspections for nonresident entities. In addition, the number of full-time equivalent pharmacy inspectors authorized to inspect either resident or nonresident pharmacies, or both, ranged from zero to 138. A respondent in one state that did not have any pharmacy inspectors reported that the five pharmacy board members conducted these inspections. Survey respondents also reported their states required certain qualifications for pharmacy inspectors. For example, most respondents reported that their state required inspectors to have a current pharmacist’s license and almost half the states required inspectors to have practiced pharmacy for a minimum number of years. Specific to inspections of compounding facilities, respondents in 21 states reported requiring inspectors to complete a specialized training program in sterile compounding, respondents in 15 states reported requiring inspectors to complete a specialized training program in nonsterile compounding, and respondents in 4 states reported requiring inspectors to have prior experience in compounding. Time frames for recurring inspections of pharmacies and other drug compounders, as well as entities that distribute compounded drugs, vary by state, and respondents in some states reported challenges in meeting their inspection time frames. Respondents reported state inspection time frames ranging from at least once a year to every 5 years or more, and they also varied by type of entity being inspected. (See table 9.) Respondents in 21 states reported that they have challenges in meeting their state’s required inspection time frames, citing reasons such as limited resources and the time required to conduct inspections. For example, a respondent in one state commented that there are over 1,000 sterile compounding pharmacies in their state that are supposed to be inspected each year, which is challenging for the 46 inspectors who conduct these inspections. A respondent in another state commented that they have a small staff responsible for inspections and investigations, so the priority goes to sterile compounding facilities. To enforce drug compounding laws, regulations, or policies, respondents in most states reported they can take several types of actions against pharmacies or other compounding entities, including suspension and revocation of a license or registration, monetary fines, or a cease and desist order. For example, respondents in 45 states reported they can suspend a pharmacy or pharmacist’s license and respondents in 41 states reported they can impose monetary fines. (See table 10.) Other types of actions that respondents reported included nondisciplinary administrative letters of warning, restricting a license (e.g., restricting a pharmacist from engaging in sterile compounding), and reprimands. While respondents in several states reported data on the number of actions taken against pharmacies for cases involving compounded drugs, respondents in some states reported that they do not track such data specific to cases involving compounded drugs. Of the respondents in the 41 states that reported they can impose a monetary fine, 13 states reported imposing monetary fines on pharmacies or pharmacists for cases involving compounded drugs in 2014, and 12 states reported taking this action in 2015. The number of pharmacies or pharmacists that states reported receiving these fines in 2015 ranged from 1 pharmacy or pharmacist in 1 state to 73 in another state. In addition, respondents in 8 states reported suspending pharmacy or pharmacist licenses in 2014 and respondents in 6 states reported taking this action in 2015. Of the respondents in the 19 states that reported they can conduct a mandatory recall of compounded drugs, 2 states reported taking this action in 2014 and 3 states reported doing so in 2015. Respondents in 4 states reported revoking 1 or 2 pharmacy or pharmacist licenses in 2015 for cases involving compounded drugs. Most states reported overall satisfaction with their communication with FDA on compounding issues through events such as FDA-sponsored activities, but some states reported challenges with this communication. Similarly, most states reported overall satisfaction with communication among states at conferences and meetings, but some states noted challenges. FDA has communicated with states on compounding issues in a variety of ways, including FDA-sponsored activities, such as intergovernmental meetings; most states reported this communication was helpful. In 2014 and 2015, FDA held three intergovernmental working meetings on pharmacy compounding with pharmacy board representatives from states and U.S. territories. Survey respondents in about three quarters of the states reported participating in FDA’s intergovernmental meetings on drug compounding, and most participating states reported these activities were very or moderately helpful; however, a number of participating states reported that the activities were slightly or not at all helpful. For example, respondents in 41 states reported participating in FDA’s March 2014 Intergovernmental Working Meeting on Pharmacy Compounding, and of those states that reported participating in this meeting, respondents in 33 states, or about 80 percent, reported that the meeting was very or moderately helpful. However, respondents in 4 states that reported participating in the March 2014 meeting reported that the meeting was slightly or not at all helpful. See table 11 for the number of states that reported participating in FDA-sponsored activities and how the participating states rated the helpfulness of the activities. Respondents from most states reported obtaining compounding-related information from FDA’s website, and in general, states found this information helpful. For example, respondents in 38 states reported obtaining a list of FDA-registered outsourcing facilities from FDA’s website, and 32 of them found the information very or moderately helpful. See table 12 for the number of states that reported obtaining information related to drug compounding from FDA’s website and how these states rated the helpfulness of the information. Of the respondents in the 40 states that reported having had communication with FDA regarding drug compounding issues, 24 states (60 percent) reported that, overall, they were very or somewhat satisfied with this communication; however, 9 states (23 percent) reported they were very or somewhat dissatisfied. (See fig. 1.) The respondent in one state that reported being satisfied with their communication with FDA said “It has been very helpful to have ongoing meetings and discussion with FDA at FDA-sponsored events and other meetings. The emphasis on state communication is noted and appreciated.” However, the respondent in another state that indicated dissatisfaction with their communication with FDA commented that “there seems to be no real progress in providing guidance as to what regulatory approaches FDA intends to take—it seems like FDA is burdened by red tape that prevents it from sharing information with the states on common issues.” Respondents in 25 states reported that they have not experienced specific challenges in their communication or interactions with FDA related to drug compounding issues, but respondents in 15 states reported experiencing one or more communication challenge with FDA. Fourteen of them reported that getting FDA to respond to their requests for information was very or moderately challenging; and 10 of them reported that getting FDA to provide responses to their questions related to oversight of drug compounding was very or moderately challenging. Finally, respondents in several states elaborated on their states’ communication or interactions with FDA. For example, one respondent reported that “it has taken years for the FDA to respond or even acknowledge the Board’s communication in some instances. Timeliness is a significant issue.” Another respondent reported that when they work with FDA, FDA requests a variety of information from the board, but will not provide any information to the board. See table 13 for how 15 states—the states that reported experiencing one or more communication challenges with FDA—rated these challenges. FDA officials noted that federal law prohibits FDA from sharing certain nonpublic information with state officials that have not provided confidentiality commitments to FDA. According to FDA officials, the agency has encouraged and worked with states and individual state officials to provide such commitments through FDA commissioning or information sharing agreements. Survey respondents in 27 states reported having commissioned officers with FDA; 16 of them reported that having commissioned officers for sharing information and conducting activities related to drug compounding was very or somewhat effective, and 5 of them reported having commissioned officers was very or somewhat ineffective. A respondent in one state reported that having commissioned officers “has expedited the sharing of information,” while a respondent in another state reported “the inability to share information with other staff, the board, or to use the information obtained through commissioner status in disciplinary actions against the subject licensee makes this process ineffective and inefficient.” In addition, 11 states reported having an information sharing agreement with FDA; 8 of them reported this agreement was very or somewhat effective for sharing information related to drug compounding, and 2 of them reported the agreement was neither effective nor ineffective. A respondent in one state reported “information sharing has improved greatly in the past two years.” However, a respondent in another state reported “the process still feels like the state needs to pry information from the FDA.” We also asked the stakeholder organizations about FDA’s communication with the states related to drug compounding. Seven of the 25 stakeholder organizations we interviewed said that, overall, communication between the states and FDA has improved since the DQSA was enacted; however, 2 stakeholder organizations commented that FDA only has one- way communication with states. Respondents in 42 states reported communicating with other states regarding issues related to drug compounding using venues such as national association meetings, e-mails, phone calls, and informal networking at FDA-sponsored events. Respondents in 35 states reported that they were very or somewhat satisfied with their communication and interactions with other state pharmacy regulatory bodies related to drug compounding issues. See table 14 for the number of states reporting having various types of communications or interactions with other state regulatory bodies, and how these states rated the helpfulness of the communication or interaction. Respondents in 35 states reported that they had not experienced challenges regarding their communication or interactions with other state pharmacy regulatory bodies related to drug compounding issues, but respondents in 5 states did report challenges. One of the 5 that reported challenges commented that some states do not return phone calls, and other states have little or no resources. Another respondent that reported challenges commented that there needs to be a single national model regarding the regulation and licensure of compounding pharmacies. FDA has taken steps to implement its drug compounding responsibilities since enactment of the DQSA, but states and stakeholder organizations have cited a number of challenges and concerns. FDA has issued numerous guidance documents related to drug compounding, and conducted more than 300 inspections of drug compounders. However, some stakeholder organizations said the amount of time it takes FDA to finalize guidance and other key documents is challenging. States and stakeholder organizations also cited concerns regarding FDA’s implementation of its drug compounding responsibilities. FDA has issued numerous documents related to compounding since the DQSA was enacted; most of these are draft documents. FDA has released final guidance on adverse event reporting requirements, the process and fees related to registering with FDA as an outsourcing facility, and pharmacy compounding under section 503A, among others. The remaining guidance and other documents that are still in draft include documents that, according to many stakeholder organizations we interviewed, are key to FDA’s implementation of its drug compounding responsibilities. See table 15 for final guidance, draft guidance, and other draft documents issued by FDA. According to our review of FDA data, FDA has also inspected drug compounders, including outsourcing facilities, and issued FDA form 483 inspection observation reports. FDA has also taken action, including issuing warning letters, when issues have been identified in these inspections. From May 2012 through April 22, 2016, FDA completed 265 inspections of 503A compounders and other drug compounders that were not outsourcing facilities. As of April 22, 2016, FDA had completed 75 inspections of outsourcing facilities. These 75 inspections were at 59 of the 91 facilities that had registered with FDA as an outsourcing facility. FDA officials noted that many of the entities that registered as outsourcing facilities withdrew their outsourcing facility registration submission before the agency scheduled an inspection, and others were not yet operating when the agency attempted to inspect them. In general, FDA conducts three types of inspections: for-cause, follow-up, and surveillance. See table 16 for a description of FDA inspection types and the number of each type of inspection conducted by FDA for drug compounders as of April 22, 2016. According to agency officials, FDA’s Center for Drug Evaluation and Research issues all inspection assignments for 503A compounders and outsourcing facilities. FDA officials told us that, in an effort to focus the agency’s resources efficiently, the center and the agency’s Office of Regulatory Affairs approach the coordination and scheduling of drug- compounding-related inspection assignments from a national perspective. Unlike outsourcing facilities or conventional manufacturers, 503A compounders are not required to register with FDA. As such, FDA is only aware of a small percentage of the thousands of pharmacies that compound drugs, and FDA does not inspect all 503A compounders, according to FDA officials. For outsourcing facilities, which register with FDA, the agency is required to inspect them on a risk-based schedule. As of May 23, 2016, 91 facilities had registered with FDA as outsourcing facilities at some point in time, and as of July 2016, FDA had inspected 46 of the 60 establishments with active outsourcing facility registrations at least once. According to agency officials, FDA’s risk models—which are used to determine which facilities to inspect—use information from a number of sources, including FDA’s Field Accomplishment and Compliance Tracking System. However, as we reported in 2013, this database does not consistently indicate the final inspection classification—that is, it does not always include accurate information about whether the agency’s final determination was that an official action was indicated, voluntary action was indicated, or if no action was indicated from the results of the inspection. We recommended that FDA address this shortcoming by taking steps to consistently collect reliable and timely information in FDA’s databases on inspections and enforcement actions associated with compounded drugs; however, as of June 2016, FDA officials reported the agency’s database did not consistently include final inspection classifications. According to FDA officials, the agency’s database includes recommendations from the district office, which may differ from the final inspection classifications after the case has undergone further review by officials in the Center for Drug Evaluation and Research and the Office of Regulatory Affairs. FDA officials told us that the agency took steps in June 2016 to make sure the final inspection classifications in its database are accurate by (1) including a section on data entry—including updating the inspection classification in the database—in a June 2016 training on compounding for center and Office of Regulatory Affairs staff, and (2) discussing the inspection classification during the joint assessment call for compounding inspections in order to decide on a final inspection classification and to make sure this classification is updated in the database. The officials said that FDA plans to update the final classifications for inspections FDA has already conducted and for all inspections moving forward. According to agency officials, FDA invites the relevant state regulatory authority (generally the state board of pharmacy, state department of health, or both) to accompany FDA on inspections of drug compounders. During the inspection, FDA investigators collect evidence relating to whether the drug compounder meets certain conditions of sections 503A or 503B, as applicable, and to conditions and practices that, if deficient, raise safety concerns for public health. The inspections typically focus on identifying any insanitary conditions that could cause a drug product to be contaminated with filth or rendered injurious to health in violation of the FDCA, and review practices that, if deficient, could lead to potency problems or labeling mix ups. From May 11, 2012, through April 22, 2016, FDA conducted 265 inspections of 210 different establishments of drug compounders that are not outsourcing facilities, including 503A compounders. As a result of these inspections, the agency issued 228 FDA form 483 inspection observation reports (finding problems such as dead insects in ceilings and other insanitary conditions), and has taken a number of actions. (See table 17.) As of April 2016, FDA had conducted 75 inspections of 59 different outsourcing facilities. Actions related to its inspections of outsourcing facilities included 24 FDA warning letters and 15 voluntary recalls. (See table 18.) Officials from 6 of the 25 stakeholder organizations we interviewed said the amount of time it takes FDA to finalize guidance and other relevant documents, including the list of drugs that are difficult to compound, is challenging. For example, officials from one of these stakeholder organizations told us that, as a result, they were uncertain regarding how to move forward under the DQSA; they did not know how to advise their members without final guidance from FDA regarding the list of drugs that are difficult to compound. In addition, FDA has not finalized the standard memorandum of understanding (MOU) under section 503A between FDA and states that choose to sign it. Under section 503A, unless a drug is compounded in a state that has entered into an MOU with FDA, a pharmacist, pharmacy, or physician cannot distribute, or cause to be distributed, compounded drug products outside the state in which they are compounded in quantities that exceed 5 percent of the total prescription orders dispensed or distributed by that pharmacy or physician. These restrictions and the terms of the MOU will apply, once the standard MOU is finalized and made available to the states for their consideration and signature, to drugs compounded under section 503A, and will not apply to drugs compounded by outsourcing facilities. The law requires the standard MOU, which FDA is to develop in consultation with the National Association of Boards of Pharmacy, to address the interstate distribution of inordinate amounts of compounded drug products and to provide for appropriate investigation by a state of complaints related to compounded drug products distributed outside of the state. Officials from two stakeholder organizations we talked to expressed concern regarding the time it is taking FDA to finalize the standard MOU. Specifically, they are concerned with the potential implications that the MOU may have on how they do business. In particular, the draft MOU that FDA published for comment in February 2015, would restrict interstate distribution of compounded products under section 503A to less than 30 percent of the number of compounded and noncompounded drug products that a pharmacy, pharmacist, or physician in a state that has entered into the MOU distributes or dispenses both intrastate and interstate in a calendar month. Pharmacists, pharmacies, and physicians in states that have not entered into the MOU would be limited to distributing compounded drug products in quantities that do not exceed 5 percent of all prescription orders they dispense or distribute. Officials from five stakeholder organizations that we talked to said they were concerned that, in the draft MOU, FDA’s proposed definition of distribution includes dispensing. Representatives from one pharmacist stakeholder organization stated that, if the MOU defines distribution interchangeably with dispensing, compounded drugs dispensed will be included in the 30 percent calculation for interstate distribution of compounded drugs. As a result, they are concerned that pharmacies that regularly dispense compounded drugs across state lines, such as pharmacies in the metropolitan Washington D.C. area, where the borders of the District of Columbia, Maryland, and Virginia are in close proximity, will be limited in the number of compounded drugs they can dispense to patients, even though some of these patients may only live a short distance from the pharmacy. FDA officials cited a number of reasons for the time it has taken the agency to finalize the agency’s draft drug compounding documents, including the time and steps required to solicit and evaluate comments and issue guidance. For example, FDA officials attributed the time it has taken to finalize the draft MOU and other documents to a number of factors, including the time needed to review public comments and to conduct public meetings with state boards of pharmacy; FDA has received over 3,000 comments on the agency’s draft MOU alone, many of which raise complex policy issues that need to be resolved, according to agency officials. In addition, according to the officials, these documents must go through FDA’s internal clearance process along with numerous other requirements before being finalized. States and stakeholder organizations reported a number of concerns related to FDA’s implementation of its drug compounding responsibilities. These concerns included the availability of compounded drugs for use in physicians’ offices, a potential loss in patient access to needed medications, and conflicting federal and state inspection protocols. In response to our survey of state pharmacy regulatory bodies, respondents from 30 states reported that they had heard concerns that FDA’s implementation of DQSA would affect the availability of compounded drugs for use in physicians’ offices, generally referred to as office-use compounding. FDA’s April 15, 2016, draft guidance on the prescription requirement for drugs compounded under section 503A states that the agency interprets section 503A to require a valid prescription for an individual patient before a pharmacy may provide a compounded drug to a provider. Therefore, the draft guidance indicates that compounding of a drug product to be kept as stock in a doctor’s office, hospital, or other health care facilities without an individual patient prescription is not permitted by any pharmacy that is not an outsourcing facility. Officials from some of the stakeholder organizations we talked to have raised concerns that FDA’s draft guidance is inconsistent with laws in states that allow compounding for office use, and respondents in 27 states reported that their state laws currently allow office-use compounding. FDA officials noted that the agency’s policies with respect to the prescription requirement in section 503A are intended to protect patients from poor quality compounded drugs that could cause serious harm while preserving access to drugs compounded for office-use for patients who need them. They stated that the prescription requirement in section 503A is critical to differentiate compounding by pharmacies and physicians under section 503A from conventional manufacturing and compounding by outsourcing facilities, which are subject to routine FDA oversight. FDA officials also said that stakeholders should advise the agency if instances arise in which a health care facility that orders compounded drugs for office use to meet patients’ medical needs is unable to obtain these drugs from outsourcing facilities. Respondents in 23 states reported concerns about access to certain compounded drugs for patients with a medical need for these drugs. For example, for compounded drugs for which there is not a great demand, there is concern that outsourcing facilities would choose not to compound these drugs. Therefore, according to these respondents, there is a concern that if 503A compounders are not allowed to compound these drugs for office use, patients could lose access to needed medications. Some states and stakeholder organizations reported differences between the protocols that some states and FDA use when inspecting pharmacies engaged in drug compounding that are not outsourcing facilities. Specifically, officials in the states noted that their states inspect pharmacies to assess their compliance with state pharmacy practice rules, which are often based on the standards in USP chapters 795 (nonsterile compounding) and 797 (sterile compounding). These officials said that although pharmacies meeting the requirements of section 503A are exempt from FDA’s CGMP requirements, FDA’s publicly available form 483 inspection observation reports have included observations related to CGMP requirements, even for those 503A compounders. FDA officials indicated they were aware of concerns about this practice, and on July 13, 2016, FDA announced a change in the agency’s procedures that took effect on August 1, 2016. Under the new procedures, FDA investigators first make a preliminary assessment of whether a compounder’s drugs are exempt from CGMP requirements under section 503A. If the preliminary assessment is that the compounder’s drugs are exempt, the investigator will not issue an inspection observation report showing observations solely related to noncompliance with CGMP requirements. Instead, the FDA form 483 inspection observation report will only include observations that do not relate solely to CGMP requirements. However, if the preliminary assessment is that the compounder’s drugs are not exempt under section 503A, the agency may cite CGMP-related observations in the inspection observation report. We provided a draft of this report to the Secretary of Health and Human Services. HHS provided written comments, which are reproduced in appendix III. HHS also provided technical comments, which we incorporated as appropriate. In its comments, HHS stated that FDA has prioritized efforts to increase collaboration between FDA and states regarding oversight of drug compounding, and cited examples of FDA’s efforts to do so. HHS also stated that FDA is committed to working with states to further improve communication, noting FDA’s efforts to improve communications while commenting that, in some cases, federal law prohibits the agency from sharing certain information. HHS also acknowledged some of the concerns of states and stakeholders that we noted in our report, including compounding by physicians and access to compounded drugs, and provided information on steps FDA has taken or plans to take regarding these issues. We are sending copies of this report to the Secretary of Health and Human Services, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or crossem@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs are on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Representatives of stakeholder organizations we interviewed and states we surveyed identified a number of tools available to purchasers of compounded drugs, including institutional purchasers (e.g., hospitals), health care practitioners (e.g., physicians), and individual patients, that are available for use to determine whether drug compounders are maintaining the appropriate standards for the safety and quality of these drugs. Examples of tools identified include the following: Food and Drug Administration’s (FDA) compounding website: Purchasers can review FDA’s compounding website, which includes information on FDA inspections and actions taken by FDA related to deficiencies found during an inspection. In response to our survey of state pharmacy regulatory bodies, respondents in 13 states reported that they would direct purchasers of compounded drugs to use FDA’s compounding website, or other FDA information, in order to determine the safety and quality of compounded drugs. State board of pharmacy websites: Purchasers can contact their state board of pharmacy or search their state board of pharmacy’s website to determine whether the state has inspected a pharmacy, and if so, whether the state had found shortcomings in its compounding operations (for those states that make this information available on their website). Fourteen states reported that they would direct purchasers of compounded drugs to state websites. Pharmacy accreditation organizations: Purchasers can determine whether a pharmacy was accredited for compounding by an organization, such as the Accreditation Commission for Health Care’s Pharmacy Compounding Accreditation Board, or identify whether a pharmacy has met the requirements of other national associations’ programs, such as the National Association of Boards of Pharmacy’s Verified Pharmacy Program. Six of the 25 stakeholder organizations we talked to indicated that pharmacy accreditation for compounding by an organization, such as the Accreditation Commission for Health Care’s accreditation board, is a tool that purchasers of compounded drugs can use to assess the safety and quality of compounded drugs. However, our review found that there were few drug compounders with clean inspections, and relatively few compounders were accredited. Therefore, many purchasers of compounded drugs may rely on information from state and federal regulatory bodies on the safety and quality of compounded drugs, including deficiencies found during inspections. Institutional purchasers and health care practitioners have additional tools available to identify and evaluate drug compounders as they seek sources to provide compounded drugs for their operations. The American Society of Health-System Pharmacists’ assessment tool: Nine of the 25 stakeholder organizations we talked to referenced the American Society of Health-System Pharmacists’ assessment tool, which is intended to help purchasers that choose to outsource the preparation of compounded drugs to evaluate proposals in order to select a drug compounder to supply those drugs. The International Academy of Compounding Pharmacists’ Compounding Pharmacy Assessment Questionnaire: Three of the 25 stakeholder organizations we talked to referenced the International Academy of Compounding Pharmacists’ compounding pharmacy assessment questionnaire checklist. This tool was developed based on the U.S. Pharmacopeial Convention’s compounding standards, to provide purchasers with a checklist of what to look for in a pharmacy compounding practice. Other organizations involved in the purchase of prescription drugs— specifically pharmacy benefit managers—may utilize their own tools to help determine whether drug compounders are maintaining the appropriate standards for the safety and quality of these drugs. For example, officials from one pharmacy benefit manager told us that their organization has developed a credentialing process to evaluate compounding pharmacies for inclusion in their network and to determine the type of compounded drugs these pharmacies may sell in the pharmacy benefit manager’s network. The officials said that this process consists of a questionnaire that covers items such as the pharmacy’s quality procedures for each compounded dosage form (i.e., it determines whether the pharmacy is capable of accurately making capsules, complex suspensions, and other dosage forms), and the pharmacy’s quality practices and procedures. In addition, the officials said they also review the findings from inspections conducted by a state or FDA. At the end of the credentialing process, the organization will establish an agreement with the pharmacy that allows it conduct either “complex nonsterile compounding” or “limited scope nonsterile compounding.” Ten of the 25 stakeholder organizations we talked to indicated that the drug’s label is also a tool for patients to use to determine whether the drug is a compounded drug. Outsourcing facilities are required to include a statement on compounded drugs indicating that it is a compounded drug, as well as the drug’s expiration date and ingredients. In addition, 24 states reported requiring labeling for compounded drugs, as of January 1, 2016. Therefore, for drugs with such labeling, the patient (if the drug is dispensed directly to a patient) or the provider (if administered in the office or medical facility) could know it was a compounded drug and the expiration date and the ingredients. Section 503A of the Federal Food, Drug, and Cosmetic Act does not require 503A compounders to include a statement that it is a compounded drug on the drugs they compound. One stakeholder organization pointed out that most labeling is not consistent and that certain drugs may not have a label, such as compounded drugs for hospital patients, or compounded drugs in nuclear pharmacies; another stakeholder organization stated that unless a state requires pharmacies to label compounded drugs as such, patients likely won’t know whether the drug was compounded. FDA officials also noted that the agency has heard from stakeholders that physicians and patients may not be aware that the drugs that they are administering or receiving were compounded, or that they are not approved by FDA. The Drug Quality and Security Act (DQSA), enacted in November 2013, included a provision for GAO to review drug compounding. We examined (1) the settings in which drugs are compounded, and the extent of drug compounding in each state; (2) state laws, regulations, and policies governing drug compounding, and how they are enforced; (3) how communication is conducted between states and FDA, as well as among states, regarding compounding, and any associated challenges; and (4) steps FDA has taken to implement its responsibilities to oversee drug compounding since enactment of the DQSA, and any challenges that have been reported with these efforts. We also examined available information for purchasers of compounded drugs (e.g., hospitals, health systems, and patients) to determine the safety and quality of those drugs. To address our reporting objectives and obtain information about purchasers of compounded drugs, we administered a web-based survey to the state pharmacy regulatory bodies (e.g., boards of pharmacy) in the 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. We interviewed officials at 25 national associations and other stakeholder organizations, government officials in 3 states (Minnesota, North Carolina, and Texas), officials at two pharmacy benefit manager organizations, and officials from the Food and Drug Administration (FDA); and we reviewed relevant documents from FDA and the organizations we interviewed. Finally, to address steps FDA has taken to implement its regulatory responsibilities to oversee drug compounding and related challenges, we reviewed relevant laws and analyzed FDA data on inspections of drug compounders and actions taken related to its inspections of these entities. We administered a web-based survey to the state pharmacy regulatory bodies in the 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands. We surveyed state pharmacy regulatory bodies (states) because these are the entities that regulate pharmacy practice, including drug compounding activities, through state laws and regulations. To collect information on drug compounding across the country, we surveyed all 50 states and the District of Columbia. We also included selected U.S. territories in our survey population—Guam, Puerto Rico, and the U.S. Virgin Islands—because these are the three most populous territories, all have boards of pharmacy, and all are members of the National Association of Boards of Pharmacy. We primarily obtained contact information for the states from information on boards of pharmacy on the National Association of Boards of Pharmacy’s website, and we tested the survey by conducting three pretests of draft versions with officials from a state board of pharmacy in a rural state, officials from a state board of pharmacy in a populous state, and a national pharmacy association. Our survey was administered from February 8, 2016, through April 15, 2016. We collected information from survey respondents on the settings in which drug compounding occurs and data on drug compounding in each state, state laws, regulations, and policies related to drug compounding, activities states have participated in related to drug compounding with FDA and other states, states’ perspectives on communication with FDA and other states, states’ perspectives on FDA’s implementation of the DQSA, and information on how states would notify purchasers of compounded drugs that a compounded drug was found to be of questionable safety or quality, among other things. We had a survey response rate of 93 percent; 50 of the 54 states completed the survey. Two states, Alaska and Indiana, responded to some of the survey questions but did not complete the survey; therefore, their responses were not included in our survey analyses. Two of the territories, Puerto Rico and the U.S. Virgin Islands, did not respond to any of the survey questions. We analyzed the survey responses from the 50 completed surveys and conducted follow up with respondents, as needed, to clarify certain survey responses or obtain additional information. We conducted data checks on the survey responses, including checking for skip patterns and invalid responses, to ensure the reliability of the data. To further address our objectives, we interviewed officials from 25 stakeholder organizations that have a stake or an interest in drug compounding to obtain information such as reviews on the extent of drug compounding; reviews of state laws, regulations, and policies on drug compounding; their perspectives on any challenges in communication between FDA and states, as well as among states, related to drug compounding; and their perspectives on FDA’s implementation of the DQSA. We selected these stakeholder organizations to include national organizations representing (1) pharmacies and pharmacists, including those that compound drugs; (2) physicians, including those in medical specialties identified as compounding drugs; and (3) state boards of pharmacy, state medical boards, and state health officials; as well as experts in drug compounding, and an organization that conducted research related to drug compounding. We reviewed relevant documents provided by these stakeholder organizations, including comments submitted to FDA regarding FDA’s compounding-related activities. We also interviewed state agency officials from the boards of pharmacy, medical boards, and the state agencies that have oversight responsibility for outsourcing facilities, in three selected states—North Carolina, Minnesota, and Texas. We selected these states because they reported differing laws, regulations, or policies related to drug compounding in their responses to the survey, which included having different types of state agencies or departments with oversight responsibilities for outsourcing facilities, and variation in their oversight responsibilities of physicians or other nonpharmacists. Through the interviews with the board of pharmacy officials, we obtained additional information on state laws and policies related to drug compounding, as well as additional details for certain survey responses. In our interviews with state medical board officials, we obtained information on the medical board’s role in the oversight of drug compounding and other information, as available, related to compounding by physicians in each state. Two of our three selected states—North Carolina and Texas—had a separate state agency responsible for overseeing FDA-registered outsourcing facilities licensed in the state; therefore, we obtained information in these interviews specific to their oversight responsibilities for these facilities. In addition, we interviewed officials from two pharmacy benefit managers—third-party administrators of prescription drug programs for certain health plans and federal and state government employee plans—to obtain information related to drug compounding, including how these entities determine the safety and quality of compounded drugs. The perspectives of the officials from the 25 stakeholder organizations, three selected states, and two pharmacy benefit managers are not generalizable, but provided us with valuable insight on these issues. We reviewed relevant documents from FDA, including FDA’s draft memorandum of understanding (MOU) for use with states regarding distribution of compounded human drug products, and FDA’s draft and final guidance related to drug compounding, such as FDA’s final guidance on registration of outsourcing facilities. We also reviewed relevant federal laws and regulations related to drug compounding, including sections 503A and 503B of the Federal Food, Drug, and Cosmetic Act. In addition, we interviewed FDA officials and reviewed information on FDA’s compounding website to determine steps FDA has taken to implement its regulatory responsibilities to oversee drug compounding since enactment of the DQSA. To further address our objective on steps FDA has taken to implement its regulatory responsibilities to oversee drug compounding since enactment of the DQSA, we analyzed FDA data from May 2012 through April 22, 2016, on the number of inspections that FDA has conducted on drug compounders, and data on actions that FDA has taken related to these inspections from May 2012 through June 28, 2016. Actions included FDA issuing an FDA form 483 inspection observation report or a warning letter to an entity. We also obtained FDA data on outsourcing facilities that were currently registered with FDA or have ever been registered with FDA (i.e., facilities that were registered as an outsourcing facility at some point with FDA but are no longer registered) as of April 22, 2016. We determined that the data we used from FDA on inspections and actions related to drug compounding were sufficiently reliable for our purposes by discussing data collection processes and limitations of the data with agency officials, and comparing the data against other published sources. We conducted this performance audit from May 2015 to November 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact above, Kim Yamane (Assistant Director), Lisa A. Lusk (Analyst-in-Charge), Matthew Byer, Julie Flowers, Sandra George, and Drew Long made key contributions to this report. | Drug compounding is the process of combining, mixing, or altering ingredients to create a drug tailored to the needs of an individual patient. An outbreak of fungal meningitis in 2012 linked to contaminated compounded drugs raised concerns about state and federal oversight of drug compounding. The Drug Quality and Security Act, enacted in 2013, helped clarify FDA's authority and included a provision for GAO to report on drug compounding. This report examines (1) the settings in which drugs are compounded, and the extent of drug compounding; (2) state laws and policies governing drug compounding, and how they are enforced; (3) communication between states and FDA, as well as among states, regarding drug compounding, and the associated challenges; and (4) steps FDA has taken to implement its responsibilities to oversee drug compounding, and challenges that have been reported with these efforts. GAO surveyed state pharmacy regulatory bodies in the 50 states, the District of Columbia, Guam, Puerto Rico, and the U.S. Virgin Islands (all but 4 completed the survey); reviewed documents and interviewed officials from FDA, 25 stakeholder organizations (including national pharmacy and medical associations), and agencies in 3 states selected for having differing laws and policies; reviewed relevant laws; and examined FDA data on drug compounding inspections and actions taken. HHS provided general comments on a draft of this report, as well as technical comments, which were incorporated as appropriate. GAO's survey of state pharmacy regulatory bodies found that drugs are compounded in a variety of health care settings, and some data are collected on the number of entities that compound drugs (drug compounders), but not the volume of compounded drugs. In addition to pharmacies, drug compounding settings include physicians' offices and outsourcing facilities—a new type of facility established by law in 2013, which can compound sterile drugs without patient-specific prescriptions and register with and are inspected by the Food and Drug Administration (FDA), an agency within the Department of Health and Human Services (HHS). While FDA and some states collect data on drug compounders, only one state reported collecting data on the number of prescriptions or the volume of compounded drugs. In addition, states GAO surveyed and stakeholders GAO interviewed did not collect data specific to the extent of compounding performed by nonpharmacists, such as physicians. Nearly all of the states GAO surveyed reported having drug compounding laws, regulations, or policies, though few apply to nonpharmacists, and states conduct inspections and can take actions to enforce them. Less than 20 percent of states reported having laws, regulations, or policies specific to compounding by nonpharmacists (e.g., physicians), and these state laws varied. To help ensure compliance, most states reported inspecting drug compounders, such as pharmacies and outsourcing facilities, and most states can take several types of actions against pharmacies, including monetary fines, and suspension and revocation of a license or registration. Most states reported being satisfied with their communication with FDA and other states, although some reported challenges. About three quarters of the states reported participating in FDA-sponsored activities, such as intergovernmental meetings, and obtaining information from FDA's website. Some states reported challenges with this communication, such as getting FDA to respond to requests for information. In terms of communication between states, most survey respondents reported that they are satisfied with this communication, which occurs through conferences and other activities. FDA has taken steps to implement its regulatory responsibilities to oversee drug compounding, but states and stakeholder organizations have cited challenges and concerns. FDA has issued numerous draft and final guidance documents related to drug compounding, and conducted more than 300 inspections of drug compounders, which resulted in actions such as FDA issuing warning letters and voluntary recalls of potentially contaminated compounded drugs. Some stakeholder organizations said the amount of time it takes FDA to finalize the guidance and other documents—including those required by the 2013 law—is challenging. FDA officials noted that reviewing the large number of comments received has contributed to the time the agency has taken to finalize them. States and stakeholder organizations also cited concerns related to access to compounded drugs and differences between states and FDA on the appropriate inspection protocols to use when inspecting drug compounders. In August 2016, FDA changed its procedures to address concerns about the appropriate protocols to use for these inspections. |
FCIC was established in 1938 to temper the economic impact of the Great Depression, and was significantly expanded in 1980 to protect farmers from the financial losses brought about by drought, flood, or other natural disasters. RMA administers the program in partnership with private insurance companies, which share a percentage of the risk of loss and the opportunity for gain associated with each insurance policy written. RMA acts as a reinsurer—reinsurance is sometimes referred to as insurance for the insurance companies—for a portion of all policies the federal crop insurance program covers. In addition, RMA pays companies a percentage of the premium on policies sold to cover the administrative costs of selling and servicing these policies. In turn, insurance companies use this money to pay commissions to their agents, who sell the policies, and fees to adjusters when claims are filed. FCIC insures agricultural commodities on a crop-by-crop and county-by- county basis, considering farmer demand and the level of risk associated with the crop in a given region. Major crops, such as grains, are covered in almost every county where they are grown, while specialty crops such as fruit are covered in only some areas. Participating farmers can purchase different types of crop insurance and at different levels. RMA establishes the terms and conditions that the private insurance companies selling and servicing crop insurance policies are to use through the SRA. The SRA provides for the cost allowance intended to cover administrative and operating expenses the companies incur for the policies they write, among other things. The SRA also establishes the minimum training, quality control review procedures, and performance standards required of all insurance providers in delivering any policy insured or reinsured under the Federal Crop Insurance Act, as amended. Under the crop insurance program, participating farmers are assigned (1) a “normal” crop yield based on their actual production history and (2) a price for their commodity based on estimated market conditions. Farmers can then select a percentage of their normal yield to be insured and a percentage of the price they wish to receive if crop losses exceed the selected loss threshold. In addition, under the crop insurance program’s “prevented planting” provision, insurance companies pay farmers who were unable to plant the insured crop because of an insured cause of loss that was general to their surrounding area, such as weather conditions causing wet fields, and that had prevented other farmers in that area from planting fields with similar characteristics. These farmers are entitled to claims payments that generally range from 50 to 70 percent, and can reach as high as 85 percent, of the coverage they purchased, depending on the crop. RMA is responsible for protecting against fraud, waste, and abuse in the federal crop insurance program. In this regard, RMA uses a broad range of tools, including RMA’s compliance reviews of companies’ procedures, companies’ quality assurance reviews of claims, data mining, and FSA’s inspections of farmers’ fields. For example, insurance companies must conduct quality assurance reviews of claims that RMA has identified as anomalous or of those claims that are $100,000 or more to determine whether the claims the companies paid comply with policy provisions. Congress enacted ARPA, amending the Federal Crop Insurance Act, in part, to improve compliance with, and the integrity of, the crop insurance program. Among other things, ARPA provided RMA authority to impose sanctions against producers, agents, loss adjusters, and insurance companies that willfully and intentionally provide false or inaccurate information to FCIC or to an insurance company—previously, RMA had authority to impose sanctions only on individuals who willfully and intentionally provided false information. It also provided RMA with authority to impose sanctions against producers, agents, loss adjusters, and insurance companies for willfully and intentionally failing to comply with any other FCIC requirement. In addition, it increased the percentage share of the premium the government pays for most coverage levels of crop insurance, beginning with the 2001 crop year. The percentage of the premium the government pays declines as farmers select higher levels of coverage. However, ARPA raised the percentage of federal subsidy for all levels of coverage, particularly for the highest levels of coverage. For example, the government now pays more than one-half of the premium for farmers who choose to insure their crop at 75-percent coverage. RMA has taken a number of steps to improve its procedures to prevent and detect fraud, waste, and abuse, such as data mining, expanded field inspections and quality assurance reviews. In particular, RMA now develops a list of farmers each year whose operations warrant an on-site inspection during the growing season because data mining uncovered patterns in their past claims that are consistent with the potential for fraud and abuse. The list includes, for example: farmers, agents, and adjusters linked in irregular behavior that suggests collusion; farmers who for several consecutive years received most of their crop insurance payments from prevented planting indemnity payments; farmers who appear to have claimed the production amounts for multiple fields as only one field’s yield, thereby creating an artificial loss on their other field(s); and farmers who, in comparison with their peers, file unusually high claims for lost crops over many years. Since RMA began performing this data mining in 2001, it has identified about 3,000 farmers annually who warrant an on-site inspection because of anomalous claims patterns. In addition, RMA annually performs about 100 special analyses to identify areas of potential vulnerability and trends in the program. RMA also provides the names of farmers from its list of suspect claims for inspection to the appropriate FSA state office for distribution to FSA county offices, as well as to the insurance companies selling the policies to farmers. As a result of these inspections and other information, RMA reported total cost savings of $312 million from 2001 to 2004, primarily in the form of estimated payments avoided. For example, according to RMA, claims payments to farmers identified for an inspection decreased nationwide from $234 million in 2001 to $122 million in 2002. According to RMA, some of the farmers on the list for filing suspect claims bought less insurance and a few dropped crop insurance entirely, but most simply changed their behavior regarding loss claims. However, as we testified in 2006, RMA was not effectively using all of the tools it had available and that some farmers and others continued to abuse the program, as the following discussion indicates. Inspections during the growing season were not being used to maximum effect. FSA was not providing RMA with inspection assistance in accordance with USDA guidance. For example, between 2001 and 2004, farmers filed claims on about 380,000 policies annually, and RMA’s data mining identified about 1 percent of these claims as questionable and needing FSA’s inspection. Under USDA guidance, FSA should have conducted all of the 11,966 requested inspections, but instead conducted only 64 percent of them; FSA inspectors said that they did not conduct all requested inspections primarily because they did not have sufficient resources. Moreover, between 2001 and 2004, FSA offices in nine states did not conduct any of the field inspections RMA had requested in one or more of the years. Until we brought this matter to their attention in September 2004, FSA headquarters officials were unaware that the requested inspections in these nine states had not been conducted. Furthermore, FSA might not have been as effective as possible in conducting field inspections because RMA did not provide it with information on the nature of the suspected abusive behavior or the results of follow-up investigations. Finally, these inspections did not always occur in a timely fashion during the growing season. Because of these problems, the insurance companies and RMA could not always determine the validity of a claim. USDA has implemented some of our recommendations to improve inspection practices. For example, we recommended that RMA more consistently inform FSA of the suspect claim patterns that it should investigate. RMA amended its crop insurance policy manual to provide information more frequently to FSA on suspect claims, as we recommended, so that FSA can conduct timelier field inspections to detect potential abuse. Specifically, RMA now provides a list twice a year—in the fall for crops such as wheat, and in the spring for crops such as corn and soybeans. However, FSA disagreed with our recommendation that it conduct all inspections called for under agency guidance, citing insufficient resources as the reason. Nevertheless, we believe that conducting these inspections would achieve potentially substantial savings for the crop insurance program by identifying cases of fraudulent claims. RMA’s data analysis of the largest farming operations was incomplete. RMA’s data mining analysis excluded comparisons of the largest farming operations—including those organized as partnerships and joint ventures. These entities may include individuals who are also members of one or more other entities. Because it did not know the ownership interests in the largest farming operations, RMA could not readily identify potential fraud. For example, farmers who are members of more than one farming operation could move production from one operation to another to file unwarranted claims, without RMA’s knowledge that these farmers participate in more than one farming operation. RMA could not make these comparisons because it had not been given access to similar data that FSA maintains. However, ARPA required the Secretary of Agriculture to develop and implement a coordinated plan for RMA and FSA to reconcile all relevant information received by either agency from a farmer who obtains crop insurance coverage. Using FSA data, we examined the extent to which (1) farming operations report all members who have a substantial beneficial interest in the operation, (2) these farming operations file questionable crop insurance claims, and (3) agents or claims adjusters had financial interests in the claim. By comparing RMA’s and FSA’s databases, we found that 21,310 farming entities, or about 31 percent of all farming entities, did not report one or more members who held a beneficial interest of 10 percent or more in the farming operation holding the policy. RMA should be able to recover a portion of these payments because, according to RMA regulations, if the policyholder fails to disclose an ownership interest in the farming operation, the policyholder must repay the amount of the claims payment that is proportionate to the interest of the person who was not disclosed. According to our analysis, RMA should be able to recover up to $74 million in claims payments for 2003. USDA has since implemented our recommendation that FSA and RMA share information on policyholders to better identify fraud, waste, and abuse. In addition, of the 21,310 entities failing to disclose ownership interest in 2003, we found 210 entities with suspicious insurance claims totaling $11.1 million. Finally, we identified 24 crop insurance agents who sold policies to farming entities in which the agents held a substantial beneficial interest but failed to report their ownership interest to RMA as required. USDA has since implemented our recommendation that FSA and RMA share information on policyholders to better identify fraud, waste, and abuse. RMA, however, has not implemented our recommendation to recover claims payments to ineligible farmers or to entities that failed to fully disclose ownership interest. RMA was not effectively overseeing insurance companies’ quality assurance programs. RMA guidance requires insurance companies to provide oversight to properly underwrite the federal crop insurance program, including implementing a quality control program, conducting quality control reviews, and submitting an annual report to FCIC. However, RMA was not effectively overseeing insurance companies’ quality assurance programs, and for the claims we reviewed, it did not appear that most companies were rigorously carrying out their quality assurance functions. For example, 80 of the 120 insurance files we reviewed claimed more than $100,000 in crop losses or met some other significant criteria; RMA’s guidance states that the insurance provider must conduct a quality assurance review for such claims. However, the insurance companies conducted reviews on only 59 of these claims, and the reviews were largely paper exercises, such as computational verifications, rather than comprehensive analysis of the claim. RMA did not ensure that companies conducted all reviews called for under its guidance and did not examine the quality of the companies’ reviews. RMA agreed with our recommendation to improve oversight of companies’ quality assurance programs, but we have not yet followed up with the agency to examine its implementation. RMA has infrequently used its new sanction authority to address program abuses. RMA had only used its expanded sanction authority granted under ARPA on a limited basis. It had identified about 3,000 farmers with suspicious claims payments—notable policy irregularities compared with other farmers growing the same crop in the same county— each year since the enactment of ARPA. While not all of these policies with suspicious claims were necessarily sanctionable, RMA imposed only 114 sanctions from 2001 through 2004. According to RMA officials, RMA requested and imposed few sanctions because it had not issued regulations to implement its expanded authority under ARPA. Without regulations, RMA had not established what constitutes an “FCIC requirement” and not explained how it would determine that a violation had occurred or what procedural process it would follow before imposing sanctions. RMA agreed with our recommendation that it promulgate regulations to implement its expanded authority, and has developed draft regulations. Once final, these regulations will allow the agency to fully use this authority to sanction program violators. While RMA can improve its day-to-day oversight of the federal crop insurance program in a number of ways, the program’s design, as laid out in RMA’s regulations or as required by statute, hinders the agency’s efforts to administer certain program provisions in order to prevent fraud, waste, and abuse, as the following discussion indicates. RMA’s regulations allow farmers the option of insuring their fields individually rather than combined as one unit. Farmers can insure production of a crop on an individual field (optional units) or all their fields as one unit. Farmers may want to insure fields separately out of concern that they could experience losses in a certain field because of local weather conditions, such as hail or flooding. If farmers instead insure their entire crop in a single basic insurance unit, the hail losses might not cause the production yield of all units combined to be below the level guaranteed by the insurance and, therefore, would not warrant an indemnity payment. Although insurance on individual fields provides farmers added protection against loss, this optional unit coverage increases the potential for fraud and abuse in the crop insurance program. Insuring fields separately enables farmers to “switch” production among fields—reporting production of a crop from one field that is actually produced on another field—either to make false insurance claims based on low production or to build up a higher yield history on a particular field in order to increase that field’s eligibility for higher future insurance guarantees. We reported that of the 2,371 farmers identified as having irregular claims in 2003, 12 percent were suspected of switching production among their fields. According to a 2002 RMA study, losses per unit (e.g., a field) increase as the number of separately insured optional units increases. However, according to an RMA official, gathering the evidence to support a yield- switching fraud case requires considerable resources, especially for large farming operations. RMA disagreed with our recommendation to reduce the insurance guarantee or eliminate optional unit coverage for farmers who consistently have claims that are irregular in comparison with other farmers growing the same crop in the same location. It stated that our recommendation represents a disproportionate response, considering the small number of producers who engage in yield switching each year, and that the adoption of our recommendation would not be cost effective. Nevertheless, we continue to believe that RMA could tailor an underwriting rule so that it would target only a few producers each year and would entail few resources. Such a tool would provide RMA another means to discourage producers from abusing the program. Minimal risk sharing on some policies, as set by statute, may not provide insurance companies with a strong incentive to carry out their responsibilities under the program. In some cases, insurance companies have little incentive to rigorously challenge questionable claims. Insurance companies participating in the crop insurance program share a percentage of the risk of loss or opportunity for gain on each insurance policy they write, but the federal government ultimately bears a high share of the risk. Under the SRA, insurance companies are allowed to assign policies to one of three risk funds—assigned risk, developmental, or commercial. The SRA provides criteria for assigning policies to these funds. For the assigned risk fund, the companies cede up to 85 percent of the premium and associated liability for claims payments to the government and share a limited portion of the gains or losses on the policies they retain. For the developmental and commercial funds, the companies cede a smaller percent of the premium and associated liability for claims payments to the government. Economic incentives to control program costs associated with fraud, waste, and abuse are commensurate with financial exposure. Therefore, for policies placed in the assigned risk fund, companies have far less financial incentive to investigate suspect claims. For example, in one claim file we reviewed, an insurance company official characterized the farmer as filing frequent, questionable claims; however, the company paid a claim of over $500,000. The official indicated that if the company had vigorously challenged the claim, the farmer would have defended his claim just as vigorously, and the company would have potentially incurred significant litigation expenses, which RMA does not specifically reimburse. With this cost and reimbursement structure, in the company’s opinion, it was less costly to pay the claim. RMA and insurance companies have difficulty determining potential abuse associated with statutory coverage for prevented planting. Under the Federal Crop Insurance Act, as amended, RMA must offer prevented planting coverage. RMA allows claims for prevented planting if farmers cannot plant owing to an insured cause of loss that is general in the surrounding area and that prevents other farmers from planting acreage with similar characteristics. Claims for prevented planting are paid at a reduced level, recognizing that farmers do not incur all production costs associated with planting and harvesting a crop. However, determining whether farmers can plant their crop may be difficult. Annually, RMA pays about $300 million in claims for prevented planting. Statutorily high premium subsidies may inhibit RMA’s ability to control program abuse. ARPA increased premium subsidies—the share of the premium paid by the government—but this increase may hamper RMA’s ability to control program fraud, waste, and abuse. Premium subsidies are calculated as a percentage of the total premium, and farmers pay only between 33 to 62 percent of the policy premium, depending on coverage level. High premium subsidies shield farmers from the full effect of paying higher premiums. Because premium rates are higher in riskier areas and for riskier crops, the subsidy structure transfers more federal dollars to those who farm in riskier areas or produce riskier crops. In addition, by regulation, premium rates are higher for farmers who choose to insure their fields separately under optional units, rather than all fields combined, because the frequency of claims payments is higher on the separately insured units. Again, however, because of high premium subsidies, farmers pay only a fraction of the higher premium. Thus, the subsidy structure creates a disincentive for farmers to insure all fields combined. Over one-half (56 percent) of the crop insurance agents responding to the survey conducted for our 2005 report believed that charging higher premiums for farmers with a pattern of high or frequent claims would discourage fraud, waste, and abuse in the crop insurance program. In our 2006 testimony, we stated that Congress may wish to consider allowing RMA to reduce premium subsidies—and hence raise the insurance premiums—for farmers who consistently have claims that are irregular in comparison with other farmers growing the same crop in the same location. To date, no action has been taken. From 1997 through 2006, USDA paid over $10.9 billion to companies that participate in the federal crop insurance program in cost allowances and underwriting gains, as table 1 shows. The $10.9 billion in total payments to the companies represents 42 percent of the government’s cost of the crop insurance program—about $26 billion—over this period. That is, more than 40 cents of every dollar the government spent on the federal crop insurance program went to the companies that deliver the program, while less than 60 cents went to farmers. While we provide 10 years of data to offer a broad perspective and to even out annual losses and gains, the most recent 5 years of data—2002 to 2006—show similar results. As discussed earlier, USDA pays both underwriting gains and cost allowances, as negotiated in the SRA. Since the crop insurance program was revised under ARPA—that is, from 2002 through 2006—USDA has paid the insurance companies a total of $2.8 billion in underwriting gains. In terms of profitability, these underwriting gains represent an average annual rate of return of 17.8 percent over this 5-year period. According to industry statistics, the benchmark rate of return for U.S. insurance companies selling private property and casualty insurance was 6.4 percent during this period. RMA officials told us that this benchmark rate can be considered a starting point for measuring the appropriateness of the underwriting gains in the crop insurance program. However, they stated that this program should have a somewhat higher rate of return because of the (1) high volatility of underwriting gains for this program compared with the relatively steady gains associated with the property and casualty insurance industry, and (2) lack of investment opportunities when participating in the program because premiums are paid to the companies at harvest, not when farmers purchase a policy. But these officials also said that current rates of return are excessive. USDA renegotiated the financial terms of its SRA with the companies beginning with the 2005 planting season. In 2005, USDA paid the insurance companies underwriting gains of $916 million—a rate of return of 30.1 percent. In 2006, USDA paid them underwriting gains of $886 million—a rate of return of 24.3 percent. The companies received these underwriting gains despite drought conditions in parts of the country in 2005 and 2006. Adverse weather conditions, such as drought, normally suggest that insurance companies would earn lower profits because of greater producer losses. In addition to underwriting gains, RMA pays companies a cost allowance to cover program delivery expenses. The allowance is calculated as a percentage of total premiums on the insurance policies that they sell. Because the cost allowance is not tied to specific expenses, the companies can use the payments in any way they choose. From 2002 through 2006, USDA paid the insurance companies over $4 billion in cost allowances. Because the cost allowance is a percentage of the premiums, it also increases when the value of policies companies sell increases, as it does when crop prices rise. For example, USDA expects the value of policies, and thereby the cost allowances paid to companies, to increase by about 25 percent from 2006 through 2008. USDA expects these higher policy values, and ultimately higher cost allowances, because of external factors, including higher crop prices, particularly for corn and soybeans. Consequently, the companies and their affiliated sales agents will receive substantially higher cost allowances without any corresponding increase in expenses for selling and servicing the policies. Substantially higher cost allowances provide these companies and their agents with a kind of windfall. Greater insurance coverage results in higher premiums and ultimately higher cost allowances; yet, the purpose of this allowance is to reimburse program delivery expenses. In this context, USDA has requested the authority to renegotiate the SRA in its proposals for the Farm Bill. Specifically, USDA recommends renegotiating the SRA financial terms and conditions once every 3 years. According to USDA, the crop insurance program’s participation has grown significantly since the implementation of ARPA. Because higher participation rates have resulted in more stable program performance, the reinsured companies have enjoyed historically large underwriting gains in the last 2 years of the program. Granting USDA authority to renegotiate periodically would also permit USDA to renegotiate the SRA if the reinsured companies experience an unexpected adverse impact. In conclusion, Mr. Chairman, federal crop insurance plays an invaluable role in protecting farmers from losses due to natural disasters, and the private insurance companies that participate in the program are integral to the program’s success. Nonetheless, as we mentioned before, we identified crop insurance as an area for oversight to ensure that program funds are spent as economically, efficiently, and effectively as possible. Furthermore, a key reason that we identified crop insurance, as well as other farm programs, for oversight is that we cannot afford to continue business as usual, given the nation’s current deficit and growing long-term fiscal challenges. RMA has made progress in addressing fraud, waste, and abuse, but the weaknesses we identified in program management and design continue to leave the crop insurance program vulnerable to potential abuse. Furthermore, as our work on underwriting gains and losses has shown, RMA’s effort to limit cost allowances and underwriting gains by renegotiating the SRA has had minimal effect. In fact, it offers insurance companies and their agents a windfall. We believe that the crop insurance program should be delivered to farmers at a reasonable cost that does not over-compensate insurance companies participating in the program. A reduced cost allowance for administrative and operating expenses and a decreased opportunity for underwriting gains would potentially save hundreds of millions of dollars annually, yet still provide sufficient funds for the companies to continue delivering high-quality service while receiving a rate of return that is closer to the industry benchmark. Congress has an opportunity in its reauthorization of the Farm Bill to provide USDA with the authority to periodically renegotiate the financial terms of the SRA with the insurance companies so that the companies’ rate of return is more in line with private insurance markets. Such a step can help position the nation to meet its fiscal responsibilities. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions that you or other Members of the Committee may have. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. For further information about this testimony, please contact Lisa Shames, Acting Director, Natural Resources and Environment, (202) 512-3841 or shamesl@gao.gov. Key contributors to this testimony were James R. Jones, Jr., Assistant Director; Thomas M. Cook; and Carol Herrnstadt Shulman. Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant. GAO-07-760T. Washington, D.C.: April 19, 2007. Climate Change: Financial Risks to Federal and Private Insurers in Coming Decades Are Potentially Significant. GAO-07-285. Washington, D.C.: March 16, 2007. Suggested Areas for Oversight for the 110th Congress. GAO-07-235R. Washington, D.C.: November 17, 2006. Crop Insurance: More Needs to Be Done to Reduce Program’s Vulnerability to Fraud, Waste, and Abuse. GAO-06-878T. Washington, D.C.: June 15, 2006. Crop Insurance: Actions Needed to Reduce Program’s Vulnerability to Fraud, Waste, and Abuse. GAO-05-528. Washington, D.C.: September 30, 2005. Crop Insurance: USDA Needs to Improve Oversight of Insurance Companies and Develop a Policy to Address Any Future Insolvencies. GAO-04-517. Washington, D.C.: June 1, 2004. Crop Insurance: USDA Needs a Better Estimate of Improper Payments to Strengthen Controls Over Claims. GAO/RCED-99-266. Washington, D.C.: September 22, 1999. Crop Insurance: USDA’s Progress in Expanding Insurance for Specialty Crops. GAO/RCED-99-67. Washington, D.C.: April 16, 1999. Crop Insurance: Opportunities Exist to Reduce Government Costs for Private-Sector Delivery. GAO/RCED-97-70. Washington, D.C.: April 17, 1997. Crop Insurance: Federal Program Faces Insurability and Design Programs. GAO/RCED-93-98. Washington, D.C.: May 24, 1993. Crop Insurance: Program Has Not Fostered Significant Risk Sharing by Insurance Companies. GAO/RCED-92-25. Washington, D.C.: January 13, 1992. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The U.S. Dept. of Agriculture's (USDA) Risk Management Agency (RMA) administers the federal crop insurance program in partnership with private insurers. In 2006, the program cost $3.5 billion, including millions in losses from fraud, waste, and abuse, according to USDA. The Agricultural Risk Protection Act of 2000 granted RMA authority to renegotiate the terms of RMA's standard reinsurance agreement with companies once over 5 years. This testimony is based on GAO's 2005 report, Crop Insurance: Actions Needed to Reduce Program's Vulnerability to Fraud, Waste, and Abuse, as well as new analyses this Committee requested on underwriting gains and administrative and operating expenses USDA paid companies. GAO discusses (1) USDA's processes to address fraud, waste, and abuse; (2) extent the program's design makes it vulnerable to abuse; and (3) reasonableness of underwriting gains and other expenses. USDA agreed with most of GAO's 2005 recommendations to improve program integrity. RMA agreed that GAO's new analyses were technically accurate. GAO reported that RMA did not use all available tools to reduce the crop insurance program's vulnerability to fraud, waste, and abuse. RMA has since taken some steps to improve its procedures. In particular, USDA's Farm Service Agency (FSA) inspections during the growing season were not being used to maximum effect. Between 2001 and 2004, FSA conducted only 64 percent of the inspections RMA requested. Without inspections, farmers may falsely claim crop losses. However, FSA said it could not conduct all requested inspections, as GAO recommended, because of insufficient resources. RMA now provides information more frequently so FSA can conduct timelier inspections. RMA's data analysis of the largest farming operations was incomplete. In 2003, about 21,000 of the largest farming operations did not report all of the individuals or entities with an ownership interest in these operations, as required. Therefore, RMA was unaware of ownership interests that could help it prevent potential program abuse. FSA and RMA now share information to identify such individuals or entities. USDA should be able to recover up to $74 million in improper payments made during 2003. RMA was not effectively overseeing insurance companies' efforts to control program abuse. According to GAO's review of 120 cases, companies did not complete all the required quality assurance reviews of claims, and those that were conducted were largely paper exercises. RMA agreed to improve oversight of their reviews, but GAO has not followed up to examine its implementation. RMA's regulations to implement the crop insurance program, as well as some statutory requirements, create design problems that hinder its efforts to reduce abuse. For example, the regulations allow farmers to insure fields individually rather than together. As such, farmers can "switch" reporting of yield among fields to make false claims or build up a higher yield history on a field to increase its eligibility for higher insurance guarantees. RMA did not agree with GAO's recommendation to address the problems associated with insuring individual fields. Statutorily high premium subsidies may also limit RMA's ability to control program abuse: the subsidies shield farmers from the full effect of paying higher premiums associated with frequent claims. From 2002 through 2006, USDA paid the insurance companies underwriting gains of $2.8 billion, which represents an average annual rate of return of 17.8 percent. In contrast, according to insurance industry statistics, the benchmark rate of return for companies selling property and casualty insurance was 6.4 percent. USDA renegotiated the financial terms of its standard reinsurance agreement with the companies in 2005, but their rate of return was 30.1 percent in 2005, and 24.3 percent in 2006. It also paid the companies a cost allowance of $4 billion to cover administrative and operating costs for 2002 through 2006. USDA recommended that Congress provide RMA with authority to renegotiate the financial terms and conditions of its standard reinsurance agreement once every 3 years. |
Corrosion affects all military assets, including approximately 350,000 ground and tactical vehicles, 15,000 aircraft and helicopters, 1,000 strategic missiles, and 300 ships. Maintenance activities—including corrosion control—involve nearly 700,000 military (active and reserve) and DOD civilian personnel, as well as several thousand commercial firms worldwide. Hundreds of thousands of additional mission support assets and thousands of facilities are also affected. Corrosion is defined as the unintended destruction or deterioration of a material due to interaction with the environment. It includes such varied forms as rusting; pitting; galvanic reaction; calcium or other mineral build up; degradation due to ultraviolet light exposure; and mold, mildew, or other organic decay. It can be either readily visible or microscopic. Factors influencing the development and rate of corrosion include the type and design of the material, the presence of electrolytes (water, minerals, and salts), the availability of oxygen, the ambient temperature, and the amount of exposure to the environment. The rate of corrosion increases exponentially when the ambient humidity is over 50 percent. Corrosion can also occur in the absence of water, but only at high temperatures, such as in gas turbine engines. The effects of corrosion on DOD equipment and infrastructure have become more prominent as the acquisition of new equipment has slowed and more reliance is placed on the service of aging equipment and infrastructure. The aging of military systems poses a unique challenge for maintenance and corrosion control for all services. A number of DOD and commercial studies have identified and evaluated technologies and techniques for corrosion prevention and control. The studies indicate that although effective corrosion prevention and control methods and technologies are well known and have been recommended for years, they have not been implemented effectively. The studies also identify a number of relatively simple solutions—such as covered storage, controlled environment, washing and rinsing, spray-on rust inhibitors, and protective wrapping—to mitigate and control the effects of corrosion. Congress has recognized the need to significantly reduce the economic burden on the military services of the damage caused by corrosion and of the efforts to mitigate its adverse affects. In November 2002, Congress passed the Bob Stump National Defense Authorization Act for Fiscal Year 2003, which required the Department of Defense to take the following steps: Designate a responsible official or organization within the department to (1) oversee and coordinate corrosion prevention and mitigation of military equipment and infrastructure; (2) develop and recommend policy guidance; (3) review programs and funding levels; and (4) provide oversight and coordination of the efforts to incorporate corrosion control during the design, acquisition, and maintenance of military equipment and infrastructure. Develop and implement a long-term strategy to reduce corrosion and the effects of corrosion on the military equipment and infrastructure of the Department of Defense not later than 1 year after the date of the enactment of the act. Submit to Congress an Interim Report regarding the actions taken to date by the corrosion control office when the President submits the budget for fiscal year 2004. On May 22, 2003, DOD submitted the report. Numerous studies in recent years have documented the pervasive nature of corrosion and its various effects on military equipment and infrastructure. Although the full impact of corrosion cannot be quantified due to the limited amount of reliable data captured by DOD and the military services, current cost estimates, readiness, and safety data indicate that corrosion has a substantial effect on military equipment and infrastructure. Costs are significant because corroded military assets must often be repaired or replaced at great expense. Readiness is also severely impaired because corrosion increases the maintenance needed and, therefore, the downtime on a large quantities of military equipment. The effects extend to infrastructure, which, in turn, has an adverse impact on the military’s ability to meet mission requirements. Further, corrosion has an equally profound effect on the safety of equipment and infrastructure. Corrosion’s impact on military costs appears to be enormous, representing one of the largest life-cycle cost components of military weapon systems. In a 2001 government-sponsored study, corrosion is estimated to cost the Department of Defense at least $20 billion a year. Another study done in 1996 puts the cost at closer to $10 billion annually. The costs identified in these reports are direct costs such as the manpower and material that are used primarily to inspect and repair damage resulting from corrosion. However, there are also indirect costs that, were they to be quantified, would significantly increase the total reported costs. Indirect costs include the loss of the opportunity to use equipment that is not in operating condition. Although extensive equipment downtime results from corrosion, the attendant financial impacts have not been fully captured. Even more difficult to quantify is the cost of using equipment that, while not inoperable, has diminished utility due to corrosion. Considering the enormous total value of all of the equipment owned by the military services, these costs are considerable, to say the least. Corrosion also shortens the service life and accelerates the depreciation of DOD facilities, which in a recent GAO report are estimated to have a replacement value of over $435 billion. This impact on facilities translates into costs that are not included in the government corrosion cost study. There are numerous examples of how profoundly corrosion affects costs. For example, in 1993, the Army estimated spending about $2 billion to $2.5 billion a year to mitigate the corrosion of wheeled vehicles, including 5-ton trucks. (See fig. 1.) Corrosion was found to be so extensive on some of the trucks that the repair costs were greater than 65 percent of the average cost of a new vehicle. Cost impacts appear to be even greater on Army helicopters, as evidenced by a 1998 analysis estimating costs of about $4 billion to repair damage attributed to corrosion. Corrosion is also a formidable cost driver to the Navy. As an illustration, the Navy’s Pacific and Atlantic Fleets estimate that about 25 percent of their total combined annual maintenance budget is directed to the prevention and correction of corrosion. Navy officials told us that the prevention and removal of corrosion on shipboard tanks alone costs the Navy over $174 million a year. Navy facilities such as waterfront structures are also decaying because of corrosion, and these facilities will need to be replaced at considerable cost. For example, naval military construction projects estimated to cost $727 million are required to restore 20 piers that have suffered extensive corrosion damage. (See fig. 2.) In 1990, the Air Force estimated the cost of corrosion to be about $700 million. Interestingly, even though the number of operational Air Force aircraft decreased significantly, corrosion costs for the Air Force increased to over $1 billion by 2001, or $300 million more than previously reported. Corrosion has been shown to substantially increase equipment downtime, thereby reducing readiness. Whether it affects a truck, helicopter, ship, or pipeline, corrosion is a major contributor to the amount of maintenance required on military equipment and infrastructure. Depending on the kind and severity of corrosion, the maintenance may be performed as part of the scheduled maintenance cycle or as emergency repairs, especially when it involves safety concerns. Whether scheduled or not, maintenance translates into equipment downtime. As a result, readiness is diminished because the equipment cannot be used for training purposes or for other kinds of operations. In addition, corrosion contributes to or accelerates the deterioration of equipment and, therefore, reduces its service life. As a result, the condition of some equipment is assessed to have deteriorated beyond repair capability and the equipment is no longer usable. The effects on readiness are extensive throughout the military services, and they are clearly evidenced in regard to military aircraft. For example, a 2001 study concluded that corrective maintenance of corrosion-related faults has degraded the readiness of all of the Army’s approximately 2,450 force modernization helicopters. (See fig. 3.) The effects on the Air Force’s KC-135 are particularly pronounced, with corrosion identified as the reason for over 50 percent of the maintenance needed on the aircraft. While the Air Force has yet to quantify the total impact, one study identified corrosion of avionics equipment contacts to be a significant cause of failure rates on all Air Force aircraft. Because these failure rates affect equipment that is sophisticated and often occurs in hard-to-access areas, a significant amount of time is needed for testing, inspection, and repair. This extends aircraft downtime and reduces readiness levels. Corrosion has also reduced the readiness levels for the Navy’s P-3C aircraft. According to Navy officials, corrosion has always been responsible for a large part of maintenance required for the aircraft, but the amount has doubled in recent years. While these officials do not have specific information regarding the effects of corrosion, they did note that in just the past year they had to ground two aircraft specifically because of severe corrosion. The effects on readiness extend well beyond aviation and include virtually every type of equipment maintained and operated by the military. Corrosion also severely affects the readiness of other types of equipment, such as Army vehicles. In 1996, the Army identified corrosion as the reason why 17 percent of its trucks located in Hawaii were not mission capable. Earlier in 1993, the availability of the Army’s High Mobility Multipurpose Wheeled Vehicles (HMMWV) had been particularly diminished because of corrosion. While some of the vehicles were out of service for as long as a year, others had such severe corrosion that they had to be scrapped after 5 years, many years short of their expected 15-year service life. The Air Force also identified severe corrosion on its ground vehicles, resulting in increased maintenance and downtime. Some of the vehicles showed significant deterioration just months after being delivered to field units. Corrosion and its impact on readiness are especially a concern for the Navy, because its ships operate in highly corrosive salt water and in high-humidity locations. A notable example of these effects occurred in 2001 on the aircraft carrier USS John F Kennedy. Maintenance problems, including many that were corrosion-related, were so severe that the carrier could not complete its planned operations. Even more recently, the carrier USS Kitty Hawk returned from a series of deployments, including Operation Enduring Freedom, with significant maintenance problems that also included topside corrosion. As a result, the carrier is expected to undergo extensive maintenance. Such effects are found Navy-wide, and the Navy estimates that about 25 percent of its fleet maintenance budget goes toward corrosion prevention and control. This and other kinds of maintenance are largely completed at a Navy depot and require an average of 6 months. During this extended period of time, the ship is not available for service. The amount of time the ship is in the depot is due in part to the repairs needed because of corrosion; Navy officials told us this amount of corrosion-related maintenance is understated because it does not include the vast amount of manpower and resources spent on corrosion removal and repainting while the ships are on operations. These repairs, too, have an impact on readiness, because crew members who would normally be undergoing training or other kinds of operations are, instead, required to perform maintenance. Corrosion also impairs the readiness of military armament. For example, the Army reported a significant number of failures due to corrosion on the 155 mm medium-towed howitzer so severe that they resulted in aborted missions. The study estimates that between 30 to 40 percent of the aborts are direct results of corrosion. Corrosion is also identified as accounting for 39 percent of all unscheduled maintenance for the howitzer, further reducing the readiness levels of the equipment. In addition, corrosion has affected the readiness of the Air Force’s general purpose iron bombs. (See fig. 4.) According to Air Force records, of the approximately 450,000 bombs of this type in the Air Force inventory, more than 107,000 (or over 24 percent) have varying levels of deterioration caused by corrosion and, as a result, are not mission capable. While many of these bombs are repairable, a certain level of maintenance is needed to restore most of them to acceptable operational condition. Some of the bombs, however, are too severely corroded to be salvageable. Military facilities are also decaying due to corrosion and, as a result, readiness is affected adversely. In 2001, the Department of Defense reported that more than two-thirds of its military facilities have serious deficiencies and are in such poor condition that they are unable to meet certain mission requirements. The department identifies corrosion as a major contributor to much of this deterioration. According to military service officials, the most significant area of concern may be the condition of military airfields. Each of the military services has reported runway cracking so severe that the runways were judged unusable. Deterioration of this kind was even identified in airfields used for operations during Enduring Freedom. For example, runway cracks at Pope Air Force Base, North Carolina, were so extensive that several C-130 cargo planes and A-10 fighters heading for Afghanistan were diverted to other U.S. installations. Further, Navy facilities officials told us that infrastructure deterioration is so significant that it has adverse impacts on the service’s ability to perform required maintenance on its equipment. For example, they said that parts of the ceiling of an aircraft hanger located at North Island Naval Air Station, California, had crumbled as a result of corrosion. Because of the safety hazard and potential damage to aircraft, the hanger had to be closed down for several months for repairs and the aircraft relocated to other storage facilities. Corrosion of facilities and the impacts on readiness go well beyond problems experienced at airfields and hangars. The Pacific Air Force Command cited corrosion as the cause of failures of numerous critical infrastructure, including aircraft refueling, fire protection, electrical, and command and control facilities. The Command noted that this kind of deterioration can significantly impact its ability to perform its mission. Corrosion also poses numerous safety risks and is a source of major concern to all military services. This concern is particularly acute when associated with the safety of military aircraft. According to an Army study, from 1989 through 2000 the Army experienced 46 mishaps, 9 fatalities, and 13 injuries directly related to corrosion. During calendar year 2001, the Army issued four Safety of Flight messages for its rotary wing systems due to corrosion-related material deficiencies that adversely affected 2,100, or over 88 percent, of its force modernization helicopters. As recently as March 2002, the Navy suspended carrier operations for F-14 aircraft when one aircraft crashed because its landing gear collapsed due to corrosion. Just 2 years earlier, the Navy had identified corrosion as the cause of a landing gear failure on a F-18 that occurred during carrier operations. Despite regular inspections, stress cracking in the landing gear evaded detection, and the problem was not revealed until after the accident when the equipment was examined under an electron microscope. Perhaps even more difficult to detect, but nevertheless just as significant, are the safety risks corrosion presents on F-16 avionics connectors. This aircraft has sophisticated electronics equipment that is housed in Line Replaceable Units. Although these containers provide considerable protection from the elements, they cannot entirely eliminate moisture from entering, and even microscopic amounts of moisture can cause catastrophic accidents. For example, during the 1980s, uncommanded fuel valve closures caused several F-16 aircraft crashes. The equipment failures were believed to be the result of corrosion on the avionics connectors. Corrosion also poses major safety hazards at military facilities. Perhaps the greatest safety risk, according to facilities officials, is the cracking of concrete runways at airfields operated by all of the military services. (See fig. 5.) One of the causes of this deterioration results from a corrosive chemical process called alkali-silica reaction, which occurs when alkalis react with water in ways that cause cracking, chipping, and expansion of concrete. As airfields continue to decay and crumble, more pieces of concrete are left on the runway, and these pieces have been absorbed by military aircraft and cited as the causes of innumerable aircraft safety incidents and accidents. Airfield cracking due to corrosion and the safety risk that it presents is so extensive that all the military services have experienced serious incidents resulting from this hazard. Examples of this kind of damage have been reported at Osan Air Base, Korea; Ft. Campbell Army Airfield, Kentucky; Naval Air Station Point Mugu, California; and Marine Corps Air Station, Iwakuni, Japan. The foreign object debris hazard was so severe at the Little Rock Air Force Base that the Air Mobility Command assessed a taxiway as unsuitable for operations. At Naval Air Station Pensacola, several recent incidents were reported of Navy aircraft penetrating cracked airfield pavement and jeopardizing pilot safety. Pipelines that contain natural gas and other kinds of fuel also pose a safety risk at military facilities. A majority of the pipelines are quite old and are constructed largely of metal that is susceptible to corrosion, which is the major cause of pipeline ruptures. Air Force facilities officials told us that some of the pipelines were installed as far back as the 1950s, and older pipelines pose an even greater hazard because they have a higher probability of rupturing from corrosion. The services are gradually replacing many of the metal pipelines with pipelines made of high-density polyethylene plastic and other materials that are more corrosion resistant. The use of cathodic protection devices also helps to prevent corrosion. Facilities officials told us that despite these measures and periodic inspections, they have experienced numerous pipeline ruptures they attribute to corrosion. They said that until all of the existing pipelines are replaced, such ruptures will continue to be a source of major concern. However, replacing pipelines is very expensive, and facilities officials said that it would take many years to obtain enough funds to replace all of them. Facilities officials at Marine Corps Base Camp Pendleton, California, said that they have experienced several fuel line ruptures, many of them caused by corroded pipe valves. They said fuel lines that run alongside base housing pose the greatest safety concern, and they have begun to replace these lines first. Eventually they hope to replace all of them throughout the base. For more than a decade, a number of DOD, military service, and private-sector studies have cited the lack of reliable data to adequately assess the overall impact of the corrosion problem. Studies done in 1996 and 2001 on DOD corrosion data collection and analysis found that, while individual services have attempted to quantify the cost of corrosion, neither the mechanisms nor the methodologies exist to accurately quantify the problem. A 2001 Army study found that no single data system provides aggregate corrosion data related to cost, maintenance, and readiness, and that the existence of many separate databases restrict the ability to collect standardized data reflecting consistent characteristics. The study, which focused on Army aviation, concluded that existing automated information systems do not provide decision makers with complete, accurate, or timely corrosion repair and replacement data. An Air Force study came to similar conclusions. Navy officials told us that information regarding the cost of corrosion is incomplete because these costs are difficult to isolate from overall maintenance costs. They said these data limitations make it difficult to determine the severity of the problems and to justify the funding needed to prevent corrosion problems in the future. Facilities officials at Marine Corps Base Camp Pendleton said that their databases do not specifically identify data as corrosion related. They told us they would prefer to have better data for making investment decisions but instead must rely primarily on information obtained from periodic and annual corrosion inspections. We identified many examples of how the lack of reliable and complete information impeded the funding and progress of corrosion prevention projects. In addition, military officials at the unit level told us that they had trouble obtaining sufficient data and analysis to justify the cost effectiveness of prevention projects. They cited the lack of information as one of the main reasons why corrosion mitigation projects were not being funded. For example, Air Force officials told us that an aircraft rinsing facility at Hickam Air Force Base is no longer operable, and they need about $4 million for a new facility. They also said that although they do not have sufficient data to accurately estimate expected cost savings from reduced maintenance, they believe it would far exceed initial investment costs. They added that their inability to move forward stems largely from a lack of the data and analysis needed to justify the projects. The Marine Corps faced similar obstacles in justifying the installation of a helicopter rinsing facilities at Marine Corps Air Facility, Kaneohe Bay. (See fig. 6.) Officials told us that the corrosion maintenance costs they would avoid in the first year alone would exceed the total amount of funding needed to build an additional facility, but they do not have the data or resources to support the necessary analysis, and without it they cannot justify the project or obtain approval for the funds. While the military services have achieved some successes on individual corrosion prevention projects, significant weaknesses in their overall approach to corrosion control have decreased the effectiveness of their efforts. An important limitation is the lack of a strategic plan that includes long-term goals and outcome-based performance measures. In addition, coordination within and among the services is limited, and the priorities of organizations that plan corrosion prevention projects and those that implement and fund them are frequently in conflict. As a result, promising projects often fall far short of their potential, and many are never initiated at all. Major commands, program offices, and research and development centers servicewide have made and continue to make improvements in the methods and techniques for preventing corrosion. Corrosion prevention improvements can either be introduced during the design and production phases or some time after equipment is fielded. For example, durable coatings, composite materials, and cathodic protection are being incorporated to an increasing extent in the design and construction of military facilities and equipment to reduce corrosion-related maintenance. Systems as diverse as the joint strike fighter, the DD-X destroyer, amphibious assault vehicles, and HMMWV trucks plan to use composite materials and advanced protective coatings to increase corrosion resistance. The military services estimate that as much as 25 to 35 percent of corrosion costs can be eliminated by using these and other corrosion prevention efforts, which would amount to billions of dollars in potential savings each year. Our recent report on total ownership costs of military equipment discusses some of the approaches DOD is using to incorporate maintenance reduction techniques, including corrosion mitigation, into the design and development of new systems. Regarding the maintenance of existing equipment and infrastructure, we have identified several examples of projects that show potential for a high return on investment and advances in the technologies of corrosion prevention but which have not, for various reasons, been fully implemented. For example, the Naval Sea Systems Command has developed durable coatings that increase the amount of corrosion protection for various kinds of tanks (such as fuel and ballast tanks) on Navy ships to 20 years instead of the 5 years formerly possible. The installation of the coatings started in fiscal year 1996. However, by the end of fiscal year 2002, the Navy had installed these coatings on less than 7 percent of the tanks, for an estimated net savings of about $10 million a year. The tank preservation effort has not been widely implemented because, Navy officials told us, the fleet has other needs that have a higher priority. Navy officials told us they frequently have to defer the installation of the new coatings because of the limited availability of ships due to the increased pace of Fleet operations and more pressing maintenance requirements. As a result, the Navy estimates that it is about $161 million short of achieving the total annual net cost savings projected for this corrosion prevention effort. The Command has numerous other projects that have fallen short of their potential because the fleet had higher priorities. While these projects have total projected annual net savings of another $919 million, they have achieved about $33 million in yearly savings to date. Once implemented, the benefits of these efforts extend well beyond cost savings because they have the potential to significantly reduce ship maintenance, thereby increasing the availability of ships for operations. The Army National Guard’s Controlled Humidity Preservation project represents another example of a high potential savings effort that has not been fully realized. Under this project, dehumidified air is pumped into buildings or equipment to reduce the rate of corrosion. (See fig. 7.) Project officials claimed net savings of $225 million through the end of fiscal year 2002. While officials state the project has proven to be a success so far, they now estimate that it will take about 15 years to achieve the total projected savings, or 5 years longer than originally planned. Army National Guard officials told us they could achieve greater savings if they receive additional funding earlier than is currently planned. The Air Force’s bomb metalization project is also not achieving its full cost savings potential. According to an Air Force study, treating cast iron, general-purpose bombs with a special protective metallic spray coating would save the Air Force at least $30 million in maintenance costs over 30 years, although one study estimated the savings to be as much as $100 million. The Air Force stores about 450,000 of this type of bomb in locations throughout the world. Air Force officials told us that the total investment costs for the project are about $5 million, which, based on the higher cost savings estimate, translates into a return on investment ratio of 20 to 1. After several years of planning and implementation, about 15,000 bombs, or 3 percent, have received the treatment. Appendix II provides more detailed information about these and other examples of projects that are not reaching their full potential. DOD does not currently have a strategic plan for corrosion prevention and mitigation, and the services either have not developed such plans or have not implemented them. However, DOD is required within 1 year of enactment of the Bob Stump National Defense Authorization Act for Fiscal Year 2003 (i.e., by December 2, 2003) to submit to Congress a report setting forth its long-term strategy to reduce corrosion and the effects of corrosion on military equipment and infrastructure. The act requires DOD include in its long-term strategy performance measures and milestones for reducing corrosion that are compatible with the Government Performance and Results Act of 1993 (GPRA). GPRA offers a model for developing an effective management framework to improve the likelihood of successfully implementing initiatives and assessing results. Under GPRA, agencies at all levels are required to set strategic goals, measure performance, identify levels of resources needed, and report on the degree to which goals have been met. Without implementing these critical performance-measuring elements, management is unable to identify and prioritize projects systematically, allocate resources effectively, and determine which projects have been successful. As a result, managers are not in a position to make sound investment decisions on proposed corrosion control projects. The military services either have not established effective strategic plans that include goals, objectives, and performance measuring systems or they have not implemented them. The limitations to the military services’ efforts to establish strategic plans are as follows: The Army created a comprehensive corrosion control program plan— including goals, objectives, and performance measures—but the plan was never fully implemented. As part of the plan, the Army defined specific performance measures to track the progress of corrosion mitigation efforts, but these were not put into effect. The strategy called for the creation of panels comprised of top government and industry corrosion experts who would use performance metrics to evaluate proposed and ongoing projects against approved goals and objectives. However, the panels were never established and the metrics were not implemented. Army corrosion control officials told us that they have very little performance data, such as return on investment or annual savings, for any of their corrosion control initiatives. Officials at the Army Center for Economic Analysis told us they have not measured performance for the purpose of determining the return on investment for any corrosion control project for many years; the last performance evaluation was carried out in 1997. In 1998, the Air Force published a business plan for equipment corrosion control, but the plan was implemented for a short time and did not contain all of the elements of a strategic plan. For example, it identified three management goals, but did not include performance measures. Also, the Air Force Equipment Maintenance Instruction that identifies responsibilities for the Air Force Corrosion Prevention and Control Office does not identify goals or performance measures. Although an Air Force Instruction on Performance Management states that performance management, including goals and performance measures, is the Air Force’s framework for a continual improvement system, officials told us that the business plan was no longer being used. They said that, in the past, there has been more emphasis on creating goals and monitoring performance, but because of limited resources, reductions in personnel, and increased optempo these activities are no longer performed. The Navy commands (Naval Air Systems Command and Naval Sea Systems Command) have engaged in some strategic planning for corrosion control, but the Navy does not have a servicewide strategic plan in this area, and its corrosion control offices lack the information and metrics needed to track progress. The Naval Air Systems Command planned to establish a corrosion control and prevention office but the plan—which included goals and objectives and outlined how progress would be measured—was never approved. The corrosion control and prevention activity at Naval Sea Systems Command is also not a formal program, and it lacks clearly defined overall goals and objectives. This office has identified cost avoidance projects and tracks the amount of savings achieved to date. However, more could be done to monitor performance. For example, there was no analysis of the reasons why specific projects were proceeding at a slow pace. Without this information, the office is not in a position to know what actions can be taken to improve the effectiveness of these projects. The Marine Corps has a corrosion control plan that includes long-term, broadly stated goals but does not include measurable, outcome-oriented objectives or performance measures. Marine Corps officials told us that they are in the process of revising the plan to include measures that will track progress toward achieving servicewide goals. Corrosion control officials said they measure progress through a combination of field surveys, special corrosion assessments, and Integrated Product Teams. They also rely on the evaluations of operational and installation commands and program offices but readily acknowledge that this is not sufficient. They told us that they would prefer to have more systematic performance measures and that these tools would improve the success of individual projects and the corrosion effort as a whole. DOD has multiple corrosion control efforts—with different policies, procedures, and funding channels—that are not well coordinated with each other; as a result, opportunities for cost savings have been lost. DOD is in the process of establishing a central corrosion control office in response to the authorization act, but no single office exists within each of the military services to provide leadership and oversight for corrosion control of equipment and infrastructure. Although the services have attempted to establish central corrosion control offices, the responsibility largely falls on numerous commands, installations, and program offices to fund and implement projects. Military officials told us the offices were not fully established, primarily because of limited funding. The Army, for example, has established a central office for corrosion control of all service equipment; the chain of command for the Army corrosion office for facilities is separate from this office. Although a central office for equipment exists, each Army command also has separate corrosion control offices that are responsible for certain types of equipment—for example, tanks/automotive, aviation/missiles, armaments, and electronics. Further, individual weapon system program offices within each command may have their own corrosion control functions. In addition, installations implement their own corrosion control projects with the assistance of the Army Department of Public Works and the Army Corps of Engineers. The recently established Army Installation Management Agency provides overall management and funding for upkeep on Army installations. The Navy and Air Force also have multiple corrosion prevention and mitigation offices. The Navy manages them through the materials offices within the Naval Sea Systems Command and Naval Aviation Command. The Air Force Materiel Command manages the Air Force’s efforts at an office located at Robins Air Force Base. Like the Army, these commands have multiple weapon systems program offices that also plan and implement corrosion projects. The Navy and Air Force also have separate organizations that are responsible for corrosion prevention and mitigation efforts related to infrastructure. The Naval Facilities Engineering Center at Port Hueneme, California, provides this service for both the Navy and Marine Corps and, in turn, relies on the individual installations to manage and implement their own efforts. The Air Force Civil Engineering Support Agency provides this service for the Air Force. This fragmentation of corrosion prevention efforts minimizes coordination and limits standardization within and among the services, as evidenced by the following examples: A June 2000 corrosion assessment of the Army’s Pacific area of operations concluded that no standard corrosion control program, policy, or training exists for any Army commodity, which reduces the effectiveness of the Army’s efforts to control corrosion on vehicles, tanks, and other equipment. Even when the services are in a severely corrosive environment in which they operate relatively near to one another, few formal mechanisms exist to facilitate the exchange of corrosion information. For example, in Hawaii Army officials for the Reserve and National Guard and active units stated that they had limited knowledge of one another’s corrosion control activities or the activities of other services. Army officials told us they cannot afford to miss an opportunity to use the latest corrosion control products and practices, and it would be unfortunate to be deprived of any advances, especially if they are available and being used elsewhere. In addition, Air Force facilities officials in Hawaii told us that they are not aware of any formal process for sharing corrosion prevention and control information with other services. Officials at Marine Corps Air Facility Kaneohe Bay, Hawaii, an area of high humidity and salt, told us that temporary shelters can be a very cost-effective way to reduce the corrosion of equipment such as vehicles, transformers, and aviation ground equipment that are currently stored outside because of limited space. (See fig. 8.) These officials were unable to acquire the shelters because they did not have the time or resources to undertake the analysis necessary to support the purchase. They were aware that temporary shelters are being used at other Marine Corps and Army installations, but they did not know how the installations acquired the shelters or justified their purchase. The officials suggested a standard mechanism for gathering and communicating the information necessary to justify purchase of the shelters. The Air Force conducted a series of multiyear studies that found that using inexpensive corrosion-inhibiting lubricants on aircraft electrical connectors has the potential to save hundreds of millions of dollars annually. (See fig. 9.) Air Force officials estimate that using corrosion-inhibiting lubricants could save more than $500 million annually on the F-16 fleet alone. Although the use of these lubricants is recommended in a joint technical manual on avionics corrosion control, their use is not required. The Air Force and Navy have developed different product specifications for the lubricants. The Navy’s specification covers the lubricants’ use on both metal surfaces and electrical connectors, and more than a dozen products have qualified for use under the specification. However, Air Force studies determined that while some of the products work well on electrical connectors, others are detrimental. As a result, the Air Force created a new specification for lubricant use, limiting it to electrical connectors. Air Force officials want the Navy to modify its specification so that only the appropriate products can qualify; otherwise, Air Force officials believe, those who refer to the joint manual containing both specifications could order a product detrimental to electronic systems. An Air Force contractor has drafted specification revisions for the Navy, but due to differing requirements and changes of personnel, the Navy has apparently decided to conduct further studies before revising its specifications. According to Air Force officials, these and other difficulties in coordinating with the Navy have prompted the Air Force to consider withdrawing from participation with the Navy in joint service manuals on corrosion control of aircraft and avionics. Army National Guard officials in Hawaii told us that they were not aware of the status of the Army’s nearby corrosion inhibitor application center. (See fig. 10.) The facility currently has the capacity to apply corrosion inhibitors to about 6,000 vehicles per year. National Guard officials told us that they often store vehicles for long periods of time, and corrosion is always a problem. They indicated interest in finding out more about the Army’s facility and any opportunities for participating with the Army if the corrosion inhibitors can reduce corrosion cost effectively. The services have created some valuable mechanisms, including special working groups and annual corrosion conferences, which make important contributions to corrosion prevention efforts and help facilitate intra- and inter-service coordination. However, these mechanisms do not represent a systematic approach to coordination. The effectiveness of these mechanisms is often dependent on the individual initiative of those who participate directly, as well as on the funds available to initiate corrosion-related activities. For example, each of the services hosts an annual corrosion conference, but individuals attend only to the extent that available time and travel funds allow. Furthermore, the dissemination of conference information relies to a large extent on attendees taking the initiative to use the information or communicate it to others. Limited follow-up is carried out to determine the extent to which this information is used in new applications. Several of the officers acting as corrosion coordinators in Hawaii indicated that their commands were often unable to allow them the time or travel funds to attend corrosion conferences. They added that some, but not all, of the conference papers and briefings were available to them. Because of the differing priorities between short-term operational needs and long-term preventative maintenance needs, corrosion projects are often given a low priority. Corrosion control offices act largely in an advisory role, providing guidance, information, and expertise on initiatives and practices. They have limited funding and authority, and they promote initiatives with benefits that may not become apparent until a project is far along in its implementation, which may be years in the future. These priorities and incentives are very different from and sometimes conflict with those held by the operational or installation commands and their subordinate units. While these commands also strive for better corrosion prevention, they place a greater emphasis on more immediate, short-term needs that are directly tied to current operations. Because the corrosion control offices generally receive only limited start-up funding for corrosion prevention projects, they must rely heavily on operational commands and other program offices to provide the necessary resources and implementation. However, these commands often have limited resources beyond those needed to carry out their immediate mission objectives, and the military services have not established sufficient incentives for the commands (which have the approval and funding authority) to invest in the long-term, cumulative benefits of corrosion prevention and control efforts. As a result, many proposed corrosion control projects—even those with large cost saving potential and other benefits, such as increased readiness and enhanced safety—often remain underfunded because they are a low priority to the commands compared to operational and repair projects that offer more immediate results. These conflicting incentives and priorities are demonstrated by the fact that the services have sacrificed the condition of their facilities and infrastructure by using base maintenance accounts, including funds for corrosion prevention and control, to pay for training and combat operations. We were told at many of the bases we visited that the problem with maintaining the infrastructure was that base commanders siphon off infrastructure maintenance and repair funds for other operational priorities. For example, at Fort Irwin we were told that only 40 percent of infrastructure requirements were funded and that most preventative maintenance is deferred. Officials at Marine Corps Base Camp Pendleton said that they have an infrastructure maintenance backlog totaling over $193 million and many of the projects are to repair facilities that have deteriorated due to corrosion. The backlog is not limited to this location, as the Navy reports an infrastructure backlog of $2 billion Navy-wide. Navy officials said they do not have accurate data but estimate that a large percentage of the deferred maintenance is corrosion related. Hickam Air Force Base facilities officials also told us that they often have to defer or reduce corrosion prevention projects because the base continually needs funds for higher priorities, usually those associated with operations. At the same time, the Army, in its 2002 Annual Report to Congress, stated that it cannot continue to fully fund its Combat Arms Training Strategy without further degrading its infrastructure and related activities. The Army recently established a new agency that centralizes all installation management activities to ensure that maintenance dollars, including those for corrosion control, are disbursed equitably and efficiently across installations. Officials of the new Installation Management Agency said that the goal of centralization is to halt the trend of major commands transferring funding from infrastructure maintenance accounts to pay for other operations. The Navy’s corrosion projects are similarly affected by a tendency to postpone maintenance projects to address more immediate demands. For example, the Navy’s efforts to reduce corrosion on more than 11,700 tanks on Navy ships are very time-consuming and expensive. (See app. II for more details of this case study.) To reduce costs, the Navy developed advanced coatings that are intended to last much longer, require less maintenance, and result in net savings of over $170 million annually. As of the end of fiscal year 2002, the Navy has only been able to install the new coatings on about 750 tanks, or less than 7 percent. Navy officials attribute the slow pace to the fact that shipyards place a higher priority on maintenance that requires immediate attention. These officials told us that the shipyards are hard-pressed to complete even necessary repairs and have little incentive to undertake prevention projects that will not show any benefits for many years. Conflicting priorities are also evidenced by Navy and Marine Corps efforts to prevent the corrosion of underground pipelines. Navy officials informed us that pipeline corrosion is one of their major facilities maintenance concerns. According to these officials, many pipelines at multiple Navy installations are several decades old and made of metal that is highly susceptible to corrosion. (See fig. 11.) Naval Facilities Engineering Service Center officials told us that they do not have accurate data, but they estimate that several million dollars are being spent each year to fix leaks and ruptures that result from corrosion. They further stated that they could save significant maintenance costs if they were to aggressively start replacing existing pipelines with pipelines made of high-density polyethylene plastic and other nonmetallic material that is much more corrosion resistant. Naval facilities officials said that while this replacement project would be a big money-saver in the long run, the strategy would require a substantial investment, and they need to place a higher priority on fixing more immediate problems that disrupt or impair current operations. The Marine Corps is faced with similar conflicting pressures. At Marine Corps Base Camp Pendleton, officials told us that they have old and decaying pipelines and valves throughout the installation. To save significant repair costs, they would prefer to replace them with pipelines and valves made of high-density polyethylene plastic as quickly as possible. (See fig. 12.) However, the process is labor-intensive and, therefore, very expensive. They said that as a rule they must attend to more immediate problems, and only when resources permit are they able to invest in projects that have more long-term benefits. At present, DOD and the military services do not systematically assess proposals for corrosion control projects, related implementation issues, or the results of implemented projects, and they disseminate project results on a limited, ad hoc basis. Without a more systematic approach to corrosion problems, prevention efforts that have a high return on investment potential will likely continue to be underresourced and continue to proceed at a slow pace. As a result, DOD and the military services will continue to expend several billion dollars annually in avoidable costs and continue to incur a significant number of avoidable readiness and safety problems. Since corrosion that is left unmitigated only worsens with time, costs will likely increase as weapon systems and infrastructures age. Perhaps this is why the adage “pay now or pay more later” so appropriately describes the dilemma with which the military services are repeatedly confronted when making difficult investment decisions. The military services will continue to pay dearly for their limited corrosion prevention efforts and will be increasingly challenged to find the funds for ongoing operations, maintenance, and new systems acquisitions. In an effort to improve current military approaches to corrosion control, the Bob Stump Defense Authorization Act of 2003 requires the department to develop and implement a long-term strategy to mitigate the effects of corrosion in military equipment and infrastructure. If properly crafted, this strategy can become an important means of managing corrosion control efforts and addressing the problems and limitations of these efforts as described in this report. To craft an effective strategy, we recommend that the Secretary of Defense direct that the department’s strategic plan for corrosion prevention and mitigation include the following: develop standardized methodologies for collecting and analyzing corrosion cost, readiness, and safety data; develop clearly defined goals, outcome-oriented objectives, and performance measures that show progress toward achieving objectives (these measures should include such elements as the expected return on investment and realized net savings of prevention projects); identify the level of resources needed to accomplish goals establish mechanisms to coordinate and oversee prevention and mitigation projects in an interservice and servicewide context. To provide greater assurances that the department’s strategic plan will be successfully implemented, we recommend that the secretaries of each of the services develop servicewide strategic plans that are consistent with the goals, objectives, and measures in the departmentwide plan and establish procedures and milestones to hold major commands and program offices that manage specific weapon systems and facilities accountable for achieving the strategic goals. In commenting on a draft of this report, DOD concurred with our recommendations. The comments are included in this report in appendix III. DOD also provided technical clarifications, which we incorporated as appropriate. In its technical comments, DOD did not concur with our finding that the department does not have an effective approach to prevent and mitigate corrosion. DOD noted that the department develops and incorporates prevention and mitigation strategies appropriate to DOD’s national defense mission within various constraints associated with operational needs, affordable maintenance schedules, environmental regulations, and other statutory requirements. DOD noted that corrosion is one of many issues that must be managed and incorporated into an overall defense mission. DOD also noted that it continually endeavors to improve its ability to manage corrosion through advanced research, upgrading of systems and facilities, application of new materials, processes and products and continuous information sharing. Our report recognizes and mentions DOD's efforts and successes with corrosion mitigation. However, we believe that DOD lacks an effective approach to deal with corrosion since it lacks an overall strategy, has limited coordination within and among the services, and conflicting incentives and priorities. As we noted in our report, the current DOD approach has led to readiness and safety issues as well as billions of dollars of corrosion-related maintenance costs for DOD and the services annually. We are sending copies of this report to the Secretary of Defense; the Director, Office of Management and Budget; and other interested congressional committees. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me on (202) 512-8365 if you or your staff have any questions concerning this report. Key contributors to this report were Allan Roberts, Allen Westheimer, Dorian Dunbar, Sarah Prehoda, Sandra Sokol, and Susan Woodward. Our study focused on how the military services implement and manage corrosion prevention and control efforts for both equipment and infrastructure. To perform our review, we contacted corrosion control offices and officials in each of the four military services. We also reviewed studies and discussed military corrosion issues with experts within and outside the Department of Defense (DOD). To develop an in-depth understanding of how corrosion prevention projects are initiated and managed, we visited field installations and developed case studies on corrosion prevention and mitigation efforts. We also contacted and obtained information from DOD, services headquarters, materiel management, research and development, logistics, systems acquisitions, safety, and installation management and maintenance organizations. To determine the extent of the military services’ corrosion problems, we reviewed numerous studies and contacted experts in both government and private industry. We contacted and obtained information from DOD, military service headquarters, strategic planning, research and development, systems acquisitions, materiel management, logistics, safety, and installation management and maintenance organizations. We also attended the U.S. Navy and Industry Rust 2002 Corrosion Technology and Exchange Conference, and we reviewed papers and presentations of other service and private industry corrosion conferences and forums. In addition, we contacted private industry suppliers, consultants, and research organizations. We contacted the following research organizations to obtain information regarding the extent of military service corrosion problems: NCI Information Systems, Inc. CC Technologies Laboratories, Inc. Calibre Systems, Inc. Diamond Head Complex, Hawaii Army National Guard Pearl City Unit Training and Equipment Site, Hawaii Army Marine Corps Air Facility Kaneohe Bay Marine Corps Camp H.M. Smith We conducted our review from August 2002 through April 2003 in accordance with generally accepted government auditing standards. The Navy has over 11,700 tanks, such as ballast, fuel, and potable water tanks, on all of its surface vessels and submarines. Because of their constant exposure to salt and moisture, these tanks rapidly lose their exterior and interior protective coatings and begin to corrode. Although maintenance personnel spend considerable time and resources removing as much of the visible corrosion as possible and repainting while the ship is deployed, some of the work cannot be accomplished until the ship returns to its home port and undergoes scheduled and unscheduled maintenance. Maintaining the tanks is labor intensive, costly, and extends the amount of time ships must spend undergoing maintenance, thereby reducing their operational availability. Naval Sea Systems Command has developed coating systems that are expected to last 20 years instead of the 5 years that existing coatings last. According to the Navy, the effort could potentially save more than $170 million a year in maintenance costs. The initiative appears to be somewhat successful, because the Navy reports that it has achieved net savings of about $10 million a year. However, in the past several years, the Navy has installed the new coatings on only about 750 tanks, or less than 7 percent of the total. Navy officials attribute the slow pace to the fleet placing higher priorities on other needs, and explained that they often must defer the installation of the new coatings because of the limited availability of ships due to increased optempo and more pressing maintenance requirements. Navy officials added that because of higher operational and maintenance priorities, resources in the form of funding and manpower usually go to these needs instead of prevention efforts such as tank coatings. These officials told us that the shipyards that perform most of the maintenance for the fleet have difficulty trying to complete the work currently scheduled with available resources and would be further challenged by having to add the application of new coatings to their existing workload. In addition, the officials told us that there is limited incentive for shipyard maintenance workers to carry out preventive projects that show benefits only in later years instead of completing more immediate repairs that show more immediate benefits. The Army National Guard maintains a wide range of equipment that includes M1 tanks, howitzers, air defense artillery systems, and radars. This equipment is susceptible to corrosion, and one of the primary causes of corrosion is humidity. The Army National Guard estimates it could achieve cost savings totaling more than $1.6 billion over 10 years by storing its equipment in short- and long-term controlled-humidity preservation centers. Depending on the type of equipment, some will be stored in long-term facilities and some will be stored for the short-term. Equipment that is not required for regular training use will be preserved in metal shelters for an average of 3 years, while equipment for which there is a recurring need will be preserved by installing dehumidifying air ducts in crew compartments and other vehicle spaces. The project, which started in 1997, is expected to have a return on investment of over 9 to 1. According to Army National Guard officials, through the end of fiscal year 2002, the project has achieved a total of $225 million in cost savings. While Army officials state that the project has proven to be a success so far, they now estimate that it will take about 15 years to accomplish the total projected savings, or 5 years longer than originally planned. They attribute the delay to other needs being given a higher priority and, as a result, not receiving the necessary funds and having to defer the installation of some controlled-humidity centers. These officials still expect to acquire and install all of the facilities, but at a slower pace. They acknowledge that the delay will likely mean deferring a significant amount of cost savings—perhaps as much as $100 million—for several years. Concrete airfield pavements for all of the military services have experienced cracking and expansion that pose significant safety hazards, impair readiness, and increase maintenance costs. One of the causes of this deterioration results from a corrosive chemical reaction called alkali-silica reaction, which occurs when alkalis react with water in ways that cause cracking, chipping, and expansion of concrete. Examples of this kind of damage have been reported at facilities for all military services, such as Osan Air Base, Korea; Ft. Campbell Army Airfield, Kentucky; Naval Air Station Point Mugu, California; and Marine Corps Air Station, Iwakuni, Japan. The foreign object debris hazard caused by cracking and crumbling concrete was so severe that the Air Mobility Command assessed a taxiway at Little Rock Air Force Base as unsuitable for use. While the military services do not have cost estimates, DOD facilities officials told us that significant resources are spent each year on mitigating the effects of alkali-silica reaction. The Navy determined that one way to mitigate the effects of alkali-silica reaction in the future is to substitute fly ash for a certain amount of cement. According to a Navy study, the use of fly ash increases the strength and durability of cement structures such as airfields. Navy officials told us that this mitigation would increase the operational availability of airfields because the facilities would experience less cracking and chipping and, therefore, pose fewer foreign object debris hazards. While the Navy did not perform the analysis, these officials told us that perhaps the greatest benefit would be the savings that would result from a marked reduction in manpower needed for maintenance. The study did not include cost savings or a return on investment analysis because its focus was on the causes of and methods for mitigating the deterioration. The study did note that fly ash substitution could save the Navy about $4 million a year in construction costs because the material is less expensive than the kinds of cement currently being used. Navy officials told us that their understanding of the overall benefits is convincing enough that the use of fly ash is required for all Navy and Marine Corps construction projects that include pavements. The Air Force recommends the use of fly ash, but only in certain circumstances. Air Force officials told us that requiring the use of fly ash for all construction projects is not feasible because fly ash is not available at all locations where the Air Force has facilities, and the additional cost and time involved in transporting the material to these places may be greater than the benefits from using it. However, Air Force officials acknowledge that they have not done a return-on-investment analysis that includes construction and maintenance costs, and additional information like this would be very useful in making decisions regarding the use of fly ash. The services continue to study the effects of alkali-silica reaction and what to do about them. However, due to limited funding, efforts to identify feasible comprehensive solutions to the entire problem for all military services have been delayed. In the meantime, airfields continue to decay, resulting in high maintenance costs as well as restricted use. Corrosion damage to tactical wheeled vehicles and ground equipment is costly and prolongs equipment downtime. According to officials of the Army Materiel Command, seawater that seeps into the inner cavities of equipment that is being transported overseas causes serious corrosion damage and represents the highest risk to the command. The equipment then decays rapidly in humid environments. This kind of corrosion damage was so extensive that in 1998 the Commanding General U.S. Army Pacific requested that all ground vehicles shipped to his command be treated with rust inhibitors. Army data indicated that 17 percent of the Army trucks in Hawaii were so corroded that performance of their missions was impaired. In 1999, the Commanding General of the 25th Infantry Division in Hawaii indicated that unit readiness was in serious jeopardy and requested funding for several corrosion control projects, including one to treat an estimated 3,000 remaining vehicles with corrosion inhibitors. Army testing had demonstrated that corrosion inhibitors, compared to other products, provided a high degree of corrosion protection and enough corrosion- reducing potential to warrant beginning their limited use. Initial estimates indicated a return on investment of 4 to 1 for every dollar spent. In 2000, the Army awarded a contract for approximately $400,000 to treat 3,000 vehicles over a period of 12 months. The contract was later doubled, increasing costs to nearly $900,000 for 6,000 vehicles over a period of 24 months. Army officials plan to analyze the information obtained on the performance of the product before deciding whether to continue using it or expand the effort to other locations. The Army has over 341,000 tactical vehicles and pieces of ground support equipment worldwide, as well as 3,770 airframes, and a significant amount of this equipment is exposed to harsh, corrosion-inducing environments. The Army originally planned to establish an all-purpose, full service corrosion control center to repair corrosion damage, as well as provide preventative corrosion-inhibitor treatments. The center, which would have had multiple service bays and wash racks would have processed more than 15,000 vehicles per year, was to have been used by all the military services in Hawaii. However, the center is currently only being used by the Army as a corrosion-inhibitor application facility. In addition, a lack of coordination exists within the individual services. For example, at an Army National Guard facility in Hawaii officials told us that they were not aware of the status of the Army’s corrosion-inhibitor application facility but that they would be interested in finding out more about it, the application of corrosion inhibitors, and participating in the project. The Air Force stores about 450,000 cast iron general-purpose bombs in locations throughout the world. The bombs are estimated to have a replacement cost exceeding $1 billion. Many of the locations are in high-humidity environments that contribute to corrosion. As of February 2003, more than 107,000 of these bombs, or 24 percent, have been assessed as being no longer mission capable because of excessive corrosion. The Air Force acquires new bombs and repairs existing ones so that it will have enough mission-capable bombs to meet its requirements. The Air Force spends about $7 million a year for corrosion protection of cast iron general-purpose bombs. Until 1996, all the bombs were renovated by maintenance personnel who removed any signs of corrosion and recoated them with liquid paint. The bombs would undergo this labor-intensive process every 3 to 8 years. In 1996, the Air Force converted a bomb renovation plant at Kadena Air Base, Japan, from a facility that used liquid paint to one that used a metal wire arc spray technique that is otherwise known as metalization. The plant conversion cost about $3 million. A metal wire arc spray coating is expected to preserve cast iron bombs for 30 years, or about 25 years longer than liquid paint. By using this preservation method, the Air Force estimates saving maintenance costs of $30 to $100 million over 30 years, resulting in a return on investment ratio of 20 to 1. The plant successfully renovated about 8,000 bombs. Based on previous successes, the Air Force decided to acquire and install mobile versions of the Kadena unit in other locations. In 2000, a prototype of the Mobile Bomb Renovation System was acquired and installed at Andersen Air Force Base, Guam, at a cost of about $2 million. About 500 bombs received the metal arc spray coating at Guam before the system experienced equipment failures. To date, the system remains inoperable. The Army has also refurbished and metalized about 6,500 bombs for the Air Force. Air Force studies show that although the metal arch spray coating process is more expensive than the use of liquid paint, it greatly minimizes the risk that bombs will need costly maintenance or deteriorate so severely that they will need replacing. Despite these benefits, about 3 percent of Air Force bombs have been treated with this coating process. While Air Force officials recommended that a much higher percentage of bombs receive this treatment, they explained that their role is mostly advisory, and the Air Force Material Command and Pacific Air Force Command together must determine the relative importance of the project, given other competing priorities. Although not visible, the corrosion of connectors on aircraft electronics equipment is prevalent throughout DOD and a significant safety risk for aircraft in all military services. The resources spent on this kind of corrosion are so vast that it is estimated that the Air Force spends perhaps as much as $500 million a year on corrosion control on the F-16 fleet alone. The costs are high because of the significant amount of labor that is involved in locating and eliminating the often microscopic sources of corrosion on very sophisticated avionics equipment. Avionics corrosion has been a topic of major interest to the Air Force for several decades. This concern was particularly heightened in 1989, when the Air Force reported several F-16 accidents caused by uncommanded fuel valve closures that were believed to have been caused by corrosion. For several decades, the Air Force has conducted extensive studies on the corrosion of aircraft avionics connectors and what should be done about it. In the 1990s, several studies recommended the use of certain lubricants that have the potential of eliminating connector corrosion on F-16 aircraft, with estimated savings exceeding $500 million a year. Although the Air Force did not complete a return on investment analysis, the return would be very impressive, given the low cost of purchasing this off-the-shelf product. The Air Force has yet to take full advantage of these corrosion- inhibiting lubricants, even though they appear to be widely available. While the use of such lubricants is recommended in the joint service technical manual on avionics corrosion control, it is not required. We were told that the Air Force would need to amend in detail more than 200 specific technical orders and job guides to require the use of lubricant to protect F-16 aircraft electrical connectors, but progress in this area has been sluggish at best. For every year that the Air Force does not require the use of the lubricants, the service loses the opportunity to avoid annual expenses that total hundreds of millions of dollars. Conflicting incentives also impeded the Army’s efforts to obtain modern helicopter rinse facilities called “birdbaths.” According to the Army Aviation Corrosion Prevention and Control office, these facilities are expected to extend the life of costly aircraft components, reduce contractor man-hour expenditures, increase aircraft fleet readiness, and provide an added margin of crew safety. The project is estimated to cost $12 million for startup and $400 thousand per year in operating costs. Even more notable was the analysis showing a 31 to 1 return on investment, with the investment costs recouped within 2 years. Citing opportunities to implement and promote effective corrosion control, the Army recommended identification of locations and deployment areas for establishing birdbath rinse facilities. Despite the potential benefits, the project has not received funding to date. Army officials told us that the project cannot compete with efforts that have a higher priority, and they have deferred the request for funds until fiscal year 2005. The Army’s attempt to obtain funding for a birdbath facility in Hawaii suffered the same fate. During our field visit to Hawaii, we were told that for a number of years a birdbath facility was included in a list of projects that required funding, but the facility never received the funds because other operational needs were considered to have a higher priority. Army officials said that funding more pressing operational needs almost always takes precedence over funding projects that have a strong potential to avoid future maintenance costs. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | The Department of Defense (DOD) maintains equipment and infrastructure worth billions of dollars in many environments where corrosion is causing military assets to deteriorate, shortening their useful life. The resulting increase in required repairs and replacements drives up costs and takes critical systems out of action, reducing mission readiness. GAO was asked to review military activities related to corrosion control. Specifically, this report examines the extent of the impact of corrosion on DOD and the military services and the extent of the effectiveness of DOD's and the services' approach to preventing and mitigating corrosion. Although the full impact of corrosion cannot be quantified due to the limited amount of reliable data captured by DOD and the military services, current cost estimates, readiness, and safety data indicate that corrosion has a substantial impact on military equipment and infrastructure. In 2001, a government-sponsored study estimated the costs of corrosion for military systems and infrastructure at about $20 billion annually and found corrosion to be one of the largest components of life-cycle costs for weapon systems. Corrosion also reduces readiness because the need to repair or replace corrosion damage increases the downtime of critical military assets. For example, a recent study concluded that corrective maintenance of corrosion-related faults has degraded the readiness of all of the Army's approximately 2,450 force modernization helicopters. Finally, a number of serious safety concerns have also been associated with corrosion, including Navy F-14 and F-18 landing gear failures during carrier operations and crashes of several Air Force F-16 aircraft due to the corrosion of electrical contacts that control fuel valves. DOD and the military services do not have an effective approach to prevent and mitigate corrosion. They have had some successes in addressing corrosion problems on individual programs, but several weaknesses are preventing DOD and the military services from achieving much greater benefits, including potentially billions of dollars in additional net savings annually. Each service has multiple corrosion offices, and their different policies, procedures, and funding channels limit coordination. Also, the goals and incentives that guide these offices sometimes conflict with those of the operational commands that they rely on to fund project implementation. As a result, proposed projects are often assigned a lower priority compared to efforts offering more immediate results. Together, these problems reduce the effectiveness of DOD corrosion prevention. While DOD is in the process of establishing a central corrosion control activity and strategy, it remains to be seen whether these efforts will effectively address these weaknesses. |
HUD and VA established HUD-VASH in 1992 to target veterans with severe psychiatric or substance use disorders. From fiscal years 1992 through 1994, the program provided approximately 1,753 housing After the initial voucher distributions, no vouchers to homeless veterans.new vouchers were made available to homeless veterans until fiscal year 2008. From fiscal years 2008 through 2011, the program received funding for about 37,000 new HUD-VASH vouchers. As of fiscal year 2008, program participants are no longer required to have chronic mental illnesses or chronic substance use disorders with required treatment. However, a significant number of veterans with those issues are expected to be helped within the program’s target population of veterans experiencing chronic homelessness. Obligations for new HUD-VASH vouchers and supportive services increased from $78 million in fiscal year 2008 to $172 million in fiscal year 2011 (see fig. 1). As of April 2012, more than 140 VA facilities were participating in HUD- VASH. In addition, according to HUD, more than 360 PHAs had partnered with VA facilities to administer HUD-VASH nationwide since fiscal year 2008. The allocation process for HUD-VASH vouchers is a collaborative approach that relies on three sets of data to determine geographic need: HUD point-in-time data on homeless veterans needing services in the area, VAMC data on the number of contacts with homeless veterans, and performance data from PHAs and VAMCs. Based on this analysis of geographic need (adjusted by the number of vouchers received in previous years’ allocations), HUD and VA identify communities that should receive VASH vouchers. The agencies then determine the exact number to allocate in proportion with each community’s level of need. VA then identifies VAMCs from these communities to participate in HUD-VASH, taking into account VA’s case management resources. HUD considers a PHA’s administrative performance and in consultation with VA identifies PHAs located in the jurisdiction of the VAMCs and invites them to apply for HUD-VASH vouchers. The selected VAMCs and PHAs in a given community must partner to administer the program. Under certain terms, HUD allows PHAs to make a portion of their HUD-VASH vouchers project-based (that is, tied to a specific housing unit and not to a tenant). PHAs can request that a portion of their allocation of HUD-VASH vouchers be project-based as long as funding for those vouchers, when added to the funding for vouchers from the PHA’s regular voucher program that have been project-based, does not exceed 20 percent of the PHA’s overall voucher budget authority and the partnering VAMC supports the project. The Veterans Health Administration within VA issues a HUD-VASH handbook, which establishes procedures and responsibilities for administering HUD-VASH. VA also has released a HUD-VASH Resource Guide that was developed in conjunction with other federal and community partners. It includes additional HUD-VASH guidance and provides technical assistance on clinical issues pertaining to individuals in permanent supportive housing programs. HUD’s policies and procedures for HUD-VASH, including PHA responsibilities, are defined in a Federal Register notice, the most recent of which dates to March 2012. Figure 2 illustrates the processes and activities for which VA and HUD (through PHAs in compliance with HUD regulations) are responsible when providing HUD-VASH assistance. For example, VA screens veterans to help ensure the following. That they are homeless based on the McKinney-Vento Homeless Assistance Act definition; that is generally, a person who lacks regular, adequate housing or will imminently lose housing and lacks resources to obtain other permanent housing. That they are eligible for VA health care. That they are willing to participate in case management services that are intended to promote housing stability and link the veteran to needed clinical services. According to VA, many veterans experiencing homelessness have physical, emotional, or other problems that make the goal of living independently challenging. VAMCs refer veterans who meet VA requirements to PHAs, which determine eligibility based on HUD’s income requirements for section 8. To be eligible for assistance, households generally must have very low incomes—not exceeding 50 percent of the area median income, as determined by HUD.offers several waivers to the regular section 8 voucher requirements. Specifically, under HUD-VASH, PHAs cannot deny assistance to potentially eligible households for past section 8 violations, such as previous nonpayment, or for criminal history. However, no members of Except for a sex offender provision, HUD-VASH the veteran household can be subject to a lifetime registration requirement under a state registration program for sex offenders. Once the veteran meets HUD’s requirements for the program, the PHA can issue the voucher for participation in HUD-VASH. According to VA, the agency has assumed primary responsibility for collecting and reporting HUD-VASH data, which it does for internal performance purposes, monthly congressional reporting, and compliance with Office of Management and Budget (OMB) reporting. VA and HUD officials told us that VA also provides HUD with program data, which HUD uses for internal performance purposes and for OMB reporting. More than one VA office shares responsibilities for HUD-VASH data collection and analysis. VA’s National Center for Homelessness among Veterans (national center), which falls under the National Homeless Program Office, undertakes development and evaluation of care options and research and methodology related to VA’s homeless programs. Additionally, VA’s Northeast Program Evaluation Center supports and oversees data collection for VA’s mental health programs. According to a VA official, this center provides sites with day-to-day support on technical aspects of data collection, and the national center provides specific feedback on the data collection process and analysis, among other activities. VA currently uses two systems to collect HUD-VASH program information. According to VA, in 2008, it implemented a HUD-VASH database, referred to as the Dashboard, to collect monthly program status updates from HUD-VASH sites. VAMC staff submit Dashboard reports to their respective Veterans Integrated Service Networks (VISN), which in VA officials told turn submit facility-level reports to the national center.us that VA implemented a new data collection system, the Homeless Operations Management and Evaluation System (HOMES), in April 2011, and VA is in the process of fully implementing reporting mechanisms required to generate reports based on HOMES data.information for several of VA’s homeless programs, including HUD-VASH. It is designed to track and maintain data on individual veterans as they move through VA’s system of care, including HUD-VASH participation. For example, VA’s HOMES user manual states that a HUD-VASH clinician who is familiar with the veteran should complete and submit a HUD-VASH monthly status report form for veterans currently enrolled in the program. The report is intended to capture various information on the veteran for the past 30-day period, including the number of contacts the veteran had for case management, the veteran’s housing arrangement, amount and source of any income, visits to the emergency room or other hospitalizations (including those for mental health conditions), use of alcohol or illegal drugs, and satisfaction (including with their current accommodations, safety of living, and leisure activities). According to HUD officials, as part of its section 8 program, HUD collects voucher utilization and household information using two information systems, the Voucher Management System (VMS) and Public and Indian Housing Information Center (PIC). PHAs are responsible for submitting VMS and PIC data to HUD. HUD uses VMS as a centralized system to monitor and manage PHAs’ use of vouchers. VMS data include PHAs’ monthly leasing and expenses for HUD-VASH vouchers, which HUD uses to obligate and disburse PHA funding. PHAs enter voucher totals in VMS rather than individual records of HUD-VASH voucher activity. HUD uses PIC as a centralized system to track information on households assisted and lease activity. PIC data fields include PHA identification, assistance program type (such as HUD-VASH), and household demographic information. PIC data fields also include information on income sources and amounts, assets, rent, housing type, and whether the subsidy is tenant-based or project-based. According to VA and HUD, the departments rely on VAMCs and PHAs to make determinations on veteran eligibility for the HUD-VASH program. Based on our meetings with staff at 10 VAMCs and 10 PHAs nationwide, VAMCs and PHAs generally followed the same procedures to determine that veterans met statutory requirements. VAMC staff that we contacted described how they screened veterans to determine whether they met requirements for HUD-VASH. Homeless status: To verify that a veteran met the McKinney-Vento definition of “homeless,” VAMC staff told us that they interviewed the veteran. This included, for example, discussing the veteran’s current housing situation (homeless, precariously housed, doubled up, in own housing but facing housing loss/eviction, or stably housed), and history or pattern of housing stability/instability. Some VAMC staff also told us that community organizations referring veterans into the HUD- VASH program may provide documentation supporting the veteran’s homeless status. VA health care: To verify that a veteran is eligible for VA health care, VAMC staff in several locations told us that they determined if the individual had an existing record in VA’s electronic patient record system. VA determines VA health care eligibility based on whether the individual meets the definition of veteran, has a minimum period of active duty service, and is enrolled in the VA health care system. A dishonorable discharge generally disqualifies an individual from receiving VA benefits. Case management: According to VAMC staff, a psychosocial assessment, which evaluates the veteran’s clinical and service needs, helps them to determine an appropriate level of case management for each veteran. This involves considering whether the veteran has (1) complex service needs or health conditions, such as serious mental illness or substance use disorder; (2) nonchronic service needs that could be overcome or managed with treatment; or (3) few or minor service needs and is employable. Prior to enrollment in HUD-VASH, each veteran must agree to participate in case management. According to VA guidance, case managers must document the veteran’s HUD-VASH enrollment using a HOMES form. For veterans who do not enter the program, the form lists reasons the veteran did not enter, including the veteran’s refusal to agree with the terms of the program (case management). In Los Angeles, New York, Washington, D.C., and Wyoming, VAMC staff explained that they required veterans to sign a case management agreement. VA officials told us that this was a local management practice rather than a requirement based on the HUD-VASH handbook. Following enrollment, the case manager and the veteran work together to develop an individualized treatment plan with goals that are revisited over the course of the veteran’s participation in HUD-VASH. VA views case management as a key component of HUD-VASH and its case management services are intended to help improve the veteran’s physical and mental health and enhance the veteran’s housing stability. Additionally, VA’s case management aims to support recoveries from physical and mental illness and substance use disorders. According to VA, HUD-VASH does not require veterans to be sober prior to program enrollment; however, the veteran’s treatment plan is recovery-focused and incorporates his or her recovery goals. In addition to monitoring the veteran’s treatment plan, the role of the case manager involves helping the veteran to access other medical and behavioral treatment resources as needed. VA regards failure to participate in case management as grounds for termination or denial of program participation. However, several VAMC staff told us that VA makes every effort to re-engage veterans in case management before proceeding with termination for nonparticipation. If VA determines that the veteran no longer requires case management services, the veteran may continue to receive the HUD-VASH housing subsidy. In such cases, the VA case manager should notify the PHA that case management is no longer required but that the veteran’s eligibility for a housing voucher remains unchanged. If the PHA has a voucher available in its regular section 8 program, the PHA can offer that voucher to the veteran and make the HUD-VASH voucher available to another homeless veteran. As previously noted, VA refers veterans who meet its requirements for HUD-VASH to PHAs, subject to voucher availability. The HUD-VASH handbook requires that if there are no available case management openings or vouchers, HUD-VASH program staff place the veteran on an interest list. According to VA, this list consists of all individuals who have been in contact with HUD-VASH staff and expressed interest in the program. These persons are subsequently screened for eligibility and a determination is made regarding acceptance. If a veteran is not eligible but vouchers are available, staff would make a referral to other VA or community resources. If a veteran is eligible but no vouchers are available, program staff must document the reason for denial in HOMES as lack of voucher availability. As of March 28, 2012, VA data show that an estimated 1,689 or 4 percent of the HUD-VASH vouchers authorized nationwide were available for use. Of the 10 VAMCs we contacted, 6 had vouchers available for use as of March 28, 2012, including the Bronx (New York) VAMC with an estimated 63 vouchers available for use and the Seattle VAMC with an estimated 32 vouchers available for use. The other four VAMCs had fewer than five remaining vouchers as of the same date. Regarding interest lists, staff at the Washington, D.C. VAMC told us that there were about 1,000 veterans on their facility’s interest list. The staff also told us that they had developed a screening tool to help make acceptance decisions and prioritize remaining vouchers for veterans on their interest list. According to VA, in addition to targeting chronically homeless veterans, consideration for HUD-VASH enrollment also may be given to women, families with children, disabled veterans, and those who served in Operations Iraqi Freedom and New Dawn in Iraq and Operation Enduring Freedom in Afghanistan. VAMC staff we contacted generally told us that they routinely directed veterans screened for HUD-VASH to other suitable VA programs, including VA’s Grant and Per Diem and Domiciliary Care for Homeless Veterans programs. For example, the staff explained that they might refer veterans to other VA programs pending HUD-VASH acceptance if another program was more immediately appropriate for the veteran or if the veteran needed services not available under HUD-VASH (such as dental care). Some VAMC staff also mentioned local resources as another referral option. PHA staff that we contacted described how they screened veterans to determine whether they met income and other requirements after receiving a referral from the VAMC. Income: PHA staff told us that they generally relied on third-party sources, such as the Social Security or Veterans Benefits administrations, to verify the reported income of HUD-VASH applicants. HUD requires PHAs to include certain sources of household income in determining income eligibility, including earned and benefits-related income. The HUD-VASH voucher subsidizes recipients’ rental payments and applicants must provide proof that their income level qualifies for this assistance. State sex offender registry status: PHA staff told us that they checked the sex offender registry for all members of the veteran household who were at least 18. In New York, the PHA staff informed us that they checked for all household members over 16 in compliance with the age limit for that state. If the veteran was subject to lifetime registration under a state registration program for sex offenders, the PHA would refuse the voucher application. If a family member who intended to occupy the assisted unit was subject to lifetime registration under such a program, the application would proceed only if that individual was removed permanently from the household. To familiarize veterans approved for a HUD-VASH voucher with the PHA’s requirements for HUD-VASH, staff at some PHAs we contacted told us that they conducted briefings with veterans. In several locations, PHAs held such briefings in a group format. Staff at PHAs with a smaller number of HUD-VASH vouchers sometimes met one-on-one with veterans. Once the veteran is in housing, PHAs reverify income and complete a housing unit inspection, typically on an annual basis. Some PHAs may conduct recertification procedures less frequently. One of the PHAs in our sample was in this category and conducted recipient renewals annually or biannually on a case-by-case basis. The PHA can terminate assistance when a veteran has been evicted from a unit or for serious and repeated lease violations. However, prior to terminating any section 8 participant, PHAs must provide the opportunity for an informal hearing. According to HUD officials, as part of HUD’s routine review of PHA records (such as to determine the accuracy of family income and rent calculations), HUD may review HUD-VASH tenant files if the files are included in a larger sample, but such reviews are not specific to the HUD- VASH program. Both VA and HUD report on HUD-VASH using information from VA’s Dashboard database. VA uses the Dashboard to collect summary count information from VAMCs and provides monthly Dashboard-based reports to HUD and Congress. Those reports typically include several data elements or measures on voucher utilization, including the number of veterans issued a voucher and looking for housing and the number of veterans housed (under lease). See table 1 for additional Dashboard data elements. In addition to the Dashboard, VA uses HOMES to collect data on veterans. HOMES data reflect a series of electronic forms that case managers must complete from the time a veteran is screened for the program to the time a veteran leaves the program. Although HOMES data could be used to create the information captured in the Dashboard database, VA has not yet completed development and testing of report- generating mechanisms necessary to release reports based on HOMES data, according to VA officials. VA officials also told us that they intended to begin using HOMES data for congressional reporting purposes by July 2012 and eventually discontinue the Dashboard reporting mechanism. VA has taken a number of steps to help ensure the reliability of HUD- VASH data reported though the Dashboard database. We compared VA’s processes against standards for internal control, including, among other things, having processes and procedures that provide reasonable assurance of the reliability of reports for internal and external use by establishing and supporting a control environment with clearly defined monitoring performance measures and indicators.areas of responsibility and appropriate lines of reporting, incorporating controls over information processing, and HUD-VASH reporting responsibilities, as identified in VA’s guidance, appeared to be consistent with HUD-VASH program responsibilities. For instance, case managers collect and submit HUD-VASH evaluation data on veterans. HUD-VASH program coordinators are responsible for conducting appropriate audits of performance measures. VAMC facility directors are responsible for verifying that staff provide timely reporting of veteran activity. Finally, the VISN’s homeless coordinators are responsible for helping ensure that data are submitted in a timely manner and the VISN directors are responsible for helping ensure the accuracy of these data. According to VA officials, the national center reviews individual weekly Dashboard reports from VISNs for reasonableness by comparing submissions with prior week reports. Questions or concerns are addressed to the respective VISN and the national center corrects weekly reports accordingly. As discussed previously, Dashboard reports include a number of program performance measures, including a specific measure for the program’s goal of moving veterans out of homelessness (the number of veterans under lease). In addition to providing data for external reporting, VA officials told us that the Dashboard database serves as a program management tool. According to VA officials, the national center uses the Dashboard reports to monitor program status at individual sites and also compares program performance across sites. VA also has taken a number of steps to help ensure the reliability of HUD- VASH data collected through HOMES. Consistent with standards for internal control, HOMES reporting responsibilities are clearly defined in VA guidance and, according to VA officials, HOMES data are collected for individual veterans as opposed to the Dashboard’s facility-level counts that did not identify individuals. HOMES includes a number of additional controls. For example, electronic data checks incorporated into HOMES improve data validity and reduce the risk of errors. Authorized program service providers enter program and veteran information into HOMES but, where appropriate, certain data fields automatically limit responses to predefined data ranges to reduce data entry errors. According to VA officials, the system is capable of flagging records for review based on approximate matches of name or Social Security number. Furthermore, only certain authorized users may edit records after data are submitted. Although counts of voucher use generated from HUD’s and VA’s information systems produce different totals, a proposed information- sharing agreement between HUD and VA is intended to facilitate data sharing and identify and resolve discrepancies. HUD has compared VA data with its VMS and PIC data for the purpose of validating HUD-VASH data. Validating data (in this case, Dashboard data) with an independent data source (such as HUD data) is an additional standard for internal control. HUD collects some HUD-VASH data, including the number of veterans receiving housing assistance (veterans under lease) through its VMS and PIC systems, but generally does not use these data for HUD- VASH reporting purposes. According to HUD and VA officials, both departments consistently use Dashboard data for reporting purposes. HUD provided its analysis of VA, VMS, and PIC data comparisons of vouchers under lease. For November 2011, HUD’s analysis listed three totals for vouchers under lease: 27,159 vouchers according to VMS, 24,768 vouchers according to PIC, and 27,285 vouchers according to VA data. The totals also differed when HUD compared voucher counts at individual PHAs for the same month. HUD noted three totals for vouchers under lease at the Harrisburg Housing Authority: 19 vouchers according to VMS, 33 according to PIC, and 34 according to VA data. In another example, HUD noted three totals for vouchers under lease at the Housing Authority of Waco: 116 vouchers according to VMS, 13 according to PIC, and 119 according to VA data. According to HUD officials, data discrepancies between VA and HUD data may have been due to one or more factors, assuming VA data provided at that time were accurate. First, PHAs may have incorrectly or inaccurately entered PIC or VMS data that relate to HUD-VASH participation counts. Second, PIC and VMS use different methodologies for assigning HUD-VASH voucher counts when veterans move across PHA jurisdictions, which could affect comparisons of participation data at the facility level. Under the HUD-VASH program, a veteran may use a HUD-VASH voucher in a jurisdiction outside of the PHA that initially awarded the voucher. VMS voucher counts are associated with the initial voucher allocation site, regardless of the participating veteran’s current location. PIC counts veteran households assisted and associates those counts with the veteran’s current location. Third, in comparison with VA reporting, HUD has taken longer to make data available for analysis. For example, up to 80 days may elapse from the time a PHA must submit VMS data to the time that VMS information is available for analysis. According to VA, the agency typically has provided Dashboard data to Congress within 50 days after the end of each reporting month. HUD’s VMS and VA’s Dashboard data are comparable when veteran participation is categorized by location; however, these respective data sources are not tied to personally identifying information. Therefore, the agencies have a difficult time identifying the specific source of data discrepancies. A proposed information-sharing agreement between HUD and VA is intended to facilitate record-level data sharing between the agencies and allow them to precisely identify and resolve data discrepancies between HUD’s PIC data and VA’s HOMES data. According to VA officials, once VA fully implements new reporting mechanisms, HOMES data will enable VA to provide summary status reports and identify information for veteran records used to create the summary totals. Further, they said that the agreement will allow VA to provide HUD with HUD-VASH data including the participating VAMC and PHA, and personally identifying information for each veteran. According to HUD officials, HUD intends to compare these records with PIC data (which include personally identifying information) and then the agencies plan to coordinate with field offices to resolve discrepancies. As of June 2012, the information-sharing agreement was under review. The agencies expected to complete final revisions to the agreement by June 25, 2012 and execute the agreement by August 2012. If VA fully implements HOMES as a data source for reporting purposes and the agencies execute the agreement as planned, it would allow the agencies to match case records in the event of data discrepancies. Although the agreement is not expected to affect VA’s monthly report submissions to Congress, according to the agencies, the information-sharing agreement should further improve their ability to validate HUD-VASH data on an ongoing basis. Information VA reports for the HUD-VASH program has focused on voucher utilization (such as the number of veterans housed), but HOMES is supposed to provide VA with additional data on veteran outcomes. VA currently reports a number of measures (or various data) related to voucher utilization in monthly reports to Congress (see table 2). These measures show that HUD-VASH has moved veterans out of homelessness. Nearly 31,200 veterans lived in HUD-VASH-supported housing as of March 28, 2012; veterans in housing represented about 83 percent of the vouchers authorized under the program. In addition, PHAs issued 4,046 vouchers to veterans who were actively seeking a lease and VAMCs reserved 620 vouchers for veterans undergoing PHA validation as of the same date. According to VA, the department’s goal is for veterans in housing to represent at least 88 percent of authorized HUD- VASH vouchers by September 30, 2012. As figure 3 shows, several states had achieved or nearly achieved this goal as of March 2012, including the four states with the largest number of vouchers authorized— California, Florida, New York, and Texas. For the 10 VAMCs we contacted, the percentage of veterans in housing varied, ranging from 70 percent to 95 percent as of March 28, 2012. For VAMCs further from the goal, such as the Sheridan VAMC in Wyoming (70 percent in housing), challenges with getting veterans placed in housing may be related to local housing markets. For example, Sheridan VAMC staff told us that there was a lack of affordable housing in the area. Similarly, staff at Greater Los Angeles Health Care System (79 percent in housing) told us that suitable housing stock (meeting program requirements for cost and housing quality) was limited, particularly in the West Los Angeles area where the VAMC facility is located. VA data show that both VAMCs had assigned 100 percent of their authorized vouchers to a veteran as of March 2012. However, nearly 30 percent of the Sheridan VAMC’s vouchers and 21 percent of the Greater Los Angeles Health Care System’s vouchers were assigned to veterans actively seeking housing at that time. We discuss challenges with getting veterans placed in housing in greater detail later in this report. In October 2011, VA submitted a report to Congress that provides additional descriptive and performance-related information on HUD-VASH for June 2008 through September 2010. Summary information from the report includes average number of days at each stage of the admission and housing characteristics of veterans admitted to the program; process; veterans’ typical 90-day housing situation within 3, 6, and 12 months of beginning case management; and reasons for ending case management. For example, according to VA, for veterans who completed the housing process, the time frame from initial referral to HUD-VASH to the move into permanent housing averaged 130 days. VA has plans to report additional information, such as measures of the time it took to complete various processes within the program (see table 3). In December 2011, VA issued guidance to its service networks outlining several outcome measures and related targets for which the department planned to start collecting data in fiscal year 2012. VA also recently began conducting research (although not always nationwide) related to (1) the Housing First approach to supportive housing; (2) positive and negative outcomes for veterans who leave the HUD-VASH program; and (3) various case management approaches for treating veterans for substance abuse.intend to use the results of these studies to assess operations and update policies and procedures accordingly, and to offer guidance on innovative practices to VAMCs. In June 2012, VA officials provided us with updates on these studies: VA officials told us that they Based on piloting the Housing First approach in Washington, D.C.’s HUD-VASH program in fiscal year 2009, VA determined that Housing First yielded several positive outcomes. The study compared results for 105 HUD-VASH vouchers set aside for Housing First and 70 vouchers that followed VA’s usual treatment process. VA found that, under Housing First, veteran placement into housing took, on average, 35 days from admission, compared with 223 days under the usual treatment process. Additionally, under Housing First, a reduced proportion of veterans had used emergency room and inpatient mental health services, and the housing retention rate was 98 percent after 1 year, compared with 86 percent under the usual treatment process. The pilot was expanded to 13 additional sites in fiscal year 2012, with VA and HUD monitoring for 3 years. Each site had 50 vouchers set aside for Housing First. Based on program data available at the end of June 2011, VA analyzed veterans who were already housed and left HUD-VASH for reasons categorized as positive (such as accomplishing goals or no longer needing program supports), negative (such as failing to comply with program requirements or being evicted), and neutral (such as death, illness, or transferring to another program site). According to VA, within the sample, 37 percent of exits were positive, 23 percent were negative, 30 percent were neutral, and there were insufficient data for 10 percent of exits. VA officials told us that VA and HUD will work together to conduct a more in-depth study of veterans leaving the program for adverse reasons to identify the major factors involved. The officials informed us that as of March 2012, the departments were in the process of obtaining OMB approval to follow up with veterans who had left HUD-VASH. VA has launched a 3-site research study comparing the effectiveness of four different intervention methods for veterans with substance use disorders and mental health problems. Methods tested will include standard case management, intensive case management, tele- coaching, and electronic interactive practices. As of June 2012, VA officials told us that they had begun interviewing veterans to participate in the study. VA did not expect results to be available until 2013. HUD-VASH case managers have started to complete a monthly status form in HOMES that includes data on outcomes. For example, case managers must record (1) changes in the veteran’s community adjustment and social contacts; (2) hospitalizations for unscheduled medical conditions or mental health conditions; (3) employment status and other sources of income or benefits; and (4) use of alcohol or illegal drugs, using a clinical rating scale. In addition to the monthly status form, case managers are required to complete in HOMES a HUD-VASH exit form for each veteran who is discharged from the program. The exit form includes some of the indicators in the monthly report, the veteran’s status upon discharge, and the reason for exit. Housing stability for veterans participating in HUD-VASH is a component of the program’s primary goal, along with moving those veterans out of homelessness and into housing. VA’s case management efforts play an integral role in helping veterans to achieve housing stability. VA’s current monthly reports, which show the number of veterans housed under the program, do not address housing stability. However, VA’s October 2011 report to Congress gave some indication of general voucher turnover and housing tenure. More specifically, the report showed the number and percentage of veterans leaving the program for positive and negative reasons at various stages of the housing process. It also showed veterans’ typical housing situation over the previous 90 days after 3, 6, and 12 months of participation. Beginning in April 2011, VA told us that case managers began using HOMES to record information on HUD- VASH participants. This would include entering information on each veteran’s housing situation upon enrollment, every 30 days following enrollment, and upon exit from the program. While not enough time has passed to assess the reporting related to HOMES data, VA expects it to provide a range of useful data for site monitoring and program management. Along with other data expected to be collected in HOMES, detailed information on veterans’ housing situation every 30 days should provide VA with an opportunity to assess program performance in helping veterans to achieve housing stability. Based on our interviews at 10 VAMCs and partnering PHAs, staff frequently cited four challenges relating to program administration or processes that they perceived as negatively affecting the goal of housing homeless veterans and helping them maintain housing stability. Delayed VAMC referrals to the PHA. As previously noted, for fiscal year 2012, VA’s goal is for VAMCs to refer veterans accepted into HUD-VASH to the PHA within 15 days of acceptance into the program. However, PHA staff discussed challenges associated with receiving timely HUD-VASH referrals from the partnering VAMC, particularly at the beginning of a new allocation year. In 9 of the 10 locations, PHA staff told us that delayed referrals from VA slowed the voucher utilization process. While PHAs generally can begin accepting referrals once HUD awards the vouchers, delayed referrals from VA extended the time frame between a PHA receiving the vouchers and getting the voucher holder into housing. Staff at King County Housing Authority in Seattle suggested that VA’s initial delay in making HUD-VASH referrals was related to VA needing to hire and assign case managers, while HUD could move quickly to pass funding on to the PHAs to issue vouchers. Staff at two VAMCs acknowledged the challenge in making initial referrals to the PHA. In one location, the staff explained that to provide an adequate number of case managers, they would need to know how many new vouchers had been added and, therefore, how many new HUD-VASH veterans they would need to serve. Moreover, once new case managers were hired, they had to undergo training and orientation, resulting in additional delays. Staff in several PHA locations noted that VAMC referral time frames had been improving. HUD-VASH case manager workload. VA’s goal is to have a ratio of 1 case manager to 25 veterans. However, when we contacted VAMCs in January and February 2012, several VAMC staff told us that some case managers had 40 or more cases, as the following examples illustrate: In South Dakota, staff at the Meade County Housing and Redevelopment Commission expressed general concern that the workload for the case manager serving their area may have been unreasonable or otherwise impractical. According to staff at Black Hills Health Care System, which partners with the housing authority, the case manager assigned to Meade County and other locations managed 51 cases in total. Similarly, case managers at James A. Haley VAMC in Tampa had between 45 and 50 cases. Staff at the Tampa Housing Authority told us that more intensive case management could reduce or eliminate veteran terminations from HUD-VASH due to nonpayment or other violations of the housing agreement. Staff at Greater Los Angeles Health Care System told us that efforts were under way to reduce their average caseload of 45 per case manager. The facility was accepting applications for additional case managers and also planning to contract with an external entity to supplement case management services. VA has made efforts to address staffing at its VAMCs, and when we later contacted two of the VAMCs identified with challenges, the staff told us that hiring additional case managers had reduced their caseloads significantly. Additionally, VA provided us with a report on HUD-VASH program hiring as of February 29, 2012. The report showed that 95 percent of program positions across all VISNs were filled. Among the VAMCs we contacted, the percentage of HUD-VASH positions filled ranged from 50 percent to 100 percent. Case managers represent the majority of HUD-VASH positions, but some facilities have also hired clinical supervisors, substance use disorder specialists, peer support and housing specialists, and other program support staff. Identifying housing for veterans. Staff at VAMCs in several locations told us that veterans experienced challenges with finding housing. In Wyoming, the VAMC staff explained that the market for affordable housing was tight in Casper and Sheridan, areas served by the VAMC. Additionally, they said that the partnering PHA that served Sheridan recently reduced the maximum allowable housing assistance payment from $595 to $571 and this amount limited access to decent housing in the area. The staff added that many landlords also have been reluctant to rent to veterans with criminal histories. VAMC staff in South Dakota similarly noted that a partnering PHA had decreased the housing allowance for the area it served while some landlords had increased their rents. They explained that they used communications with a local homeless coalition, community stakeholders, and landlords to identify options for affordable housing. At Greater Los Angeles Health Care System, the staff told us that a housing specialist had been hired and kept staff informed of new housing stock while working with developers and realtors to identify suitable housing. According to the VAMC staff, the housing specialist also has conducted outreach to educate landlords on HUD-VASH and advocate for veterans, making them aware that case management will be available to HUD-VASH tenants. Move-in resources for veterans. Both PHA and VAMC staff discussed challenges veterans experience accessing the funds and household items that they needed to move in once they found a suitable housing unit. In some instances, veterans were delayed in moving into their units because of a lack of available funds to pay rental application fees, security deposits for rent or utilities, and the first month’s rent. Such delays could affect VA’s goal for placing veterans into housing within 100 days of being accepted into the program. The availability of resources to help veterans varied among locations, but generally was more limited outside of larger cities. Two of the 10 locations had a consistent source that could provide this type of assistance to veterans. For example, New York City has a Department of Homeless Services that provides a range of services to homeless individuals. Through this entity, HUD-VASH veterans could receive assistance with security deposits, first month’s rent, and household items. In Seattle, HUD-VASH veterans could access a limited-term Human Services and Veterans Levy that assisted veterans, military personnel and their families, and others in need through a variety of housing and supportive services. In other locations, VAMC and PHA staff told us that veterans had relied on local public or nonprofit assistance and on Homeless Prevention and Rapid Re-Housing Program funds that were temporarily provided under the Recovery Act. Additionally, several said that they hoped veterans would be able to use funds that would be provided under the new Supportive Services for Veteran Families grant program.Homeless Prevention and Rapid Re-Housing Program funds are no longer available and the other sources mentioned, according to the staff, often were insufficient or were not guaranteed. In some locations, the VAMC staff had developed other approaches to mitigating this challenge for veterans. For example, at several facilities, including Greater Los Angeles Health Care System, Black Hills Health Care System in South Dakota, and Washington, D.C. VAMC, the staff explained that they solicited landlords’ cooperation in waiving or spreading out up-front fees. Additionally, staff at White River Junction VAMC in Vermont had developed a handbook for veterans participating in VA’s homeless programs that included a community resources guide. They explained that the guide was included to assist veterans with obtaining furniture, household items, and other resources they needed to move into housing. In April 2012, HUD released a best practices document that included practices submitted by PHAs and VAMCs that administer HUD-VASH. According to HUD, the purpose of the document is to share effective strategies for administering HUD-VASH and highlight the efforts of specific sites and other partners. According to HUD officials, VA was involved in soliciting best practices from VAMCs and reviewed the document that HUD developed. HUD intends to revise the document over time. While the document was developed from the housing standpoint, it includes information on strategies for carrying out procedures pertaining to general PHA and VAMC management. More specifically, it describes the ways in which individual sites have addressed specific challenges such as those identified previously. For example, in addition to the Los Angeles VAMC hiring a housing specialist, the document described other facilities’ efforts to direct veterans to suitable housing by contracting with a nonprofit housing referral organization, maintaining a list of potential housing options in the VAMC’s service area, and conducting targeted landlord outreach. Similarly, several PHAs had established a loan fund or trust fund to assist veterans with move-in costs, and one PHA applied for county Community Development Block Grant funds to assist veterans with security and utility deposits. Advocates for veterans and the homeless that we contacted generally agreed that HUD-VASH was essential in helping homeless veterans to access housing and long-term treatment. Representatives at one of the organizations stated that the long-term housing HUD-VASH provides was crucial to addressing the immediate and long-term needs of homeless individuals and that combining case management with housing was appropriate for veterans with the most significant problems. Additionally, representatives at two organizations told us that HUD and VA sharing a common strategic goal had been beneficial and that program administrators had been responsive to the HUD-VASH community. Moreover, they noted that the program’s administration had improved over time. Specifically, they explained that VA had been willing to make changes to improve HUD-VASH, including in terms of leadership. The advocates offered suggestions for improving the HUD-VASH program, including the following. One advocate suggested that the program should continue to target those with the greatest need for assistance and explore flexibility for service delivery mechanisms, including having case managers conduct more work in communities and outside of the traditional VAMC appointment approach. Related to this point, recently the Veterans Health Administration Homeless Program National Director noted that VA was taking steps to have more of a presence in the community. This included hiring HUD-VASH case managers living in communities where veterans were being served and seeking more opportunities to have case managers co-located with community- based organizations. A second advocate thought it would be useful to remove the section 8 limits on project-based housing under HUD-VASH to allow developers to allocate portions of higher-quality, mixed-use developments for project-based HUD-VASH vouchers. The representative explained that this would be particularly helpful in locales with limited affordable housing and in areas that are desirable (particularly for female veterans with dependent children). HUD officials clarified that PHAs can make the case to HUD to have funding for project-based HUD- VASH vouchers exceed the voucher budget authority limit of 20 percent. According to HUD officials, exceeding the limit must be tied to effective administration of HUD-VASH, and HUD had not received any such requests as of May 2012. A third advocate expressed that VA should increase its outreach to veteran service organizations to advertise to veterans who may not be participating in VA programs. VA officials told us that VA has a national outreach initiative under way that includes collaborating with veteran service organizations to make information on HUD-VASH and other VA programs more readily available. Finally, a fourth advocate emphasized that sufficient resources needed to be committed to HUD-VASH in support of the goal of ending veteran homelessness. The representative explained that a certain volume of vouchers needed to be in the system for it to be successful and that inconsistent resources led to uncertainty among service providers and veterans who need to access the program. We provided a draft of this report to the Secretary of Housing and Urban Development, the Secretary of Veterans Affairs, and the Executive Director of the U.S. Interagency Council on Homelessness. We received comments from HUD, VA, and the Interagency Council that are reproduced in appendixes II, III, and IV, respectively. HUD and VA also provided technical comments, which we incorporated in the report as appropriate. In their responses, HUD, VA, and the Interagency Council generally agreed with our conclusions. HUD and VA noted that they were committed to their partnership and the continued improvement of the HUD-VASH program. The Interagency Council stated in its response that VA and HUD work closely on local implementation through VA medical centers and public housing agencies, and have improved lease-up rates, enhanced data collection, and reduced the amount of time it takes to house veterans in the HUD-VASH program. We are sending copies of this report to appropriate congressional committees; the Secretary of Housing and Urban Development; Secretary of Veterans Affairs; and the Executive Director of the U.S. Interagency Council on Homelessness. This report will also be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or cackleya@gao.gov. Contact points for our Offices of Congressional Affairs and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in Appendix V. Our objectives were to examine (1) how the Department of Veterans Affairs (VA) and the Department of Housing and Urban Development (HUD) determine that veterans who participate in the HUD-VA Supportive Housing (HUD-VASH) program meet the statutory eligibility criteria, (2) what data VA and HUD collect and report on the HUD-VASH program and the steps that VA and HUD take to help ensure the reliability of these data, and (3) what is known about the performance of the HUD-VASH program. To address all three objectives, we reviewed VA and HUD documents to determine the purpose of the HUD-VASH program and the agencies’ roles and responsibilities related to HUD-VASH. In addition, we reviewed federal strategic plans that address veteran homelessness to obtain information on VA’s and HUD’s goals related to reducing veteran homelessness. We interviewed officials at the Veterans Health Administration within VA and in HUD’s Office of Public and Indian Housing and Office of Community Planning and Development. We reviewed VA and HUD Office of Inspector General reports pertaining to HUD-VASH and our previous reports. We selected a purposive, non- representative sample of 10 locations in which to interview management and staff at VA medical centers (VAMC) and their partnering public housing agencies (PHA) (see fig. 4). Results of these interviews cannot be projected to other VAMCs or PHAs. We selected the 10 locations (9 states and the District of Columbia) based on several criteria, including a significant presence of homeless veterans in and a large allocation of HUD-VASH vouchers to the state, identified best practices or challenges in administering the HUD-VASH program, and geographic diversity. To obtain information on the presence of homeless veterans by state, we reviewed the jointly developed veteran supplements to HUD’s 2009 and 2010 Annual Homeless Assessment Reports to Congress. We used information from HUD on annual HUD-VASH voucher allocations by PHA and partnering VAMC for fiscal years 2008 through 2010. To address our first objective, we reviewed eligibility requirements in the HUD-VASH statute to assess how VA and HUD are to determine that veterans who participate in HUD-VASH meet the statutory eligibility criteria. We also reviewed requirements specific to VA in the Veterans Health Administration’s HUD-VASH handbook and a HUD-VASH resource guide developed by the National Center for Homelessness among Veterans. To obtain specific information on how VA screened veterans to determine if they were eligible for the program, we interviewed VAMC management and staff in the selected 10 locations. The centers are responsible for screening and evaluating veterans for acceptance into HUD-VASH, referring veterans to partnering PHAs, and coordinating veterans’ case management under HUD-VASH. Similarly, to obtain more specific information on how PHAs (following HUD’s procedures) screened veterans referred by partnering VAMCs, we interviewed management and staff at PHAs that partner with the 10 VAMCs to assess veterans and also manage various aspects of the housing process. In our interviews with VAMC and PHA staff, we asked about their general procedures for administering HUD-VASH, including how they made eligibility determinations based on VA’s requirements and HUD’s guidelines, respectively. We also discussed cooperation at the local level between partnering VAMCs and PHAs. To address our second objective, we reviewed program manuals and guidance on data that VA and HUD collect on HUD-VASH, their data collection mechanisms, and reliability controls. We interviewed VA and HUD officials to determine what HUD-VASH information the agencies report and the systems they use for collecting and reporting the related data. We obtained and reviewed selected monthly Dashboard-based reports that VA provided to Congress during fiscal years 2011 and 2012 to identify the data elements typically reported for HUD-VASH; we reviewed VA program data through March 2012. While VA provides monthly voucher utilization reports to Congress, HUD reports to Congress on HUD-VASH only upon request. To identify the steps that VA takes to help ensure the reliability of its data, we interviewed knowledgeable VA officials about the purpose, structure, and quality controls used to capture or report HUD-VASH program data using VA’s Dashboard and HOMES. We reviewed VA documentation, including the HOMES user manual, HUD-VASH data entry forms, and data validity checks. In interviews with VAMC staff at the 10 selected locations, we asked about data collection and reporting, and any related challenges. In addition, we observed a demonstration of VA’s reporting mechanism for HUD-VASH on-site. Finally, we compared VA’s data collection and reporting procedures to standards for internal control in the federal government. To identify the steps that HUD takes to help ensure the reliability of its data, we interviewed knowledgeable HUD officials about the purpose, structure, and relevant quality controls for HUD-VASH data, including information captured in HUD’s Voucher Management System (VMS) and Public and Indian Housing Information Center (PIC). We also interviewed PHA staff at the 10 selected locations about data collection and reporting, and any related challenges. We reviewed relevant documentation, including the information systems’ user guidance and HUD’s documented analysis of comparisons between VMS, PIC, and VA data. To address our third objective, we reviewed performance-related information reported by VA such as monthly Dashboard-based reports on HUD-VASH voucher utilization and a more descriptive report submitted to Congress in October 2011. In addition, we interviewed representatives of, and gathered documentation from, HUD and VA headquarters; the U.S. Interagency Council on Homelessness (Interagency Council); and veteran and homeless advocacy organizations, including the National Coalition for Homeless Veterans, the National Coalition for the Homeless, the National Alliance to End Homelessness, and Vietnam Veterans of America. In interviews with VA and HUD officials, we asked about performance measures the agencies were monitoring for HUD-VASH. In interviews with representatives of advocacy organizations, we discussed their perspectives on HUD-VASH administration and the program’s performance. We also asked VAMC and PHA staff for their perspectives on HUD-VASH performance, potential ways to measure program success, and opportunities for improvement. We conducted this performance audit from September 2011 through June 2012 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Marshall Hamlett (Assistant Director), Bernice Benta, F. Chase Cook, Pamela Davidson, Cynthia Grant, John McGrail, Marc Molino, and Barbara Roesmann made key contributions to this report. | According to a HUD and VA report, veterans are overrepresented among the homeless population. The HUD-VASH program combines rental assistance for homeless veterans in the form of section 8 Housing Choice vouchers provided by HUD with case management and clinical services provided by VA at VAMCs and community-based outpatient clinics. This collaborative initiative between the two agencies is intended to target the most vulnerable, most needy, and chronically homeless veterans. GAO was asked to examine (1) how VA and HUD determine veteran eligibility for HUD-VASH, (2) what data VA and HUD collect and report on HUD-VASH and their data reliability efforts, and (3) what is known about HUD-VASH performance. To address these objectives, GAO reviewed HUD-VASH program requirements and reported program data through March 2012; and interviewed VA and HUD headquarters officials, staff at a non-representative sample of 10 VAMCs and 10 PHAs, and representatives of organizations that advocate for veterans or individuals experiencing homelessness. GAO makes no recommendations in this report. HUD, VA, and the U.S. Interagency Council on Homelessness generally agreed with GAOs conclusions. The Department of Veterans Affairs (VA) and Department of Housing and Urban Development (HUD) rely on VA medical centers (VAMC) and public housing agencies (PHA) that serve veterans directly to determine participant eligibility for the HUD-VA Supportive Housing (HUD-VASH) program. VAMC staff GAO contacted said that they interview veterans interested in the HUD-VASH program to assess whether the veteran met the programs definition of homelessness, check VAs electronic patient record system to determine whether the veteran was eligible for VA health care, and obtain the veterans agreement to participate in case management. VAMCs refer eligible veterans to partnering PHAs (subject to rental assistance voucher availability) and are required to place them on an interest list when no vouchers are available. PHA staff GAO contacted said that they compare the veterans reported income to information provided by third-party sources, such as the Social Security Administration, to verify that the veterans household income did not exceed HUD-VASH program limits and check state sex offender registries to help ensure that no member of the veterans household was subject to a lifetime registration requirement. VA and HUD collect various data on veteran participation and voucher utilization and are taking steps to address the reliability of data collected and reported on HUD-VASH. Since 2008, VA has used an electronic database referred to as the Dashboard to collect and report various data, such as the number of veterans issued a voucher and seeking housing and the number of veterans housed. VA described taking a number of steps intended to help ensure the reliability of Dashboard-based reports, including routine reviews of underlying reports. VA expects to fully implement reporting based on data collected with its new Homeless Operations Management and Evaluation System (HOMES) by July 2012. According to VA, HOMES incorporates additional data reliability controls, such as data fields that automatically limit responses to predefined ranges. HUD also collects data on HUD-VASH voucher utilization, although HUD officials acknowledged discrepancies between VA and HUD data. VA and HUD are working to finalize an information-sharing agreement intended to help the departments better identify the source of the discrepancies and validate reports based on HOMES data. HUD-VASH data show that the program has moved previously homeless veterans into housing. As of March 2012, nearly 31,200 veterans lived in HUD-VASH supported housing (about 83 percent of the rental assistance vouchers authorized under the program). The program goal is to have veterans in housing represent 88 percent of authorized vouchers by September 2012; several states had met or exceeded the goal as of March 2012. VAMC and PHA staff GAO contacted also cited challenges in administering the HUD-VASH program, including a lack of resources to assist veterans with moving into housing. In April 2012, HUD released a best practices document that illustrated how some of the challenges identified had been addressed. For example, one PHA applied for county Community Development Block Grant funds to assist veterans with security and utility deposits. |
The history of government reform has demonstrated that new policies, whether based in law or in administrative directives, are not self-implementing. In our work on state and local privatization initiatives, we reported that reforms such as privatization are most likely to be sustained when there is a committed political leader to champion the initiative. In the six governments we visited, a political leader (the governor or mayor), or in one case, several leaders working in concert (state legislators and the governor), played a crucial role in fostering privatization. These leaders built internal and external support for privatization, sustained momentum for their privatization initiatives, and adjusted implementation strategies when barriers to privatization arose. H.R. 716 does not, and probably cannot, provide for effective political leadership. It has been executive branch policy for more than 30 years to encourage competition between the federal workforce and the private sector for providing commercial goods and services. However, this policy has been embodied only in an administrative directive, Office of Management and Budget (OMB) Circular A-76. While we have consistently endorsed the concept of encouraging such competition, its effectiveness in practice has been questioned both in the executive branch and in dozens of congressional hearings. H.R. 716 would give the force of law to general reliance on the private sector for commercial goods and services, and thus would provide a stronger foundation, but not a substitute, for political leadership. To implement their privatization initiatives, the governments we visited reported the need to establish an organizational and analytical structure. A key aspect of this structure is an office to guide and support the privatization initiative and provide the analytical framework to evaluate the costs, benefits, and risks of privatizing a particular activity. Many of the frameworks established by the six governments shared common elements, such as criteria for selecting activities to privatize, methods for cost comparisons, and procedures for monitoring the performance of privatized activities. ensuring compliance by agencies; and providing guidance, information, and assistance to both private and public sectors. OMB is given wide latitude as to what regulations it will issue and what they will contain. This grant of broad authority affords OMB flexibility in implementing the legislation. However, given the wide latitude that OMB is afforded by the bill, issues will inevitably arise during implementation that will have to be dealt with by OMB. These issues could include such questions as Whether government corporations, federally funded research and development centers, state governments, or even the U.S. Postal Service should be included within the definition of “private sector sources” and thus eligible to compete for the government’s contracts. Whether public buildings would need to be sold to the private sector in order to house federal employees. How OMB will incorporate congressional views when significant or highly sensitive conversions are proposed. Given concerns such as these, Congress will need to oversee OMB’s performance of its responsibilities. The strategic and annual performance plans and annual report that OMB is to produce under the Government Performance and Results Act, provide a mechanism for such accountability. OMB could include in its strategic plan an objective and strategy for implementing the bill’s requirements. The strategy could be developed in consultation with Congress and could describe major priorities as well as specific milestones for implementing the bill’s provisions. In addition, OMB through its annual performance plan could provide a schedule for changing current policies and systems that would be necessary to accomplish the bill’s purposes. Such a schedule would provide greater direction for agencies as they go through the process of identifying potential activities to be included in their annual performance plans. It could also provide a firm basis for Congress to assess OMB and agency activities as they relate to the bill’s requirements. management responsibilities, which have been expanded significantly in recent years. Such a plan might be an appropriate vehicle for addressing such resource issues. The experiences of other governments as well as of major private firms indicate that, when the outsourcing of functions is contemplated, answers to fundamental questions about the purpose and mission of an organization should precede any major outsourcing activities. The bill has significant implications for the ongoing implementation of the Results Act; the Act focuses on what activities the government should or should not be performing from the perspective of overall contributions to missions and goals, while the bill addresses how and by whom those activites should be performed. Under the provisions of the Results Act, agencies are required to set their strategic direction through multiyear strategic plans, develop annual goals, and report on performance against those goals. Agency strategic plans and performance measures are intended to provide Congress with a vehicle for asking fundamental questions about federal functions and their performance. In our recent reports on the implementation of the act, we have found that many agencies are not yet well positioned to specify their plans and strategies in terms of tangible results. If enacted, the bill’s implementation will occur as agencies are going through their first cycle of planning, measuring, and reporting on program performance, as called for under the Results Act. The bill would amend the Results Act by requiring, among other things, that agencies include in the annual performance plans and reports that they submit to Congress (1) inventories of functions that are and are not subject to the Freedom From Government Competition Act’s provisions and (2) a schedule for converting to private sector performance those functions capable of, but not currently, being performed by the private sector. Requiring agencies to specify the activities they would perform directly, and those they would convert to private sector performance, is consistent with the Result Act’s strategic planning requirements. key provision of H.R. 716 requires OMB to create a methodology for making determinations on what types of activities should and should not remain in government. This provision, if integrated with the strategic planning and annual performance planning requirements of the Results Act, could avoid the potential situation of agencies inadvertently replacing unneeded federal functions with unneeded private sector contractors—a concern we have expressed regarding Department of Defense depots. By making clear that, as part of their strategic planning and performance measurement activities, agencies should review potential outsourcing candidates in light of their contribution to mission accomplishment, the bill could reduce the possibility of such an outcome. Encouraging the magnitude of change that this bill contemplates will require incentives if it is to be effective. We believe that integrating the bill’s requirements with those of the Results Act is one of the best incentives Congress could use to ensure successful implementation. The Act should, if successfully implemented, expand opportunities for congressional oversight of agency performance, including, for example, closer scrutiny of agency budget requests for specific activities in the context of expectations about program performance. Another incentive could be to allow government agencies to use savings gained from eliminating duplication and unnecessary non-core functions to further improve operations or satisfy other priorities such as modernization.However, such proposals need to be carefully examined as they raise questions of congressional oversight and the allocation of scarce financial resources. the union-management team performed the activity at the desired level of performance for less than it had bid, the team would receive a share of the savings at the end of the year. The city, after tracking performance over a period of years, could place a moratorium on bidding for areas for which city employees had demonstrated performance excellence and in which they had consistently outbid private competitors. In addition, Indianapolis built community support by taking some cost savings achieved through outsourcing and managed competitions and allocated it to hiring additional police, lowering tax rates, and increasing infrastructure projects. According to the Deputy Mayor, this approach built community support and provided further incentives for managed competition and outsourcing. In contrast, Georgia’s Governor instituted a budget redirection program that required all agencies to prioritize their current programs and activities and identify those programs that could be eliminated or streamlined. The agencies were required to make at least 5 percent of their total state-funded budgets available for redirection to higher priorities. According to a Georgia Privatization Commission official, agencies were given a 6-month notice that their budgets would be cut by 5 percent. State officials said these budget cuts required managers to rethink how they could perform the same activities for a lower cost. This action provided the incentive for agencies to contract out more activities, such as vehicle maintenance and management services for a war veterans facility. In our state and local work, we found that all five states and the city of Indianapolis used some combination of legislative changes and resource cuts as part of their privatization initiatives. These actions were taken to encourage greater use of privatization. Georgia, for example, enacted legislation to reform the state’s civil service and to reduce the operating funds of state agencies. Virginia reduced the size of the state’s workforce and enacted legislation to establish an independent state council to foster privatization efforts. These actions, officials told us, reduced obstacles to privatization and sent a signal to managers and employees that political leaders were serious about implementing it. provide any products or services that can be provided by the private sector, and it prohibits agencies from providing any goods or services to any other governmental entity. This could conflict with the “Economy Act of 1932” (31 U.S. 1535-1536), which authorizes interagency orders for goods and services, as well as with the General Services Administration’s (GSA) authority to provide agencies with goods and services. GSA was created, and still exists, to provide goods and services to agencies, such as office space, consolidated purchasing, air fare contracts, and excess property disposal. Its role under H.R. 716 is unclear. In addition, the bill does not contain language limiting judicial review of management actions taken under its provisions. The possibly unintended effect of subjecting management decisions to judicial review could slow implementation and increase costs due to litigation. In the governments we visited, reliable and complete cost data on government activities were deemed essential in assessing the overall performance of activities targeted for privatization, in supporting informed privatization decisions, and in making these decisions easier to implement and justify to potential critics. Most of the governments we surveyed used estimated cost data because obtaining complete cost and performance data, by activity, from their accounting systems was difficult. However, Indianapolis, and more recently Virginia have used activity based costing (ABC) to obtain more precise and complete data on the cost of each separate program activity. consistent with current efforts aimed at improving federal financial management. In the past, when competitive contracting has been done at the federal level under the provisions of Circular A-76, the absence of workload data and adequate cost accounting systems has made the task all the more difficult. Given that most agencies do not have cost accounting systems in place at this point, the bill’s requirement to use past performance and cost data will be difficult for many federal activities to meet. Efforts are under way to develop the type of cost and performance data that would be necessary to compare public versus private proposals, as could occur under the provisions of H.R. 716. The Federal Accounting Standards Advisory Board (FASAB) has developed standards that are designed to provide information on the costs, management, and effectiveness of federal agencies. These standards require agencies to develop measures of the full costs of carrying out a mission or of producing products and services. Such information, when available, would allow for comparing the costs of various programs and activities with their performance outputs and results. To help agencies meet these standards, the Joint Financial Management Improvement Program (JFMIP) plans to issue guidance to facilitate the acquisition and development of managerial cost accounting systems needed to accumulate and assign cost data consistent with governmentwide data. We found that governments we visited needed to develop strategies to help their workforces make the transition to a private-sector environment. Such strategies, for example, might seek to involve employees in the privatization process, provide training to help prepare them for privatization, and create a safety net for displaced employees. Among the six governments we visited, four permitted at least some employee groups to submit bids along with private-sector bidders to provide public services. All six governments developed programs or policies to address employee concerns with privatization, such as the possibility of job loss and the need for retraining. The bill’s findings section states that it is in the public interest for the private sector to utilize government employees who are adversely affected by conversions of functions to the private sector. The legislation does not create any new benefit or competitive job right that does not already exist. It does, however, assign to the Director of OMB the function of providing information on available benefits and assistance directly to federal employees. This would be a new and possibly burdensome function for OMB—a function that probably could be better handled by the Office of Personnel Management, which already has responsibility and experience in this area. Involving employees in the privatization process by letting them compete for the right to provide the service was a strategy used by state and local governments to gain employee cooperation during the privatization process. H.R. 716 neither encourages nor prohibits public-private competitions. However, it does give implicit authority to OMB to implement such a program, by requiring that the implementing regulations include standards and procedures for determining whether it is a private sector source or an agency that provides certain goods or services for the best value. While the question of how such determinations would be made is left up to OMB, competitive contracting has been the traditional method for making such determinations both at the federal level and the state and local level. When a government’s direct role in the delivery of services is reduced through privatization, we found that, at least among the state and local governments we visited, the need for aggressive monitoring and oversight grew. Oversight was needed not only to evaluate compliance with the terms of the privatization agreement, but also to evaluate performance in delivering goods and services in order to ensure that the government’s interests were fully protected. Indianapolis officials said their efforts to develop performance measures for activities enhanced their monitoring efforts. However, officials from most governments said that monitoring contractors’ performance was the weakest link in their privatization processes. The essential foundation for effective oversight is good cost and performance data. H.R. 716’s analytical requirements call for the consideration of all direct and indirect costs, qualifications, and past performance as well as other technical considerations. These requirements, along with the authority and flexibility given to OMB in implementing the legislation, provide the necessary foundation for effective performance monitoring and oversight, but they do not resolve capacity problems. Converting government activities to private-sector performance will increase the contracting workload on federal agencies. Conversion to contract performance requires considerable contract management capability. An agency must have adequate capacity and expertise to successfully carry out the solicitation process and effectively administer, monitor, and audit contracts once they are awarded. In past reports on governmentwide contract management, we identified major problem areas, such as ineffective contract administration, insufficient oversight of contract auditing, and lack of high-level management attention to and accountability for contract management. Some federal agencies have recognized the problem and have taken actions intended to improve their contract management capacity. The Department of Energy (DOE) and The National Aeronautics and Space Administration (NASA) provide examples of the challenges agencies face in overseeing contractors. DOE—the largest civilian contracting agency in the federal government—contracted out about 91 percent of its $19.2 billion in fiscal year 1995 obligations. We designated DOE contracting in 1990 as a high-risk area, vulnerable to waste, fraud, abuse, and mismanagement, because DOE’s missions rely heavily on contractors and DOE has a history of weak contractor oversight; however, it has been working to improve its contract management practices. As we recently reported in our high-risk report on DOE, changing the way DOE does business has not come easily or quickly. DOE has taken various actions in the past to improve its contracting, and a recent contract reform effort that has received high priority and visibility appears promising; however, much remains to be done to ensure effective oversight of contractors. NASA’s contracting reforms demonstrate what can be accomplished when an agency places high priority on contractor oversight. NASA spends about 90 percent of its budget on contracts with businesses and other organizations. NASA’s procurement budget is one of the largest among federal civilian agencies, totaling about $13 billion annually in recent years. NASA first identified its contract management as vulnerable to waste and mismanagement in the late 1980s. Since then, it has grappled with a variety of contract management problems. NASA has made considerable progress in developing ways to better influence contractors’ performance and to improve oversight of field centers’ procurement activities. It has, for example, established a process for collecting cost, schedule, and technical information for all major NASA contracts to assist management in the tracking of contractor performance, and it also has restructured its policy on award fees to emphasize contract cost control and the performance of contractors’ end products. In conclusion, Mr. Chairman, striking a proper balance between the public- and private-sector provision of goods and services to the American people is among the most enduring issues in American politics and public policy. The Freedom From Government Competition Act would redirect current policy, which does not now have the weight of legislative authority and significantly affect the operation and management of the federal government. We believe that Congress is the proper forum to address such fundamental questions, and we hope that our testimony today has been helpful by raising some issues for the Subcommittee to consider in its deliberations on the proposed act. That concludes my prepared statement. I would be pleased to answer any questions the Subcommittee may have. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed H.R. 716, the Freedom From Government Competition Act, as a potential vehicle for competitive contracting, using the results of GAO's recent work on privatization initiatives at the state and local government levels. GAO noted that: (1) on the basis of GAO's literature review, privatization experiences and lessons learned by state and city governments in implementing privatization efforts, the views of a panel of privatization experts, and GAO's work in Georgia, Massachusetts, Michigan, New York, and Virginia, as well as the city of Indianapolis, GAO identified six lessons that were generally common to all six governments; (2) in general, the governments found that they needed to: (a) have committed political leaders to champion the privatization initiative; (b) establish an organizational and analytical structure to implement the initiative; (c) enact legislative changes and/or reduce resources available to government agencies to encourage greater use of privatization; (d) develop reliable and complete cost data on government activities to assess their performance, support informed privatization decisions, and make these decisions easier to implement and justify to potential critics; (e) develop strategies to help their workforces make the transition to a private-sector environment; and (f) enhance monitoring and oversight to evaluate compliance and performance and ensure that the government's interests are fully protected; (3) H.R. 716 provides a tool but not a substitute for a political champion; (4) H.R. 716 would establish a flexible implementation structure; (5) implementation of H.R. 716 would be helped by integrating it with agencies' strategic and performance planning activities; (6) incentives may be needed for implementing change; (7) the relationship of H.R. 716 to other relevant laws is unclear; (8) reliable and complete cost information is needed for privatization decisions; (9) H.R. 716 recognizes federal workforce transition needs; (10) effective monitoring and oversight of contractor performance are essential to successful privatization; and (11) the Freedom From Government Competition Act would redirect current policy, which does not now have the weight of legislative authority and significantly affect the operation and management of the federal government. |
IRS’s 2008 budget request proposes to increase spending. The $11.6 billion requested total operating budget is an increase of $608.8 million (almost 5 percent) over the FY 2007 level as shown in table 1. IRS proposes to fund 92,814 full-time equivalents (FTE), a slight decrease compared to the FY 2007 level. Table 1 summarizes IRS’s appropriation accounts and shows that its 2008 budget submission continues a trend of shifting spending toward enforcement. The request for $4.9 billion for direct enforcement appropriations is an increase of 3.9 percent over the FY 2007 level and almost 4.6 percent over the FY 2006 level. Table 1 also shows that IRS is requesting more funding for operational support in 2008 over the 2007 level. Among the reasons for the increased spending is that IRS is proposing to reduce the backlog of outdated information systems and telecommunications equipment. Finally, IRS is requesting $282 million for its BSM program—a significant increase in funding over both FYs 2006 and 2007. This includes over $55 million for developing and deploying the capability to accept individual income tax returns on Modernized e-File and $16 million for new Web portals to support key business processes and compliance initiatives. When operational support funding shown in table 1 is allocated to enforcement and taxpayer service, a more complete picture of what IRS actually spends on these activities emerges. Based on the allocation reported in the budget request, IRS plans to spend a total of $7.2 billion for enforcement and $3.6 billion for taxpayer service. Including operational support, IRS is requesting almost 56,600 FTEs for enforcement and about 35,200 FTEs for taxpayer service (an increase of 0.7 percent and a decrease of 3.7 percent, respectively, compared to FY 2007 levels). Figure 1 shows that this continues a trend since 2004 of shifting a greater portion of spending toward enforcement as compared to service. In years following passage of the IRS Restructuring and Reform Act of 1998, IRS made significant progress in taxpayer service, although there were declines in many aspects of enforcement activities, such as for enforcement staff and revenue collected as shown in figures 2 and 3, respectively, later in this statement. However, at FY 2008 requested levels, total spending for enforcement will increase by over 19 percent while spending for taxpayer service will decrease by almost 4 percent since 2004. In the 2008 budget submission, IRS proposes a number of new initiatives, all of which are intended to improve taxpayer compliance—some by increasing staffing for enforcement or making legislative changes, and some by improving taxpayer service or infrastructure. The request includes estimates of the annual costs of the initiatives plus, for some initiatives, dollar estimates of the increased revenue expected to be realized, as summarized in table 2. IRS recognizes that there are likely revenue effects beyond those shown in table 2. Table 2 shows, for example, the direct revenue from new enforcement initiatives. Direct revenue is the amount collected from taxpayers targeted by IRS enforcement actions, such as audits. However, the budget submission states that enforcement actions have indirect revenue effects as well by increasing voluntary compliance by all taxpayers. The magnitude of the indirect effects of enforcement is not known with a high level of confidence because of challenges in measuring compliance; developing reasonable assumptions about taxpayer behavior; and accounting for factors outside of IRS’s actions that can affect taxpayer compliance, such as changes in tax law. However, several research studies have offered insights to help better understand the indirect effects of IRS enforcement on voluntary tax compliance and show that they could exceed the direct effect of revenue obtained. Given the uncertainty of estimates of indirect revenue, in its budget request, IRS says that it cannot measure the impact of deterrence of enforcement or service on compliance, but only that their effects are positive. Finally, the budget request also recognizes that the initiatives intended to improve taxpayer service or modernize information systems are also expected to ultimately improve taxpayer compliance. Again, however, reliable information about the magnitude of the improvement is not available. Over the 3 years shown in table 2, IRS expects the estimated cost for the initiatives will decrease while the resulting direct revenue increases. IRS is requesting about $410 million for FY 2008 to fund all the initiatives, with the estimated costs declining in FYs 2009 and 2010 because of start-up costs in FY 2008. IRS is projecting that direct revenues will increase by about $2.6 billion in FY 2010, as more staff are hired, trained, and become more productive, and all aspects of the legislative initiatives are phased-in, particularly for the information reporting requirements. However, the direct revenues expected are small compared to the estimated $290 billion net tax gap for tax year 2001. For instance, the revenue-producing initiatives are expected to yield about $699 million in FY 2010, or about one-fourth of 1 percent of the tax year 2001 net tax gap. In 2010, the total estimated increased revenue from both the revenue-producing and legislative initiatives, about $2.6 billion, is about 0.9 percent of the 2001 net tax gap. No single approach, such as IRS enforcement, is likely to fully and effectively address noncompliance. Multiple approaches are needed because noncompliance has multiple causes and spans different types of taxes and taxpayers. Approaches include devoting additional resources to enforcement, providing more enforcement tools like information reporting, improving taxpayer service, periodically measuring compliance, setting tax gap reduction goals, leveraging technology to enhance IRS’s efficiency, and simplifying or reforming the tax code. For example, regarding information reporting, we recently recommended to IRS, that to assist taxpayers in accurately reporting their capital gains and losses from securities, in the instructions to Schedule D clarify the appropriate use of capital losses to offset capital gains or other income and provide guidance on resources available to taxpayers to determine their basis. Justifications for the new spending initiatives varied in the basic information they provided. In some cases, the budget submission lacked information that would have allowed us or others to assess the proposed spending and comment on, for example, whether the initiative would be a worthwhile expenditure in light of expected benefits and costs. To better understand IRS’s initiatives and their expected benefits and costs, we asked for supplementary documentation on selected new spending initiatives: Improve compliance among small businesses and self-employed (SB/SE) taxpayers: $73.2 million; 485 FTEs Critical upgrades to IT infrastructure: $60 million; 0 FTEs Improve tax gap estimates, measures, and noncompliance detection: $41.0 million; 258 FTEs Improve compliance for large multinational businesses: $26.2 million; 158 FTEs Research effects of taxpayer service on compliance: $5.0 million; 8 FTEs Expand volunteer income tax assistance (VITA): $5.0 million; 46 FTEs Our review of the justifications showed that some had descriptive, cost, and expected performance information while others lacked such information. Our previous work on results-oriented government and performance budgeting, states that budget requests and supporting documentation should provide information on the results to be achieved with the funding requested. More specifically, our work has shown that congressional decision makers benefit from information on the problem or performance shortfall to be addressed, cost estimates, and performance measures and goals. The justification for the initiative to upgrade IT infrastructure included information on the extent of the problem, including the impact of computer downtime on employee performance and how much IRS’s aged computer inventory would grow without additional funding. Similarly, the initiatives to increase compliance among SB/SE taxpayers and large multinational businesses had such information as the portion of the tax gap that is attributable to certain types of taxpayers, data on growth in certain tax return filings for businesses that are high-risk for underreporting, and the need for increasing enforcement activity in these areas. However, the justification for expanding VITA did not provide problem or performance shortfall information, such as evidence of how some taxpayers do not receive needed services due to the current level of spending or problems with those taxpayers’ compliance levels due to the lack of services. Similarly, the initiative to research the effects of taxpayer service on compliance did not explain the problem such research would correct. The IT initiative had information on the planned expenditures to upgrade specific computer equipment, including descriptions of the equipment and how it is to be used. Also, the initiatives to increase compliance among SB/SE taxpayers and large multinational businesses had descriptions of the types of staff to be hired and work to be done—such as examinations, collections, and legal support. However, the justifications for the initiatives to improve tax gap estimates and expand VITA lacked information on how IRS determined the amount requested or FTEs needed. We could not determine the budget or FTEs or specifics about the work to be done such as the number of examinations to be conducted. Further, the initiative to research the impact of service on compliance lacked descriptive details on the work to be done—such as potential research questions, methodologies, deliverables, and estimated costs of delivering them—that would provide examples of what IRS would accomplish with proposed spending and allow Congress or others to assess the initiative. The compliance initiatives had performance measures and goals, such as direct revenue to be generated or additional examinations to be conducted; the IT initiative had quantitative targets for reducing the aged computer inventory; the VITA initiative had a target for improving the quality of returns prepared by volunteers; and the tax gap estimate improvement initiative had quantitative targets related to examinations. However, the initiatives for researching the impact of service on compliance lacked a performance measure and target, such as, for improving the use of IRS resources based on the research. We do not contend that because some of the justifications were lacking in certain information that the initiatives are not worthwhile, or that all justifications should have the same extent and types of information. For example, although the justifications for conducting research to improve tax gap estimates and determine the effects of taxpayer service on compliance lacked certain information, in previous reports and testimony we have been supportive, in general, of such research. However, without some explanation of how cost and resource needs were determined for these initiatives, assessments of whether the initiatives are worth their costs are not possible. Since gathering basic information to justify an initiative has costs, it is reasonable for justifications of more costly initiatives to have more detail. When all the basic information becomes too cumbersome to include in the budget submission itself, an agency can supplement its request with readily available supporting documentation. In its 2008 budget request, IRS identified $120 million in savings as it has done in prior years—$82.3 million through enhancing technology and streamlining work processes in its enforcement programs and $37.7 million through increases in electronic filing from its taxpayer service programs. IRS is proposing to use all internally generated savings to maintain its current operating levels. In addition to the areas identified by IRS in its budget request, there are additional opportunities for savings and efficiency gains. Increasing electronic filing through mandates: Last year we reported that state mandates that required paid preparers who file a certain number of tax returns to electronically file state tax returns increased federal electronic filing. Without a federal mandate, IRS is missing an opportunity for savings—using IRS’s estimate that it saves $2.38 on every return that is processed electronically we estimated that IRS would save $68 million per year if 90 percent of returns submitted by preparers that are currently filed on paper were filed electronically. However, IRS lacks the authority to mandate electronic filing for paid preparers and we suggested to Congress that it mandate filing by paid preparers meeting criteria, such as filing a certain number of tax returns. Consolidating telephone call sites: We previously reported that IRS has excess space at its call site operations and the agency had a study underway to determine the feasibility of consolidating those operations. IRS has nearly completed the first phase of the study and plans to complete the second phase in 2008. According to IRS officials, this study is on schedule and is important because it will allow IRS to identify the costs and benefits of consolidating phone operations. Consolidating or retiring legacy systems: We have previously recommended that IRS prepare a long-term vision and strategy for completing the BSM program, including establishing time frames for consolidating and retiring legacy systems. While IRS developed an initial modernization vision and strategy and associated 5-year plan, more remains to be done for IRS to fully address our recommendation. Consolidating and retiring legacy systems should lead to a reduction in costs associated with maintaining these systems. Changing the menu of taxpayer services: IRS recently issued its comprehensive strategy for improving taxpayer service, including for telephone, walk-in, volunteer and Web site assistance. That strategy, known as TAB, was developed in response to a congressional directive. In addition to providing information on taxpayer needs of service, TAB provides information on the cost of taxpayer serviced for the various types of service. Information on needs and costs, along with a better understanding of taxpayer’s preferences, needs and expectations, could provide taxpayers with the same taxpayer service benefits at a lower cost through alternative methods. IRS has made noticeable progress in its enforcement efforts including increasing the amount of direct enforcement revenue collected, number of collection activities undertaken, and enforcement staff. Nevertheless, enforcement of the tax laws remains high risk, because of the persistence of the tax gap and the lack of a data-based plan. IRS reported that direct enforcement revenue rose from $43.1 billion in FY 2004 to $48.7 billion in FY 2006 (a 13 percent increase). As shown in figure 2, most of the enforcement revenue is from IRS’s collection efforts ($27.5 billion), followed by examination ($17.4 billion) and document matching ($3.2 billion). In recent testimony, the IRS Commissioner reported increases in some enforcement activities; for example, he reported that the overall percentage of individual income tax returns examined between FYs 2001 and 2006 increased by about 75 percent. IRS’s 2008 budget request shows that enforcement goals are comparable or slightly greater than 2006 actual performance and 2007 planned performance; for example, the examination rate of all individual income tax returns will remain at 1 percent. Also, IRS is proposing to increase document matching activities for individual taxpayers and increase examinations for businesses. With its 2008 budget, IRS is proposing to roughly maintain its skilled enforcement staff at the FY 2006 level—just over 21,000 FTEs. This would be an increase of over 8 percent since its low in FY 2003, as shown in figure 3. However, it is 9 percent less than the skilled enforcement staff that IRS had in FY 1998. IRS has three main categories of skilled enforcement staff: revenue officers, who perform field collection work; revenue agents, who examine complex returns; and special agents, who perform criminal investigations. Despite the projections for skilled enforcement staffing, officials from the SB/SE and Large and Mid-Size (LMSB) divisions noted that even maintaining skilled enforcement staff levels may be difficult because both divisions are experiencing high attrition rates because of retirements. Furthermore, officials said the 2007 continuing resolution limited their ability to hire in 2007. SB/SE and LMSB officials noted that the delays in hiring may have an adverse affect on their ability to meet performance goals in 2008 and beyond, particularly for the most complex examination issues, including abusive tax shelters and corporate returns, because of the lead time needed to train and develop staff. Recently, IRS studied individual taxpayer compliance through the NRP, and used the resulting compliance data to estimate the tax gap for individual income tax underreporting and the portion of employment tax underreporting attributed to self-employment taxes for tax year 2001. NRP, which involved reviewing around 46,000 individual tax returns, has yielded new information on taxpayer compliance for the first time since IRS’s previous compliance measurement study was undertaken for tax year 1988. As a result of NRP, IRS has taken steps to better ensure efficient allocation and use of its enforcement resources. For example, the NRP study has provided better data on which taxpayers are most likely to be noncompliant. IRS is using the data to improve its audit selection processes in hopes of reducing the number of audits that result in no change, which should reduce the unnecessary burden on compliant taxpayers and increase enforcement staff productivity. Despite the progress in enforcement, enforcement of the tax laws remains on our high risk list because of the persistence of the tax gap and, among other things, the lack of a data-based plan to address it. The tax gap has been a persistent problem in spite of a myriad of congressional and IRS efforts to reduce it, as the rate at which taxpayers voluntarily comply with our tax laws has changed little over the past three decades. The rate at which taxpayers pay their taxes voluntarily and on time has tended to range from around 81 percent to around 84 percent. IRS’s most recent estimates of the gross tax gap are $345 billion for tax year 2001, and the net tax gap is estimated to be $290 billion. IRS’s overall approach to reducing the tax gap consists of enhancing enforcement and improving taxpayer service. IRS uses its enforcement authority to ensure that taxpayers are reporting and paying the proper amounts of taxes through efforts such as examining tax returns and document matching. IRS seeks to improve voluntary compliance through efforts such as education and outreach programs and tax form simplification. IRS needs better, more continuous compliance research and better measurements of compliance. We have long been a supporter of such research, because it can give IRS and Congress an important measure of taxpayer compliance and it allows IRS to better target enforcement resources towards noncompliant taxpayers. Taxpayers benefit as well, because properly targeted audits mean fewer audits of compliant taxpayers and more confidence by all taxpayers that others are paying their fair share. IRS’s budget request includes $41 million for improving tax gap estimates and detecting noncompliance including for a rolling NRP sample of individual taxpayers and a dedicated cadre of examiners to conduct audits. Using a rolling sample, IRS plans to replicate the 2001 NRP study by conducting audits of a smaller sample size instead of larger intermittent efforts. At the end of 5 years, IRS would have a comparable set of results to the 2001 study and continue to update the study annually by sampling the same number of taxpayers, dropping off the oldest year in the sample, and adding the new years’ results every year. While we have concerns about the lack of basic information to justify the specific funding requested, we generally support this approach. We have previously reported that doing compliance studies once every few years does not give IRS or others information about what is happening in the intervening years, and a rolling sample should reduce costs by eliminating the need to plan entirely new studies every few years or more and train examiners to carry them out. IRS also needs a data-based plan to reduce the tax gap. Congress has been encouraging IRS to develop an overall tax gap reduction plan or strategy that could include a mix of approaches like simplifying code provisions, increased enforcement, and reconsidering the level of resources devoted to enforcement. Some progress has been made toward laying out the broad elements of a plan or strategy for reducing the tax gap. On September 26, 2006, the U.S. Department of the Treasury, Office of Tax Policy, released “A Comprehensive Strategy for Reducing the Tax Gap.” However, the document generally does not identify specific steps that Treasury and IRS will undertake to reduce the tax gap, the related time frames for such steps, or explanations of how much the tax gap would be reduced. In a recent hearing, the Chairman of the Senate Finance Committee asked the Secretary of the Treasury for a more detailed plan by July 2007. IRS’s key filing season efforts are processing electronic and paper individual income tax returns and issuing refunds, as well as providing assistance or services to taxpayers. As already noted, processing and assistance were complicated this year by three tax system changes: TETR, the split refund option, and enactment in December 2006 of tax law changes. From January 1 through April 20, 2007, IRS processed approximately 104.6 million individual income tax returns, about the same number as last year, and issued 88.2 million refunds for $203 billion compared to 85.2 million refunds for $190.5 billion at the same time last year. Over 65 percent of all refunds were directly deposited into taxpayers’ accounts, up 3.5 percent over the same time last year. Direct deposits are faster and more convenient for taxpayers than mailing paper checks. IRS recently granted some extensions to taxpayers, including those affected by a major storm and those unable to file their returns because of a software company’s server problems. According to IRS data and officials, performance is comparable to last year. IRS is meeting most of its performance goals, including deposit error rate, which is the percentage of deposits applied in error, such as being posted to the wrong tax year. Groups and organizations we spoke with, including the National Association of Enrolled Agents, the American Institute of Certified Public Accountants, and large tax preparation and tax preparation software companies, corroborated IRS’s view that filing season performance is comparable to last year. IRS uses two systems for posting taxpayer account information—the antiquated Master File legacy system and CADE. The latest release of CADE became operational in early March, 2 months behind schedule because of problems identified during testing. IRS originally planned to post 33 million taxpayer returns by CADE, more than four times the 7.4 million posted by CADE last year. We reported in early April that IRS had revised this estimate down to approximately 17-19 million taxpayer returns. However, as of April 20, IRS has posted fewer tax returns than expected—9.1 million—with the remainder being posted to the Master File legacy system. This means that millions of taxpayers did not benefit from faster CADE processing this year. Taxpayers eligible for a refund this year whose returns are posted by CADE will benefit from CADE’s faster processing, receiving their refunds 1-5 days faster for direct deposit and 4- 8 days faster for paper checks than if their return had been processed on the legacy system. The CADE setback may impact IRS’s ability to deliver the expanded functionality of future versions of CADE, thus delaying the transition to the new processing system (discussed further in the BSM section of this testimony). The rate of electronic filing is up compared to the same period last year. As of April 20, over 72.6 percent of all individual income tax returns (75.9 million) were filed electronically, up 8.5 percent over the same time last year. We previously reported that state mandates for electronic filing of state tax returns also encourage electronic filing of both state and federal tax returns, and last year, we suggested that Congress consider mandating electronic filing by paid tax preparers meeting criteria, such as a threshold for number of returns filed. Last year, electronic filing of federal returns increased 27 percent for the three states (New York, Connecticut and Utah) with new 2006 mandates. This year, state mandates are likely to continue to show a positive effect on federal electronic filing because, with the addition of West Virginia, 13 states now have state mandates. Compared to processing paper returns, electronic filing reduces IRS’s costs by reducing staff devoted to processing. In 2006, IRS used almost 1,700 (36 percent) fewer staff years for processing tax returns than in 1999, as shown in figure 4. IRS estimates this saved the agency $78 million in salary, benefits, and overtime in 2006. Electronic filing also improves service to taxpayers. Returns are more accurate because of built-in computer checks and reduced transcription errors (paper returns must be transcribed in IRS’s computers—a process that inevitably introduces errors). Electronic filing also provides faster refunds. Although electronic filing continues to grow, taxpayers’ use of the Free File program continues to decline. The Free File program, accessible through IRS’s Web site, is an alliance of companies that have an agreement with IRS to provide free on-line tax preparation and electronic filing on their Web sites for taxpayers below an adjusted gross income ceiling of $52,000 in 2007. About 95 million (70 percent) of all taxpayers are eligible for free file. Under the agreement, companies are not allowed to offer refund anticipation loans and checks, or other ancillary products, to free file participants. Although IRS has increased its marketing efforts, the agency has not been successful in increasing free file use. As of April 19, 2007, IRS processed about 3.7 million free file returns—less than 4 percent of eligible taxpayers and a decrease of 2.2 percent from the same period last year. IRS officials attributed this decline in part to companies offering free electronic on-line filing separate from the Free File program. While all 19 companies participating in the Free File program allow for TETR requests, only 3 of the 19 companies offer Form 1040 EZ-T requests. TETR and split refund volume has been less than IRS projected. Over 68 percent of individuals who filed returns through April 14 have requested the TETR, although all who paid the excise tax were eligible for the refund. IRS projected that 10 to 30 million individuals who did not have a tax filing obligation could claim TETR. As of April 13, approximately 578,000 of this group have asked for a refund (3.4 percent of the 17.1 million IRS expected by this time). As of April 21, just over 77,000 individual taxpayers chose to split their refunds into different accounts, which represent a small fraction of the 57.2 million taxpayers who had their refunds directly deposited and the 3.8 million split refunds IRS projected for the filing season. IRS delayed processing a small number of returns claiming tax extender provisions until February 3 to complete changes to its tax processing systems. IRS has anticipated some problems due to the late passage of extender provisions which prevented information about them included in printed tax publications. Finally, in order to minimize problems, IRS planned and prepared extensively for this year’s primary tax system changes: TETR, split refund, and tax law extenders. For example, IRS updated forms and created new ones, hired and trained additional staff to handle potential volume of TETR and split refund requests, and updated the Web site and tax systems. As reported in App. 1, of the tax systems changes, only TETR created new compliance concerns for IRS and IRS modified its plans to address those concerns during the filing season. The number of calls to IRS’s toll-free telephone lines has been less than last year and is significantly less for automated calls than in 2002 (see table 3). Similar to last year, IRS assistors answered over 40 percent of the total calls, while the rest of the calls were answered by an automated menu of recordings. By one measure of access, IRS’s performance is somewhat better and for another it is somewhat worse than this time last year. Taxpayers’ ability to access IRS’s toll-free telephone lines is somewhat better than last year, and IRS is meeting its annual goals. According to IRS officials, IRS does not try to match previous years’ performance, but sets and tries to achieve performance goals according to the budget received. As shown in table 4, the percentage of taxpayers who attempted to reach an assistor and actually got through and received services—referred to as the level of service—was one percentage point higher than the same time period last year and greater than IRS’s goal of 82 percent for both FYs 2006 and 2007. Average speed of answer, which is the length of time taxpayers wait to get their calls answered, is just under 4 minutes, almost 15 percent longer than last year, but better than IRS’s annual goal of 4.3 minutes. IRS estimates that the accuracy of telephone assistors’ responses to tax law and account questions to be comparable to the same time period last year by using a statistical sampling process. IRS officials noted that there was unprecedented hiring for FY 2007, and while every employee working tax law applications completes a requisite certification process, new employees will be less productive than experienced employees. IRS has implemented several initiatives, such as targeted monitoring and training, to assist the new hires. IRS officials reported that tax system changes have had minimal impact on telephone operations so far this filing season. TETR-related calls are a small fraction of the TETR calls that IRS projected and all calls that IRS received. Between January 1 and April 14, 2007, IRS expected 12.4 million TETR-related calls, but received about 540,000. IRS hired 650 FTEs in FY 2007, with the expectation that those hires would be used to cover anticipated attrition in 2008. Their first assignment was answering TETR telephone calls and they also were trained to handle other accounts calls allowing more experienced employees to address paper inventory. IRS anticipated little impact on telephone service from the split refund option and tax provision extenders. For split refunds, IRS anticipated it would receive about 70,000 calls to assistors compared to the 70 million total calls it receives each year. IRS did not have projections for tax provision extensions. Use of IRS’s Web site has increased so far this filing season compared to prior years except for downloads of forms and publications. From January 1 through March 31, IRS’s Web site was visited more often and the number of searches increased over the same time period as last year. However, the number of downloaded forms and publications has decreased 22 percent over the same period compared to last year. According to IRS officials, reasons for this decrease include the increase in taxpayers using e-file, tax preparation software, and paid preparers, negating the need for taxpayers to download and print forms and publications. In terms of new features, IRS added a state deduction calculator this filing season, which IRS wants to use as a new standard for developing other on-line calculators. Web site assistance is important because it is available to taxpayers 24-hours a day and it is less costly to provide than telephone and walk-in assistance. In addition to the Free File program, IRS’s Web site offers several important features, such as “Where’s My Refund”, which allows taxpayers to check on the status of their refunds. This year, the feature allows taxpayers to check on the status of split refunds, and tells the taxpayer if one or more of the deposits were returned from the bank because of an incorrect routing or account number. However, for certain requests, the feature is not useful. For example, IRS stopped some refunds related to TETR requests, but “Where’s My Refund” informed taxpayers that their refunds had been issued. Further, if taxpayers make a mistake calculating the amount of their refund the feature would indicate that IRS corrected the refund amount, but will not show the new amount. IRS is considering providing more information about taxpayer accounts on its Web site as part of its strategy to improve taxpayer services at reduce costs. There is further evidence that IRS’s Web site is performing well as these examples show. According to the American Customer Satisfaction Index, for January through March 2007, IRS’s Web site is scored above those of other government agencies, nonprofits, and private sector firms for customer satisfaction. For example, in March, IRS scored 74 versus 72 for all government agencies surveyed and 71 for all Web sites surveyed. An independent weekly study by Keynote, a company that evaluates Web sites, reported that, as of April 9, 2007, IRS’s Web site has repeatedly ranked in the top 6 out of 40 government agency Web sites evaluated in terms of average download time. Last year, IRS consistently ranked second for the same time period. Average download time remained about the same for IRS compared to last year, indicating that IRS is not performing worse, but that other government agencies are performing better. On the basis of our own searches, we found IRS’s Web site to be readily accessible, easy to navigate, and easy to search. As of April 14, approximately 2.9 million taxpayers used IRS’s 401 walk-in sites, which is comparable to the same period last year. Figure 5 shows the trend in walk-in site use for the filing season including slight projected declines in 2007 and 2008. At walk-in sites, staff provide taxpayers with information about their tax accounts, answer a limited scope of tax law questions about, for example, income and filing status, and provide limited tax return preparation assistance. As of April 14, over 10,700 taxpayers have requested TETR on Form 1040EZ-T at walk-in sites, which is 8.5 percent of the 126,000 individuals IRS expected. IRS officials attribute this year’s projected decline in walk-in use to taxpayers’ increased use of tax preparation software and IRS.gov. This decline has allowed IRS to devote 2.3 percent fewer FTEs compared to last year for walk-in assistance (down from 260 to 266 FTEs). Volunteer sites, often run by community-based organizations and staffed by volunteers who are trained and certified by IRS, do not offer the range of services provided at walk-in sites. Instead, volunteer sites focus on preparing tax returns primarily for low-income and elderly taxpayers and operate chiefly during the filing season. As of April 15, the number of taxpayers getting return preparation assistance at over 11,000 volunteer sites has increased to approximately 2.3 million, up 16 percent from last year and continuing a trend since 2001. Although no projections have been made for TETR claims, over 80,600 taxpayers have claimed this credit at these locations. We have reported that the shift of taxpayers from walk-in to volunteer sites is important because it has allowed IRS to transfer time- consuming services, such as return preparation, from IRS to other less costly alternatives that can be more convenient for taxpayers. While IRS is collecting better data on the quality of service at walk-in sites, concerns about quality of the data and service remain. According to IRS, it is measuring the accuracy of tax law and accounts assistance. IRS has reported a goal for tax law accuracy, and plans to use data collected for 2007 to set an annual goal for accounts accuracy. While IRS provided return assistance for almost 210,000 taxpayers, it lacks information on the accuracy of that assistance. For volunteer sites, as of April 12, for a small non-statistical sample, IRS reported a 64 percent accuracy rate for return preparation, compared to its goal of 55 percent. Independent from IRS, but using similar methods, TIGTA showed a 56 percent accuracy rate. IRS developed TAB to provide the agency with information on taxpayers’ needs and preferences to improve taxpayer service at lower cost as part of a 5-year plan, in response to a November 2005 law and a congressional directive. IRS notes that with TAB, it has more information than ever before about taxpayers, partners, employees, and the effect of service- related decisions on taxpayers to help the agency provide, evaluate, and improve services. IRS issued two reports under TAB: The Phase I report, released in April 2006, outlines the results of preliminary research on taxpayer expectations and establishes five strategic themes for improving taxpayer services. Phase II, released in April 2007, includes the results of additional research, numerous areas and initiatives both funded and unfunded for service improvement, and a set of recommended performance measures. IRS has identified 54 initiatives, some of which are underway, that include taxpayer service upgrades such as improvements to the Spanish version of “Where’s My Refund” and research studies. IRS identified 28 of the initiatives as unfunded and included several as part of its FY 2008 budget request as noted above. As part of its strategy, IRS developed estimates of the cost per service contact for providing different types of taxpayer services, although there were qualifications to those estimates. As table 6 indicates some assisted services, such as e-mail, are far more expensive than self-assisted services, such on IRS’s Web site. However, while there may be some overlap in services (e.g., taxpayers can receive similar return assistance at both walk- in sites and volunteer sites), they are likely to serve different taxpayers and may provide different levels of service (e.g., taxpayers can receive account assistance at walk-in sites, but not at volunteer sites). But, even between the two self-assisted options, there is a difference in unit costs, with automated phone calls estimated to be more than five times higher than Web contacts. Having reliable cost information, together with a better understanding of taxpayers’ preferences, needs, and expectations, could assist IRS in determining whether it could provide taxpayers with the same taxpayer service benefits at a lower cost through alternative methods. However, to further evaluate IRS’s strategy, additional information would be required, for example, on how savings estimates were developed. BSM is critical to supporting IRS’s taxpayer service and enforcement goals and reducing the tax gap. For example, BSM includes projects to allow taxpayers to file and retrieve information electronically and to provide technology solutions to help reduce the backlog of collections cases. Despite progress made in implementing BSM projects and improving modernization management controls and capabilities, significant challenges and serious risks remain, and further program improvements are needed, which IRS is working to address. Over the past year, IRS has made further progress in implementing BSM projects and in meeting cost and schedule commitments, but two key projects experienced significant cost overruns during 2006—CADE and Modernized e-File. During 2006 and the beginning of 2007, IRS deployed additional releases of the following modernized systems that have delivered benefits to taxpayers and the agency: CADE, Modernized e-File, and Filing and Payment Compliance (a tax collection case analysis support system). Each of the five associated project segments that were delivered during 2006 were completed on time or within the targeted 10 percent schedule variance threshold, and two of them were also completed within the targeted 10 percent variance threshold for cost. However, one segment of the Modernized e-File project as well as a segment of the CADE project experienced cost increases of 36 percent and 15 percent, respectively. According to IRS, the cost overrun for Modernized e-File was due in part to upgrading infrastructure to support the electronic filing mandate for large corporations and tax-exempt organizations, which was not in the original projections or scope. IRS has also made significant progress in implementing our prior recommendations and improving its modernization management controls and capabilities, including efforts to institutionalize configuration management procedures and develop an updated modernization vision and strategy and associated 5-year plan to guide information technology investment decisions during fiscal years 2007 through 2011. However, critical controls and capabilities related to requirements development and management and post-implementation reviews of deployed BSM projects have not yet been fully implemented. In addition, more work remains to be done by the agency to fully address our prior recommendation of developing a long-term vision and strategy for completing the BSM program, including establishing time frames for consolidating and retiring legacy systems. IRS recognizes this and intends to conduct further analyses and update its vision and strategy to address the full scope of tax administration functions and provide additional details and refinements on the agency’s plans for legacy system dispositions. Future BSM project releases continue to face significant risks and issues, which IRS is taking steps to address. IRS has reported that significant challenges and risks confront its future planned system deliveries. For example, delays in deploying the latest release of CADE to support the current filing season have resulted in continued contention for key resources and will likely impact the design and development of the next two important releases, which are planned to be deployed later this year. The potential for schedule delays, coupled with the reported resource constraints and the expanding complexity of the CADE project, increase the risk of scope problems and the deferral of planned functionality to later releases. Maintaining alignment between the planned releases of CADE and the new Accounts Management Services project is also a key area of concern because of the functional interdependencies. The agency recognizes the potential impact of these project risks and issues on its ability to deliver planned functionality within cost and schedule estimates and, to its credit, has developed mitigation strategies to address them. We will, however, continue to monitor the various risks IRS identifies and the agency’s strategies to address them and will report any concerns. IRS has also made further progress in addressing high-priority BSM program improvement initiatives during the past year, including efforts related to institutionalizing the Modernization Vision and Strategy approach and integrating it with IRS’s capital planning and investment control process, hiring and training 25 entry-level programmers to support development of CADE, developing an electronic filing strategy through 2010, establishing requirements development/management processes and guidance (in response to our prior recommendation), and defining governance structures and processes across all projects. IRS’s high- priority improvement initiatives continue to be an effective means of assessing, prioritizing, and incrementally addressing BSM issues and challenges. However, more work remains for the agency to fully address these issues and challenges. In addition, we recently reported that IRS could improve its reporting of progress in meeting BSM project scope (i.e., functionality) expectations by including a quantitative measure in future expenditure plans. This would help to provide Congress with more complete information on the agency’s performance in implementing BSM project releases. IRS recognizes the value of having such a measure and, in response to our recommendation, is in the process of developing it. IRS’s budget submission is important because it shows the resource tradeoffs IRS intends to make between enforcement and taxpayer service—both of which have potential to reduce the tax gap. One way that IRS reallocates resources is through new spending initiatives. However, in order for Congress and other external parties to assess the merits of new initiatives, basic information about the description of the initiatives and their costs and expected performance is necessary. Without such information, decisions makers do not have an informed basis on whether to approve and fund new initiatives. Of course, the costs of developing justifications must also be taken into account. More costly initiatives generally would be expected to have more detailed justifications. We recommend that the Commissioner of Internal Revenue have available basic descriptive, cost, and expected performance information on the spending initiatives proposed in the 2008 budget submission to the extent to such information has not been provided, and include in future budget submissions, basic descriptive, cost, and performance information on new spending initiatives, with supplementary documentation available if needed. In comments on a draft of this statement, IRS’s Chief Financial Officer agreed with the second recommendation, but not the first. She stated that the FY 2008 budget and justification did provide basic descriptive, cost, and expected performance information for each initiative. IRS agreed that the amount of performance data provided for each initiative varied, stating that some of the initiatives did not necessarily merit such performance indicators and, for those initiatives, IRS provided explanations of general benefits or reasons behind the request. While we agree that for every initiative IRS provided the total proposed spending, some initiatives lacked basic information on how the amount to be spent was determined and work to be done. For example, the initiative for improving compliance estimates provided no explanation of how the 258 FTEs were determined or basic information on the work such as the number of examinations to be conducted. Without such information, at the end of the fiscal year, Congress would be unable to tell whether IRS spent the money as intended. Mr. Chairman, this concludes my prepared statement. Mr. Powner and I would be happy to respond to questions you or other members of the Committee may have at this time. For further information regarding this testimony, please contact James R. White, Director, Strategic Issues, on 202-512-9910 or whitej@gao.gov or David A. Powner, Director, Information Technology Management Issues, on 202-512-9296 or powenrd@gao.gov. Contacts for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Joanna Stamatiades, Assistant Director; Amy Dingler; Evan Gilman; Timothy D. Hopkins; Ronald W. Jones; Matthew Kalmuk; Varflay Kesselly; Frederick Lyles; Jennifer McDonald; Signora May; Paul B. Middleton; Karen O’Conor; Lerone Reid; Sabine R. Paul; Cheryl Peterson; Neil Pinney; and Shellee Soliday. TETR is the only one of the three tax changes that created new compliance concerns for IRS (filers could request greater TETR amounts than they are entitled to). The split refund option does not create compliance concerns for IRS since it relates to the accounts into which taxpayers want their refunds deposited rather than to complying with tax provisions. Since these provisions extending the tax laws already existed, IRS anticipates that any compliance concerns for 2006 returns will be the same as for previous years. IRS developed a plan before the filing season began to audit suspected TETR overclaims before issuing refunds. IRS’s plan for TETR was consistent with good management practices identified in previous GAO reports. IRS’s plan included appointing an executive, developing an implementation plan for TETR that included standard amounts that individuals could request, developing a compliance plan to select TETR requests for audit, and monitoring and evaluating compliance by using real-time data to adjust TETR compliance efforts. For example, each week, IRS reviews the requests for TETR, selects some for audit, and revises the criteria for audit selection as necessary. As of April 21, 2007, about 324,000 individuals had requested the actual amount of telephone excise tax paid for a total of $128 million. IRS selected about 3.4 percent of these requests for audit, involving about $33 million. IRS has closed 464 of the individual audits with the taxpayer agreeing to accept the standard amount; it has not completed the remaining individual audits. About 346,000 businesses had requested TETR for a total of about $161 million. IRS selected over 1,000 for audit, involving about $22 million. IRS has closed four business audits. IRS reassigned about 77 FTEs from discretionary audits and Earned Income Tax Credit audits to conduct TETR audits. Additionally, Criminal Investigation has spent 13 FTEs staff on TETR activities in 2007. Tax Filing Season: Interim Results and Updates of Previous Assessments of Paid Preparers and IRS’s Modernization and Compliance Research Efforts, GAO-07-720T Washington, D.C.: April 12, 2007. Internal Revenue Service: Interim Results of the 2007 Tax Filing Season and the Fiscal Year 2008 Budget Request, GAO-07-673 Washington, D.C.: April 3, 2007. Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings, GAO-07-27 Washington, D.C.: November 15, 2006 Internal Revenue Service: Assessment of the Interim Results of the 2006 Filing Season and Fiscal Year 2007 Budget Request, GAO-06-499T Washington, D.C.: April 27, 2006. Tax Administration: IRS Improved Some Filing Season Services, but Long-Term Goals Would Help Manage Strategic Trade-offs, GAO-06-51 Washington, D.C.: November 14, 2005. Tax Administration: IRS Improved Performance in the 2004 Filing Season, but Better Data on the Quality of Some Services Are Needed, GAO-05-67 Washington, D.C.: November 10, 2004. Business Systems Modernization: Internal Revenue Service’s Fiscal Year 2007 Expenditure Plan, GAO-07-247 Washington, D.C.: February 15, 2007. Business Systems Modernization: IRS Needs to Complete Recent Efforts to Develop Policies and Procedures to Guide Requirements Development and Management, GAO-06-310 Washington, D.C.: March 20, 2006. Business Systems Modernization: Internal Revenue Service’s Fiscal Year 2006 Expenditure Plan, GAO-06-360 Washington, D.C.: February 21, 2006. Business Systems Modernization: Internal Revenue Service’s Fiscal Year 2005 Expenditure Plan, GAO-05-774 Washington, D.C.: July 22, 2005. IRS Modernization: Continued Progress Requires Addressing Resource Management Challenges, GAO-05-707T Washington, D.C.: May 19, 2005. Tax Compliance: Thousands of Federal Contractors Abuse the Federal Tax System, GAO-07-742T Washington, D.C.: April 19, 2007. Tax Compliance: Using Data from the Internal Revenue Service’s National Research Program to Identify Potential Opportunities to Reduce the Tax Gap, GAO-07-423R Washington, D.C.: March 15, 2007. Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap, GAO-07-488T Washington. D.C.: February 16, 2007. Tax Compliance: Multiple Approaches Are Needed to Reduce the Tax Gap, GAO-07-391T Washington, D.C.: January 23, 2007. Tax Compliance: Challenges to Corporate Tax Enforcement and Options to Improve Securities Basis Reporting, GAO-06-851T Washington, D.C.: June 13, 2006. Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would Improve Compliance if Related Challenges Are Addressed, GAO-06-603 (Washington, D.C.: June 13, 2006). Tax Gap: Making Significant Progress in Improving Tax Compliance Rests on Enhancing Current IRS Techniques and Adopting New Legislative Actions, GAO-06-453T Washington, D.C.: February 15, 2006. Tax Gap: Multiple Strategies, Better Compliance Data, and Long-Term Goals Are Needed to Improve Taxpayer Compliance, GAO-06-208T Washington, D.C.: October 26, 2005. Tax Compliance: Better Compliance Data and Long-Term Goals Would Support a More Strategic IRS Approach to Reducing the Tax Gap, GAO- 05-753 Washington, D.C.: July 18, 2005. Tax Compliance: Reducing the Tax Gap Can Contribute to Fiscal Sustainability but Will Require a Variety of Strategies, GAO-05-527T Washington, D.C.: April 14, 2005. Compliance and Collection: Challenges for IRS in Reversing Trends and Implementing New Initiatives, GAO-03-732T Washington, D.C.: May 7, 2003. Tax Administration: Telephone Excise Tax Refund Requests Are Fewer Than Projected and Have Had Minimal Impact on IRS Services, GAO-07- 695 Washington, D.C.: April 11, 2007. Taxpayer Service: State Experiences Indicate IRS Would Face Challenges Developing an Internet Filing System with Net Benefits, GAO-07-570 Washington, D.C.: April 5, 2007. Internal Revenue Service: Procedural Changes Could Enhance Tax Collections: Enhancing IRS Collection Procedures, GAO-07-26 Washington, D.C.: November 15, 2006. Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure Contracting Out Achieves Desired Results and Best Use of Federal Resources, GAO-06-1065 Washington, D.C.: September 29, 2006. Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors, GAO-06-563T Washington, D.C.: April 4, 2006. 21st Century Challenges: Reexamining the Base of the Federal Government, GAO-05-325SP Washington, D.C.: February 2005. High Risk Series: An Update, GAO-07-310 Washington, D.C.: January, 2007. Tax Administration: Most Taxpayers Believe They Benefit from Paid Tax Preparers, but Oversight for IRS is a Challenge, GAO-04-70 Washington, D.C.: October 31, 2003. Tax Administration: IRS Is Implementing the National Research Program as Planned, GAO-03-614 Washington, D.C.: June 16, 2003. Tax Administration: IRS Needs to Further Refine Its Tax Filing Season Performance Measures, GAO-03-143 Washington, D.C.: November 22, 2002. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Internal Revenue Service's (IRS) budget request shows how IRS intends to balance spending for enforcement and taxpayer service, including spending for new initiatives and the Business Systems Modernization (BSM) program. A combination of enforcement and taxpayer service promotes compliance with the tax laws. GAO was asked to (1) compare IRS's proposed FY 2008 budget to prior years' and assess how the new spending initiatives are justified, and (2) describe IRS's enforcement, filing season, and BSM performance. GAO analyses are based on IRS's 2008 budget submission, supplementary IRS data, interviews with IRS officials, and prior GAO reports. Some of GAO's analyses have been reported earlier this year and updated here. IRS's budget proposes to increase spending by almost 5 percent to $11.6 billion. The budget proposes shifting a greater proportion of spending to enforcement, continuing a trend since 2004. IRS projects that revenue from the new initiatives will have a relatively small impact on the tax gap--less than one percent of the gap last estimated at $290 billion in 2001. The tax gap is the difference between what taxpayers owe and voluntarily pay. Justifications for the new initiatives varied with some lacking descriptive, cost, and expected performance information. For example, an initiative for improving compliance estimates provided no information on how the budget and staff needed or work to be done were determined. Without such information, decision makers do not have an informed basis for approving and funding the new initiatives. IRS has made noticeable progress in its enforcement efforts including increasing the amount of enforcement revenue collected and enforcement staffing. For example, between FY 2004 and 2006 enforcement revenue increased 13 percent to $48.7 billion. Nevertheless, enforcement remains on GAO's high-risk list. The tax gap has been a persistent problem in spite of efforts to reduce it, as the rate of taxpayers' voluntarily compliance with the tax laws has changed little over the past three decades. To better target enforcement resources, IRS has requested funding to do additional compliance research which GAO has long supported. Finally, GAO has reported on IRS's lack of a data-based plan to improve compliance. Filing season performance in 2007 improved in some areas compared to prior years', but there have been challenges. As of April 20, IRS processed about 104.6 million individual income tax returns and issued 88.2 million refunds. Electronic filing grew, telephone access is somewhat better, and Web site use continues to grow. However, fewer than 4 percent of eligible taxpayers used the Free File program. The latest release of Customer Account Data Engine (CADE), the new tax processing system, was delayed. As a result, millions of taxpayers did not benefit from CADE's faster processing of refunds. IRS recently issued its plan, the Taxpayer Assistance Blueprint, to improve taxpayer service. Despite progress in implementing BSM projects including for CADE and improving management controls and capabilities, significant challenges and serious risks remain. Delays in the latest release of CADE resulted in continued contention for key resources and will likely impact future releases. IRS has more to do to address GAO's prior recommendations such as developing a long-term strategy that would include time frames for retiring legacy computer systems. |
Military operations generally rely on petroleum-based fuels that power communication equipment, forward deployed bases, tactical and combat ground vehicles, aircraft, naval vessels, and other platforms. For military operations, DOD primarily uses jet and naval distillate fuels. With regard to jet fuel, until recently DOD predominately used two types: Jet Propellant-8 and Jet Propellant-5. Jet Propellant-8 is the primary fuel used in DOD land-based aircraft, tactical and combat ground vehicles, and ground support equipment. Aircraft, ground vehicles, and support equipment deployed aboard maritime vessels (such as aircraft carriers) use Jet Propellant-5 since this jet fuel—which is stored in large quantities—is less combustible than other types of jet fuel, which is important for fire safety reasons. The standards for these two fuels are listed in the DOD technical fuel specification documents maintained by the Departments of the Air Force and Navy, respectively, and approved for use by all DOD departments and agencies. Jet Propellant-8 fuel is similar to commercial jet fuels—known as Jet A and Jet-A-1. The standards for these fuels are listed in the technical fuel specification document issued by ASTM International. As of the end of calendar year 2014, DOD reported completing conversion from Jet Propellant-8 fuel to Jet A—with the inclusion of specific additives for military unique requirements—at military installations within the United States. DOD uses naval distillate fuel, known as F-76, to power nonnuclear ships. This fuel can be burned in shipboard boilers, diesel engines and gas turbines. The standards for this fuel are listed in the DOD technical fuel specification document maintained by the Department of the Navy. Unlike the case of jet fuel, according to DOD officials, there is no commercial equivalent that meets the Navy’s maritime needs. DOD Directive 4180.01, DOD Energy Policy, among other things, establishes that DOD will diversify and expand its energy supplies and sources, including alternative fuels.responsibilities for various matters, including the following: The Assistant Secretary of Defense for Operational Energy Plans and Programs for development, certification, qualification, field demonstration, and ongoing purchases of alternative fuels for operational platforms in accordance with the U.S. Code; is to develop policy and guidelines and provide oversight The Director, Defense Logistics Agency is to (1) manage energy commodities and related services to support the qualification of alternative fuels and support field demonstration activities; and ; and (2) provide energy expertise The Secretaries of the military departments are to develop and implement doctrine, guidance, and strategies consistent with the directive and implementing instructions. This position was recently merged with the former Deputy Under Secretary of Defense (Installations & Environment) position to create the Assistant Secretary of Defense for Energy, Installations, and Environment. See Carl Levin and Howard P. “Buck” McKeon National Defense Authorization Act for Fiscal Year 2015, Pub. L. No. 113-291, § 901(f) (2014) (amending 10 U.S.C. § 138(b)(9)). Many of the responsibilities of the Assistant Secretary of Defense for Operational Energy Plans and Programs were transferred from section 138c of Title 10, U.S. Code, to section 2926. See id. § 901(g). This responsibility is to be carried out in accordance with Department of Defense Directive 4140.25, DOD Management Policy for Energy Commodities and Related Services (Apr. 12, 2004). This directive was reissued as Department of Defense Instruction 4140.25 on June 25, 2015. alternative fuels are obtained using the DOD’s standard fuel alternative fuels for operational purposes are purchased when cost- competitive with traditional fuels and when qualified as compatible with existing equipment and infrastructure; and fuel systems are qualified to use available commercial-type fuels, including alternative fuels. DOD’s Alternative Fuels Policy for Operational Platforms lists the department’s primary alternative fuels goal as, among other things, furthering flexibility of military operations through the ability to use multiple, reliable fuel sources. for the department’s investment in alternative fuels, to include: increasing DOD’s resilience against strategic supply disruptions, reducing the effect of petroleum price volatility, and increasing fuel options for operational commanders. This policy indicates alternative fuels can serve as a mechanism for mitigating anti-access/area denial effects, and for enabling flexibility in supply chain logistics. The policy stresses that the desired end-state of investments in alternative fuels is operational military readiness and battlespace effectiveness. Additionally, it articulates considerations DOD’s Operational Energy Strategy and related Operational Energy Implementation Plan identify the high-level goal of expanding DOD’s operational energy supply options. Promoting the development of alternative fuels—in the form of testing and approving them for use by existing military platforms, and helping to catalyze a competitive biofuels industry—constitutes one means for achieving this goal. Department of Defense Alternative Fuels Policy for Operational Platforms (July 5, 2012). Each of the three military departments has energy guidance documents that address alternative energy or alternative fuels. Two of DOD’s military departments—the Navy and the Air Force—have also established usage goals for alternative fuels. The Department of the Navy’s guidance sets a goal of deriving 50 percent of total energy consumption from alternative sources—including alternative fuels—by 2020, which, according to Navy estimates, would require using about 336 million gallons of alternative fuels (both naval distillate and jet fuels) annually by 2020. In addition to setting quantitative goals, the guidance established a goal of demonstrating (which the Department of the Navy completed in July 2012) and deploying (by 2016) the Great Green Fleet—that is, ships and aircraft fueled by alternative fuels and other alternative energy sources or utilizing other energy conservation measures. The Department of the Air Force’s guidance includes a goal of increasing, to 50 percent of total consumption, the use of cost-competitive drop-in alternative jet fuel blends for non-contingency operations by 2025. Although the Department of the Army uses jet fuel in its tactical and combat ground vehicles, aircraft, and other ground support equipment (such as generators) and engages in efforts to test and approve alternative jet fuel for use in these platforms, the Army does not have specific alternative fuel usage goals in its energy guidance. For additional details about each military department’s guidance as related to alternative fuels, see appendix I. ) Strategy (May 1, 2015). select federal agencies—including DOD—to sponsor research that specifically targets alternative jet fuel development or provide direct support for its future commercial production, or both. For example, we described multiple non-DOD research and development projects that provide federal support for helping to develop technologies and processes necessary for the commercial production of biofuels. Regarding DOD, we noted DOD’s activities to test and approve alternative jet fuel, in particular. In addition, we underscored that while federal government activities help to address the main challenge of alternative jet fuel’s price-competitiveness, it is market factors that affect the long-term commercial viability of alternative jet fuels. The Defense Production Act (DPA) generally provides the authority to, among other things, expedite and expand the supply of critical resources from the U.S. industrial base to support the national defense. Title III of the Act—Expansion of Productive Capacity and Supply—allows military and civilian agencies to provide a variety of financial incentives to domestic firms to invest in production capabilities, so as to ensure that the domestic industrial and technological base is capable of meeting the national defense needs of the United States.Title III authorizes the president to provide for the following in order to create, maintain, protect, expand, or restore domestic industrial base capabilities essential for the national defense: purchases of or commitments to purchase an industrial resource or encouragement of exploration, development, and mining of critical and strategic materials, and other materials; development of production capabilities; and increased use of emerging technologies in security program applications and rapid transition of emerging technologies. Use of the authorities is subject to conditions and requirements established by statute. For example, prior to using the above DPA authorities, the president must determine that the industrial resource, material, or critical technology item is essential to the national defense, that U.S. industry cannot reasonably be expected to provide the capability in a timely manner, and that purchases, purchase commitments, or other actions are the most cost effective, expedient, and practical alternative method for meeting the need. According to DOD officials, the focus of Title III is to establish commercially viable industrial capabilities that will continue to prosper after federal government assistance ends. The DPA fund manager is the Secretary of Defense. Within DOD, the Under Secretary of Defense for Acquisition, Technology, and Logistics provides guidance to implement the DPA and monitors the Title III program. III program and maintains a program office to manage and administer aspects of individual Title III projects. Program Office activities include conducting market research and analysis when assessing potential Title III projects; monitoring the technical and business performance of firms receiving Title III financial incentives; and overseeing aspects of contracting for Title III projects. See Department of Defense Directive 4400.01E, Defense Production Act Programs, paras. 4.1.2, 4.1.10 (Oct. 12, 2001) (certified as current as of Sept. 14, 2007). According to DOD, the Under Secretary of Defense for Acquisition, Technology, and Logistics is assisted by the Deputy Assistant Secretary of Defense (Manufacturing & Industrial Base Policy) and the Program Director of the Defense Production Act Title III Program. DOD has purchased small quantities of alternative fuels for research, development, and demonstration purposes but not large quantities for military operations yet. DOD’s energy and alternative fuels guidance discusses the research and development aspects of alternative fuels—to include testing and approving fuels, as well as demonstrating their use in an operational environment—and DOD’s Operational Energy Strategy lists conditions for investment in the research, development, testing, and evaluation of alternative fuels. The guidance notes that DOD is currently purchasing alternative fuels for testing purposes, at a premium price— that is, prices higher than those for conventional fuels. The marginal unit cost of producing a commodity at small scale with new processes being researched and developed is typically much higher than the cost of producing the same or similar commodities using existing large-scale commercial production facilities. The military departments purchased about 2.0 million gallons of alternative jet and naval distillate fuels from fiscal years 2007 through 2014 to conduct the department’s testing, approving, and demonstration activities, at a total cost of about $58.6 million (adjusted for inflation to fiscal year 2015 dollars using the gross domestic product price index). This total amount includes about 450,000 gallons for the Department of the Navy’s July 2012 Great Green Fleet demonstration with a group of ships and aircraft fueled by alternative fuels in an operational environment that was part of a larger, biennial multinational maritime exercise, known as the Rim of the Pacific exercise.funding sources for the quantities of alternative fuels purchased include each military department’s Research, Development, Test, and Evaluation funds and the Department of the Navy’s Operations and Maintenance funds—for the Great Green Fleet demonstration—as well as other funds that DOD identified as being associated with the American Recovery and Reinvestment Act of 2009. According to DOD officials, the By contrast, over the same period of time, the military departments purchased approximately 32.0 billion gallons of jet and naval distillate conventional petroleum fuel at a total cost of about $107.2 billion (adjusted for inflation to fiscal year 2015 dollars using the gross domestic product price index). Figure 1 shows the total quantities and costs of the military departments’ jet and naval distillate alternative and conventional petroleum fuels purchases from fiscal years 2007 through 2014. For more details on the quantity and cost of the military departments’ jet and naval distillate alternative and conventional petroleum fuels purchases by each fiscal year, see appendix II. Before any alternative fuel can be used in military operations, DOD tests the fuel to validate whether it can meet unique safety, performance, and reliability standards of military equipment and platforms. These standards reflect the disparate environments in which the military operates—from extreme cold weather to desert geography—and the different types of functionality present in military equipment and platforms—such as flying at high altitudes for military reconnaissance purposes or the afterburner thrust augmentation in military aircraft engines. Two examples of fuel properties important to these standards include a liquid fuel’s flash point—the temperature at which existing vapors will combust, or ignite— and its freeze point—the temperature at which it freezes, which affects how it behaves at low temperatures. Jet fuel (specifically Jet Propellant-5) used on military ships is required to have a substantially higher flash point than other jet fuels for safety reasons, since this fuel is stored in large quantities on aircraft carriers and other vessels. A liquid fuel’s freezing point potentially can have an effect on certain long-range, high-altitude missions during which extreme cold temperatures are encountered. Requirements for alternative fuels are set out in the relevant DOD technical fuel specification documents. For more details about fuel properties, see appendix III. The Departments of the Navy, Air Force, and Army test alternative fuels to ensure that they can be used in and on tactical and combat ground vehicles and ground support equipment, ships, aircraft, and fuel distribution systems. The military departments follow a testing and approval process that is similar to that used in evaluating whether to include prospective alternative fuels in the commercial jet fuel standard issued by ASTM International. captures technical data through laboratory, component, engine, and weapon system platform tests that evaluate the effects of alternative fuels on the performance and reliability of military hardware. The chemical properties of an alternative fuel may be tested in a laboratory using small quantities of fuel—as little as 500 milliliters. As that fuel progresses through the testing process, however, fuel quantity requirements increase. For example, testing alternative fuels in jet engines could require 60,000 gallons of fuel. For more details about the overall testing process, see appendix IV. ASTM International, formerly known as the American Society for Testing and Materials, develops and delivers international voluntary consensus standards. ASTM Standard D7566 covers the manufacture of jet fuel containing blends of conventional and synthesized hydrocarbons (those not derived from petroleum hydrocarbons) for commercial use. Departments of the Navy and Air Force. Consequently, according to DOD officials, they do not duplicate tests previously conducted by another military department; however, when necessary, a department may conduct additional tests if there are fuel properties that are specifically important in certain military applications. In addition, DOD officials stated that they are streamlining the number of specific tests they conduct as they gain more expertise with alternative fuels. Other DOD stakeholders who need to know about fuel issues—such as platform program managers—review the testing results and share their feedback. Once these stakeholders concur that test results demonstrate the prospective alternative fuel meets safety, performance, and reliability expectations and share their approval, the applicable DOD technical fuel specification documents are updated. Certain alternative fuels made from the Fischer-Tropsch and Hydroprocessed Esters and Fatty Acids production processes have been tested and approved for use in Navy aviation and ship platforms, Air Force aviation assets, and Army tactical and combat ground vehicles and ground support equipment, but not yet for Army aviation assets. Under the previously mentioned DOD technical fuel specification documents, alternative fuels produced through these two processes are approved for up to a 50 percent blend with conventional fuel. According to DOD officials, the alternative fuels made from these production processes that were used in the testing process included fuels derived from natural gas, coal, and renewable biomass (such as camelina, algal oil, and tallow) feedstock sources. The military departments continue to have some alternative fuel testing efforts underway. Currently, according to Department of the Army officials, the testing process for alternative fuels made from the two production processes discussed above, as well as fuel made from the Alcohol to Jet production process, for use in Army aviation assets is complete. Further, they stated that the test results are undergoing review in order to decide whether to approve the use of these fuels in Army aviation assets. Also, according to Department of the Army officials, they plan to complete the testing of alternative fuels made from the Alcohol to Jet production process for use in tactical and combat ground vehicles and ground support equipment by the end of calendar year 2015. They stated they plan to start considering, just for these platforms, alternative fuels made from the Synthesized Iso-Paraffins and Catalytic Hydrothermolysis production processes before the end of fiscal year 2015 by purchasing fuel and beginning some testing. According to a Navy official, the testing for alternative fuel made from the Alcohol to Jet and Synthesized Iso-Paraffins production processes in aviation platforms is complete while testing of these fuels in ship platforms is ongoing. In addition, the Department of the Navy has begun testing alternative fuels made from the Catalytic Hydrothermolysis and Hydroprocessed Depolymerized Cellulosic production processes. According to an Air Force official, beyond updating previously conducted tests of alternative fuels made from other production processes—such as Alcohol to Jet— there are no ongoing or planned efforts within the Department of the Air Force to complete additional testing and approval. According to Air Force officials, if other fuel production processes appear likely to become commercially viable, the Air Force will revisit resuming its alternative fuel testing and approval efforts. As discussed above, DOD recently reported converting from purchasing military-specification Jet-Propellant 8 jet fuel in the United States to purchasing commercial-grade jet fuel—Jet A—with specific additives for military-unique requirements as a means for cost savings and broadening the fuel provider supply pool. While commercial-grade jet fuels blended with alternative fuels are not being produced on a commercial scale in the United States, ASTM International has approved, for commercial aviation, the use of three types of alternative fuels produced through the (1) Fischer-Tropsch and Hydroprocessed Esters and Fatty Acids production processes discussed above for up to a 50 percent blend with conventional fuel and (2) Synthesized Iso-Paraffins production process referenced above for up to a 10 percent blend with conventional fuel. In addition, ASTM International continues to evaluate and consider approving alternative fuels made from other production processes, including those cited above for use in commercial aviation. Consequently, DOD could use alternative fuels in the future via Jet A fuels once those fuels are available on a commercial scale and a widespread basis in the fuel marketplace. According to DOD officials, unless DOD continues to test and approve additional alternative fuels that are being approved by ASTM International, DOD runs the risk of having to develop a separate supply chain for jet fuel—in other words, buying a specialty jet fuel product—as it cannot be assured that commercial-grade jet fuel will meet military safety, performance, and reliability standards. DOD has a standard process in place for purchasing large-scale volumes of fuel, including alternative fuels, for military operations. In support of DOD’s large-scale fuel program, the Defense Logistics Agency Energy (DLA-E) activity provides worldwide energy support, including for large- scale fuel purchasing, transportation, and storage for the military and As depicted in figure 2 below, DLA-E other government customers.purchases fuel worldwide in large volumes via four major regions: Inland/East/Gulf Coast/Offshore; Rocky Mountain/West Coast/Offshore; Atlantic/European/Mediterranean; and Western Pacific. DLA-E considers two primary factors—technical acceptability and price—when evaluating fuel vendors’ submitted proposals. The fuel must first meet DOD’s technical fuel specifications and other technical evaluation factors as part of the consideration. DOD officials indicated that DLA-E typically awards multiple 1-year contracts in these purchase programs. Because the price of energy commodities changes frequently, DOD documents indicate that DLA-E and DOD establish fuel purchase contracts that are tied to market price indicators with fixed margins. The fuel is moved through a commercial distribution system (via tankers, railcars, barges, tank trucks, and pipelines) to intermediary storage locations for redistribution, or directly to the end use military customer. DLA-E utilizes its Defense-wide Working Capital Fund for large-scale fuel purchases for its military and other government customers. According to DOD’s Financial Management Regulation, working capital funds were established to satisfy recurring DOD requirements using a businesslike buyer-and-seller approach. The fund covers DLA-E’s costs for purchasing large quantities of fuel and is reimbursed through its sale of the fuel to the military at a standard price. The standard price is also based on, among other things, an estimate for non-product costs such as transportation and storage costs. The standard price is intended to remain unchanged until the next fiscal year. To simplify cost planning and budgeting, the standard price for a given fuel is the same globally. As DOD seeks to purchase alternative fuels for military operations, it is required to consider whether alternative fuels are cost-competitive with conventional fuels. Under the previously mentioned DOD technical fuel specifications, fuels produced through the Fischer-Tropsch and Hydroprocessed Esters and Fatty Acids production processes are approved to be used in Navy aviation and ship platforms, Air Force aviation assets, and Army tactical and combat ground vehicles and ground support equipment but not yet for Army aviation assets for a blend of up to 50 percent with conventional fuel. From a technical requirements perspective, DOD can purchase and use alternative fuels produced via these approved processes for military operations. However, in conforming to the law and to departmental guidance, DOD must currently consider whether alternative fuels are cost-competitive with conventional fuels. For example, DOD may not obligate or expend funds made available for fiscal year 2015 to make a large-scale purchase of alternative fuel for operational purposes unless the fully burdened cost— that is, the commodity price of the fuel plus the total cost of all personnel and assets required to move and, when necessary, protect the fuel from the point at which the fuel is received from the commercial supplier to the point of use—of that fuel is cost-competitive with the fully burdened cost of conventional fuel. However, with the requisite notice to the congressional defense committees, the Secretary of Defense may waive this limitation and the Secretary is required to notify the congressional defense committees no later than 30 days before the purchase date if DOD intends to purchase an alternative fuel for operational use that has a fully burdened cost that is in excess of 10 percent more than the fully burdened cost of conventional fuel for the same purpose. A similar provision was in effect for fiscal year 2014 funds, but it did not reference the fully burdened cost of fuel, nor was the 10 percent notice requirement included. DOD guidance also discusses consideration of cost with regard to alternative fuel purchases for operational purposes, and DOD’s Operational Energy Strategy indicates that the department will acquire such fuels for military operations at prices that are competitive with the market price for conventional fuels. DOD has also recently issued updated guidance establishing it is DOD’s policy that alternative fuels for operational purposes are purchased when cost-competitive with traditional fuels and when qualified as compatible with existing equipment and infrastructure. In December 2013, the Secretaries of the Departments of Agriculture and the Navy announced an initiative, called Farm to Fleet, which is intended to help the Department of the Navy meet its alternative fuels usage goals. Related to this initiative, DOD intends to purchase, through its regular domestic fuel purchases, Jet Propellant 5 jet and naval distillate fuels meeting DOD’s technical fuel specifications and that are blended with at least 10 percent but no more than 50 percent alternative fuels— specifically biofuels—for the Department of the Navy’s use in military operations. The Department of Agriculture plans, under the authority of the Commodity Credit Corporation Charter Act, to contribute up to $161 million to alternative fuel purchases to help defray some of the extra costs—which may include the costs of feedstocks—that would have caused the final alternative fuel to be more expensive than the price of conventional fuels for DOD. To be eligible for the Department of Agriculture’s Commodity Credit Corporation funding, the specific amounts per gallon of which are provided in DOD’s fuel solicitation documents, fuel vendors have to provide an alternative fuel that was produced from an approved domestic feedstock—such as crop and tree residues, algae/algal oil, or animal waste and by-products of animal waste. In the event of a contract award with fuel vendors providing alternative fuels, the vendors would receive separate payments from the Department of Agriculture’s Commodity Credit Corporation and DOD. The Department of Agriculture’s Commodity Credit Corporation would pay the incentive amount per gallon indicated in the solicitation to the fuel vendors in order to help them defray some of their costs, including domestic feedstock costs. DOD would pay the remainder of these alternative fuel vendors’ prices. However, the incentive is not an additional sum paid to a fuel vendor over and above the price submitted in its proposal, but rather provides Commodity Credit Corporation funds to cover the portion of the total submitted price that exceeds the price DOD would otherwise pay. In no event would fuel vendors providing alternative fuels be paid more than the price they submitted in their proposals. We note that such an arrangement means that the cost of the alternative fuel to the federal government as a whole may be higher than the cost of conventional fuel. This is because, while DOD would be paying a price that is competitive with the price of conventional fuel, the Department of Agriculture would be paying an additional subsidy. DOD’s first attempt to purchase alternative fuels for military operations, through its large-scale fuel program, occurred in June 2014, when DOD issued a solicitation, through its regular domestic large-scale fuel purchase program for the Inland/East/Gulf Coast/Offshore region of the United States, for the purchase of Jet Propellant-5 jet and naval distillate fuels for which blended fuels with between 10 to 50 percent alternative fuels were to be considered. The solicitation listed the estimated maximum quantity of Jet Propellant-5 and naval distillate fuels as approximately 392.5 million gallons. As such, the maximum amount of biofuel to be blended into the desired fuel amount would be equivalent to approximately 39 million gallons (at 10 percent blend) to 196 million gallons (at 50 percent blend). The Department of Agriculture made available approximately $27 million in Commodity Credit Corporation funds to support successful biofuel contract awards. According to DOD officials, proposals with biofuel bids for only naval distillate fuel but not Jet Propellant-5 jet fuel were received. However, according to DOD officials, none of the submitted proposals successfully met all of the technical evaluation factors. The fuel contract awards under this solicitation were announced on February 20, 2015. According to DOD officials, none were for alternative fuels. DOD’s second attempt to purchase alternative fuels for military operations, through its large-scale fuel program, began in April 2015. At that time, DOD issued a solicitation, through its regular domestic large- scale fuel purchase program for the Rocky Mountain/West Coast/Offshore region of the United States, for the purchase of Jet Propellant-5 jet and naval distillate fuels for which blended fuels with between 10 to 50 percent alternative fuels were to be considered. The solicitation listed the estimated maximum quantity of Jet Propellant-5 and naval distillate fuels as approximately 290.6 million gallons. As such, the maximum amount of biofuel to be blended into the desired fuel amount would be equivalent to approximately 29 million gallons (at 10 percent blend) to 145 million gallons (at 50 percent blend). The Department of Agriculture has made available approximately $66 million in Commodity Credit Corporation funds to support successful biofuel contract awards. Fuel vendors had until May 18, 2015, to submit proposals, and DOD plans to make contract awards before October 1, 2015. According to a Navy official, the Department of Agriculture’s Commodity Credit Corporation funds will not be available for DOD’s regular fuel purchase programs for the Atlantic/European/Mediterranean and Western Pacific regions because those are international rather than domestic fuel purchases. Title III of the Defense Production Act (DPA)—Expansion of Productive Capacity and Supply—generally allows military and civilian agencies to provide a variety of financial incentives to domestic firms to invest in production capabilities, so as to ensure that the domestic industrial and technological base is capable of meeting the national defense needs of the United States. Use of certain Title III authorities requires a determination that, among other things, the industrial resource, material, or critical technology item is essential to national defense and U.S. industry cannot reasonably be expected to provide the capability needed Title III financial incentives can reduce the risks for in a timely manner.domestic suppliers associated with the capitalization and investments required to establish, expand, or preserve production capabilities. According to DOD officials, the focus of Title III is to establish commercially viable industrial capabilities that will continue to prosper after federal government assistance ends. Funding for Title III projects comes from appropriations for DPA purchases, DOD components, or other federal agencies. DOD first used Title III authority in relation to alternative fuels in 2010, for the purpose of producing Bio-Synthetic Paraffinic Kerosene, an alternative jet and naval distillate fuel made from the Hydroprocessed Esters and Fatty Acids production process. Alternative fuels made from this process can meet DOD’s technical fuel specifications when blended with conventional fuels. The modified biorefinery resulting from this project is to produce Bio-Synthetic Paraffinic Kerosene fuels and other co-products from natural oils, fat, and grease feedstocks via the Hydroprocessed Esters and Fatty Acids production process. According to DOD officials, the project originated from the Department of Defense Appropriations Act for Fiscal Year 2010. The explanatory statement for that act listed Bio-Synthetic Paraffinic Kerosene Production among the DPA projects for that year. In September 2009, the Air Force, as Executive Agent for the DPA Title III program, issued a Request for Information inviting the private sector to provide information about establishing manufacturing capability for Bio-Synthetic Paraffinic Kerosene fuel derived from renewable biomass feedstock sources. According to DOD officials, only one private company responded to the request. In December 2010, the Under Secretary of Defense for Acquisition, Technology, and Logistics issued a determination that (1) the industrial resource or technology item of Bio-Synthetic Paraffinic Kerosene fuel is essential for national defense, and (2) U.S. industry cannot reasonably be expected to provide this fuel in a timely manner without action under the Defense Production Act. This written determination was submitted to relevant congressional committees.Before awarding the Bio-Synthetic Paraffinic Kerosene production agreement, DOD made a second attempt to identify other private companies with expertise in this area. With no additional responses, DOD entered into a technology investment agreement in September 2012 with the sole private company that had previously responded to the Request for Information. According to DOD officials, the modified biorefinery project began in September 2012 and the biorefinery is expected to be completed and operational in September 2015. They stated that it has an end goal of producing alternative fuels and co-products in a volume between 20 and 28 million gallons per year as of when DPA Title III assistance ends, and will have the capability to blend the alternative fuel with conventional petroleum fuel for its customers. DOD’s financial contribution for this project comprises approximately $4 million of its total cost, with the awarded private company paying the remainder. A commercial airline has announced that it has entered into an agreement with the biofuel refinery to purchase 15 million gallons of the jet fuel produced by this project over 3 years. Also, the biofuel refinery announced that it has a strategic partnership with a fuel distributor that supplies aviation fuel. DOD officials noted that, although the department has not entered into any agreement to purchase alternative fuel from this modified biorefinery, the biofuel refinery would be able to compete for a fuel contract with DOD via DLA-E’s existing large-scale fuel purchase process. DOD’s second use of Title III authority in relation to alternative fuels began in 2012 with the Advanced Drop-in Biofuels Production Project. The goal of the project is to establish one or more domestic integrated biofuels production enterprise capable of annually producing at least 10 million gallons of alternative jet and/or naval distillate fuel that can meet DOD’s technical fuel specifications. This enterprise would include feedstock acquisition and logistics, conversion facilities (Integrated Biorefineries), and fuel blending, transportation, and logistics. The effort would include the design, construction or retrofit, validation, qualification, and operation of a domestic commercial-scale integrated biofuels production enterprise. In June 2011, the Department of Agriculture, Department of Energy and Department of the Navy signed a memorandum of understanding that initiated a cooperative effort to assist in the development and support of a sustainable commercial biofuels industry. This occurred in response to the president’s March 2011 Blueprint for a Secure Energy Future, which challenged the Secretaries of these three departments to investigate how they might work together to speed the development of drop-in biofuels substitutes for diesel and jet fuel. The Blueprint noted that competitively priced drop-in biofuels could help meet the fuel needs of the Navy, as well as the commercial aviation and shipping sectors. The memorandum of understanding explained that given the current economic environment, significant start-up risks, and the competitive barriers posed by the firmly established conventional fuels market, private industry would not assume all of the uncertainty and risk associated with providing a commercially viable production capability for drop-in biofuels. Accordingly, it was necessary for the federal government to cooperate with industry to create a strong demand signal and to make targeted investments to achieve the necessary alternative fuels production capacity. The stated objective was to construct or retrofit multiple domestic commercial- or pre-commercial- scale advanced drop-in biofuel plants and refineries. Specific characteristics for these facilities include the capability to produce biofuels meeting DOD’s technical fuel specifications at a price that would be competitive with conventional fuel, and that they would cause no significant impact on the supply of agricultural commodities for the production of food. Under the memorandum of understanding, the three departments stated their intentions to equally contribute funding over a period of 3 years. The Departments of Energy and the Navy plan to apply their funds through the DPA. The Department of Agriculture plans to provide its contribution via the Commodity Credit Corporation funds, as discussed above. In August 2011, the Air Force, as Executive Agent for the DPA Title III program, issued a Request for Information to the private sector to obtain information related to advanced drop-in hydrocarbon biofuels production, including the technical, manufacturing, and market barriers to establishing a viable business for producing biofuels. According to DOD officials, an interagency team was formed to review the responses and use the findings as guidance to develop the requirements for the biofuel project. In June 2012, DOD announced the initiation of and a solicitation for the Advanced Drop-in Biofuels Production Project, which would provide awards for biofuels production facilities over two phases. Phase I awards would be for planning and preliminary designs for biofuel production facilities; and Phase II awards would be for constructing, commissioning, and performance testing of biofuel production facilities. In January 2013, the Under Secretary of Defense for Acquisition, Technology and Logistics issued a determination that (1) an advanced drop-in biofuels production capability is essential to the national defense; and (2) without action under DPA authority, U.S. industry could not reasonably be expected to provide the capability in a timely manner. This written determination was submitted to relevant congressional committees. In May and June 2013, DOD selected four private companies to receive Phase I awards totaling $20.5 million, with private industry contributing funds for the remainder of the Phase I costs (at least 50 percent). Only Phase I awardees were eligible to apply for the Phase II awards. In August 2014, three of the four Phase I awardees received Phase II awards totaling $210 million, with private industry contributing funds for the remainder of the costs (which are to be more than 50 percent). Phase II awardees are currently performing activities in preparation for constructing their biorefinery facilities, including conducting environmental analyses and securing financing. According to DOD officials, DOD will monitor the Phase II awardees by conducting biweekly teleconferences, quarterly status reporting updates, and site visits. In general, monitoring activities will monitor factors such as whether there are any changes to the company’s project scope, implementation, or timelines; and if the company’s amount of spending correlates to how much of the biofuel production facility has been completed. As shown in Table 1 below, the Phase II awardees will be making alternative fuel from different production processes and deriving it from various feedstock sources. According to DOD program officials, the Advanced Drop-in Biofuels Production Project should provide, between 2017 to 2018, production capacity for about 106 million gallons per year of alternative jet and naval distillate fuels that meet DOD’s technical fuel specifications and are available at a price that is competitive with that of conventional fuels. DOD applied $100 million in fiscal year 2012 procurement funds to this project. For fiscal year 2013, the explanatory statement for the Consolidated and Further Continuing Appropriations Act, 2013, listed $60 million for this project. The National Defense Authorization Act for Fiscal Year 2013 provided that amounts made available to DOD under the DPA for fiscal year 2013 for biofuels production could not be obligated or expended for the construction of a biofuel refinery until matching contributions were received from the Department of Energy and equivalent contributions from the Department of Agriculture. For fiscal years 2014 and 2015, the Department of Energy received authorization to transfer up to $45 million each year for DPA purposes. The Department of Energy has contributed those funds to the DPA fund for this project. For the Department of Agriculture’s equivalent contribution, it has committed to expenditures of Commodity Credit Corporation funding through the initiative described above. Two commercial airlines have announced they are entering into fuel purchase agreements with two of the Phase II awardees. The third Phase II awardee, according to DOD officials, is also in talks with potential non-DOD customers. DOD officials noted that, although the department has not entered into any agreement to purchase alternative fuels from these private companies, they would be able to compete for a contract with DOD via DLA-E’s existing large-scale fuel purchase process. We are not making any recommendations in this report. We provided DOD with a draft of this report for review. DOD provided technical comments on our findings, which we have incorporated where appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense; the Deputy Assistant Secretary of Defense (Manufacturing & Industrial Base Policy); the Assistant Secretary of Defense (Installations, Energy, and Environment); the Director, Defense Logistics Agency, and the Secretaries of the Army, Navy, and Air Force. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-5257 or merritz@gao.gov Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The Department of the Navy includes two military services—the Navy and the Marine Corps. the Air Force purchased more than 2 billion gallons of petroleum- based jet fuel in fiscal year 2014. This was about 97 percent of all of the Department of the Air Force’s fiscal year 2014 petroleum and other fuel product purchases. The plan indicates that using alternative jet fuels could help to diversify the types of energy and obtain the quantities of energy that are needed to perform the Air Force’s missions, which are currently “heavily dependent” upon petroleum and petroleum-derived fuels, thereby posing significant strategic and security vulnerabilities. The Department of the Army uses jet fuel in its tactical and ground combat vehicles, aircraft, and other ground support equipment (such as generators) and engages in efforts to test and approve alternative jet fuel made from different production processes for use in these platforms. However, the Army does not have specific alternative fuel usage goals in its energy guidance. The Department of the Army’s 2015 Energy Security and Sustainability Strategy includes the strategic goals, among others, of: optimizing use and assuring access. To accomplish these goals, the Department of the Army plans to minimize overall energy demand and improve efficiency, while securing access to renewable/alternative energy sources to diversify and expand its resource supply, among other actions. The Department of the Army purchased more than 350 million gallons of petroleum-based jet fuel in fiscal year 2014. This was about 76 percent of all of the Department of the Army’s fiscal year 2014 petroleum and other fuel product purchases. ) Strategy (May 1, 2015). Tables 2 and 3 show detailed quantity and cost data by fiscal year of the alternative and conventional petroleum jet and naval distillate fuels that the military departments purchased from fiscal years 2007 through 2014. Before any alternative fuel can be used in military operations, it is tested and approved to meet unique safety and performance standards. Listed below are examples of fuel properties important to these standards. Requirements for alternative fuels are set out in the relevant DOD technical fuel specification documents. Flash point – A liquid fuel’s flash point indicates the temperature at which existing vapors will combust, or ignite. Fuels with higher flash points contribute to a less flammable, less hazardous fuel for better safety and combat survivability. Jet fuel (specifically Jet Propellant-5) used on military ships is required to have a substantially higher flash point than other jet fuel for safety reasons since this fuel is stored in large quantities on aircraft carriers and other vessels. Energy density is evaluated for both the mass and volume of fuel required. the components coming in contact with the liquid fuel can remain. Also, it can affect the rate of deposits forming when the fuel temperature is elevated; these deposits on components can affect their performance, such as reducing the fuel flow through fuel filters. Lubricity – A liquid fuel’s lubricity refers to its effectiveness in reducing friction between moving parts in equipment such as pumps and fuel control units. Viscosity – A liquid fuel’s viscosity—which is critical to proper equipment operations—is a measure of its internal resistance to motion or flow. The Departments of the Navy, Air Force, and Army test alternative fuels to ensure that they can be used in and on tactical and combat ground vehicles and ground support equipment, ships, aircraft, and fuel distribution systems. In general, the military departments use the test protocols listed below, which are similar steps to those used in evaluating whether to include prospective alternative fuels in the commercial jet fuel standard issued by ASTM International. Specification properties – This laboratory testing protocol evaluates how a prospective alternative fuel’s basic chemical and physical properties—such as its freezing and flash points—compare with the baseline properties of conventional jet or naval distillate petroleum fuel. These required properties are outlined in the associated technical fuel specification documents. Fit for purpose – This laboratory testing protocol involves evaluating additional properties that are inherent to conventional jet or naval distillate petroleum fuel, such as how compatible a prospective alternative fuel is with specific metallic and non-metallic materials and various additives that, among other things, inhibit corrosion and dissipate static. Component/Rig testing - This testing protocol involves evaluating how a prospective alternative fuel performs in major components found in the military department’s ground vehicles and support equipment, ships, and aircraft. Examples of these components include injectors and the section of an engine where combustion occurs. Full scale testing – This testing protocol involves evaluating how a prospective alternative fuel performs in engines of ground vehicles and support equipment, ship and aircraft engines, auxiliary power units, and fuel handling systems. Platform testing - This testing protocol involves evaluating how a prospective alternative fuel performs when different types of ground vehicles and support equipment, ships, aircraft, and fuel support equipment run on the fuel. Typically, these equipment and platforms are the military department’s assets that are running on alternative fuel in settings and under conditions that mimic environments where military operations may occur. In addition to the individual named above, Marilyn K. Wasleski, Assistant Director; Jerome A. Brown; Nirmal Chaudhary; Lindsey M. Cross; Philip G. Farah; Shvetal Khanna; Michael Shaughnessy; Amie Steele; Cheryl Weissman; and Alexander Welsh made key contributions to this report. | DOD is the single largest consumer of energy in the federal government, spending billions of dollars annually on petroleum fuels to support military operations. One of DOD's strategic operational energy goals is to expand its energy supply options. Investing in alternative fuels—liquid fuels, derived from non-petroleum feedstocks, whose use does not necessitate any modifications to platforms and equipment—represents one means of potentially achieving this goal. GAO was asked to examine aspects of DOD's investment in alternative fuels. GAO reviewed the extent to which DOD (1) has purchased alternative fuels, and has demonstrated these fuels can meet its safety, performance, and reliability standards; (2) has a process for purchasing alternative fuels for military operations that takes into consideration any cost differences between alternative and conventional fuels; and (3) has used the DPA authorities to promote the development of a domestic biofuel industry. GAO reviewed past alternative and conventional petroleum fuel procurements, as well as statutes, regulations, and DOD guidance related to fuel purchases. Also, GAO reviewed various documents on biofuel projects initiated under the DPA authority and interviewed cognizant DOD officials involved with purchasing and using fuel and administering the biofuel projects. GAO is not making recommendations in this report. DOD provided technical comments on the findings, which GAO has incorporated where appropriate. The Department of Defense (DOD) has purchased small quantities of alternative fuels—jet and naval distillate (known as F-76, to power ships)—for testing and demonstration purposes, but has not done so yet for military operations. DOD's testing process validates the ability of alternative fuels to meet safety, performance, and reliability standards for military equipment and platforms. From fiscal years 2007 through 2014, DOD purchased about 2.0 million gallons of alternative fuel for testing purposes, at a cost of about $58.6 million. Over the same period, it purchased about 32.0 billion gallons of petroleum fuel at a cost of about $107.2 billion. DOD has approved alternative fuels made from two production processes for use in certain items and is continuing to test others. DOD is currently required by law to ensure alternative fuel purchases for operational purposes are cost-competitive with conventional fuels and has a standard process to purchase large-scale volumes of all fuels. Proposals are evaluated according to technical acceptability and price. To help the Navy purchase alternative jet and naval distillate fuels blended with conventional fuels, the Department of Agriculture plans to provide funding directly to alternative fuel vendors that meet certain requirements and receive awards from DOD. These funds are intended to defray some of the alternative fuel producer's extra costs—such as costs of domestic feedstocks. Per DOD, no alternative fuel vendors have received awards so none of these funds have been paid out yet. DOD has used financial incentives provided for by Title III of the Defense Production Act (DPA) to help facilitate the development of commercially viable plants for producing biofuels for the military and commercial sectors. To date, DOD has used this authority for two ongoing projects: Bio-Synthetic Paraffinic Kerosene and Advanced Drop-In Biofuels Production Project and the federal government's cost share for these projects was about $234.1 million. |
Passenger airlines, air freight companies, and other air carriers in the United States spend almost $6.5 billion every year maintaining and repairing their aircraft, according to industry estimates. While these carriers have traditionally performed much of this maintenance and repair work themselves, many are now contracting an increasing portion of the work to about 2,800 repair stations in the United States and other countries. As the agency responsible for overseeing the aviation industry, the Federal Aviation Administration (FAA) has the primary responsibility for ensuring that repair stations are operating in accordance with laws and regulations. Commercial air carriers certified in the United States now operate more than 6,700 aircraft, nearly 1,000 more than in 1990. Operators include more than 150 airlines, freight carriers, charter firms, and other companies certified by FAA and operating under part 121 of the Federal Aviation Regulations. The aircraft they operate range from planes such as a Fairchild Metroliner III, which typically carries a maximum of 19 passengers or about 5,000 pounds of cargo, to planes such as a Boeing 747-400, which is capable of carrying more than 400 passengers or 122 tons of cargo. Some of the largest companies, like United Airlines or American Airlines, may have 500 or more aircraft. With more aircraft flying, the need for maintenance and repair services has grown. Air carriers spent almost $6.5 billion for maintenance and repair on their aircraft in 1996, according to an industry estimate. This amount is an increase of $1.2 billion, or 23 percent, over the estimate of $5.3 billion in 1990. The term “maintenance and repair” encompasses a wide variety of activities. Some activities involve frequent servicing, such as overhauling tires, wheels, and brakes. Others include more extensive renovation, such as airframe maintenance, that must be done as aircraft get older. FAA classifies maintenance and repair activities into six rating categories (see table 1.1), which it uses to designate the type of maintenance or activity it has certified a repair station to perform. Some major air carriers, such as American Airlines and United Airlines, have substantial maintenance facilities of their own. However, many air carriers, including smaller air carriers, have used third-party repair stations rather than invest in the additional staff and hardware needed to do the work in-house. Some new air carriers entering the passenger or air freight markets have chosen to rely heavily—and in some cases, almost exclusively—on repair stations. The term “repair station” spans a wide variety of operations. In 1996, there were almost 5,000 repair stations certified by FAA, about 2,800 of which performed maintenance work on aircraft used by air carriers. A repair station’s certificate specifies the types of maintenance it can perform. Some repair stations specialize in one particular maintenance and repair category, while others may conduct work in several categories. As figure 1.1 shows, the types of maintenance most often included in the certificates of these 2,800 repair stations were for accessories and airframes. In addition to specifying the types of maintenance a repair station can perform, FAA may limit the scope of a repair station’s activities. For example, whenever appropriate, FAA may issue a rating that limits a repair station’s work to maintaining or altering only certain types of airframes, power plants, propellers, radios, instruments, or accessories. Such a rating may be limited to a specific model of aircraft, engine, or constituent part or to any number of parts made by a particular manufacturer. FAA also issues limited ratings for specialized work, such as nondestructive testing, maintenance on landing gear or emergency equipment, or other specific areas not included in any of the six standard rating categories. Repair stations vary considerably in size and scope of operations. For example, Tramco, Inc., located in Everett, Washington, is one of the largest repair stations in the United States, with hangar facilities of 450,200 square feet and a workforce of more than 2,000. At one time, this facility can accommodate five wide-body aircraft, such as Boeing 747s, and five narrow-body aircraft, such as Boeing 737s. The repair station primarily conducts regularly scheduled maintenance and modifications, and it also modifies new aircraft when specifications are changed after manufacturing is completed. Figure 1.2 shows maintenance being done on a Boeing 727 at this facility. By contrast, Precision Avionics & Instruments in Atlanta, Georgia, is a much smaller repair station. It employs 35 workers and has a facility of 24,000 square feet where it primarily services instruments, electrical and electronic components and accessories. While most domestic repair stations are operated independently of commercial airlines, a few are in-house maintenance operations that conduct work for other airlines on a contractual basis. For example, at its own maintenance facilities, Delta Airlines performs power plant maintenance for such carriers as American Airlines, Air Jamaica, Trade Winds, and Aeroflot Russian International Airlines. Repair stations that work on the aircraft of U.S. carriers are found throughout the rest of the world, though not in as great a number as repair stations in the United States. In all, about 270 FAA-certified foreign repair stations perform repair work for U.S. air carriers. For example, Sabena Technic, the maintenance arm of Sabena Belgian World Airlines, does engine repair work for Federal Express and other carriers at its facility in Brussels. Sabena has FAA’s approval for work on airframes, power plants, radios, instruments, and accessories. FAA’s oversight of repair stations is divided into two phases—certification and surveillance. Certification initially involves a repair station’s applying to FAA for authority to perform certain types of maintenance on certain types of aircraft. FAA inspects the repair station to ensure that the applicant’s proposed procedures are effective and that the equipment meets regulatory requirements. In addition, FAA also inspects facilities, personnel, and material as well as the repair station’s inspection system. If FAA finds these things to be in order, it issues a certificate with a set of “operation specifications” that cover what maintenance activities the repair station is authorized to perform. Certification is handled in one of two ways, depending on whether the repair station is in the United States or abroad. FAA requires foreign repair stations to renew their certification at least every 2 years, but for domestic repair stations, certification is permanent unless it is surrendered by the applicant or suspended or revoked by FAA. Surveillance, usually in the form of inspections, follows certification. FAA’s guidelines require its safety inspectors to perform a facility inspection of each domestic and foreign repair station at least once every year. For many of the larger domestic repair stations, this inspection is broken into multiple visits. For example, FAA inspectors visited Evergreen Air Center, one of the larger repair stations we reviewed in depth, more than 20 times during fiscal year 1996. Located in Marana, Arizona, Evergreen employs about 590 workers who conduct all types of maintenance on most types of large transport aircraft. FAA divides repair station inspections into two categories, avionics and maintenance. Avionics inspections focus on a repair station’s overall program for aircraft electronic components, including personnel training, policies, and procedures. Maintenance inspections cover a repair station’s overall maintenance program, including personnel training, policies, and procedures. FAA’s certification and inspection activities are carried out by inspectors based in the United States and abroad (see table 1.2). On the domestic side, certification and inspection activities are carried out by more than 550 FAA inspectors, most of whom have many other responsibilities as well. Unless they are assigned to one of the largest operations, inspectors usually are responsible for more than one repair station. We examined the workloads of 98 inspectors at the FAA offices we visited and found that the number of repair stations these inspectors were responsible for ranged from 1 to 42, with a median workload of 12 repair stations. These repair stations varied in size and complexity. Most of the inspectors had many other surveillance responsibilities as well, such as overseeing training schools for pilots and mechanics, helicopter operators, agricultural operators, and air taxis. On the foreign side, about 50 FAA inspectors handle the oversight of repair stations, again with responsibility for multiple repair stations. Unlike their counterparts in the United States, however, inspectors in these offices generally have the oversight of repair stations as their primary responsibility. Under Federal Aviation Regulations, air carriers must ensure that repair stations are conducting work that conforms with the air carriers’ manuals and the applicable FAA regulations. As part of meeting this requirement, air carriers may use one or both of the following means: They may conduct their own audits of repair stations—generally every 2 years—to ensure that the facilities have the capability to perform the work in accordance with the air carriers’ maintenance policies, procedures, and requirements. They may rely on audits conducted by the Coordinating Agency for Supplier Evaluation, an international industry organization of major airlines and aerospace and marine contractors. These audits are conducted—again, generally every 2 years—by staff from member airlines who use a standardized approach that includes Federal Aviation Regulation requirements. Because many airlines use the same repair stations, these audits eliminate the expense of redundant evaluations of repair stations. Repair stations, both foreign and domestic, are also potentially subject to review by the regulatory agencies of other countries. Many of the national aviation authorities in countries where repair stations are located have developed their own extensive inspection, surveillance, evaluation, and certification programs for repair facilities. Like FAA, many of these agencies review repair stations in other countries as well (including the United States). Twenty-seven European nations have banded together to coordinate their efforts through an organization called the Joint Aviation Authorities (JAA), but many nations such as China conduct reviews on their own. Like FAA, these other regulators have set up their programs to help ensure compliance with their own national standards. Figure 1.3 summarizes the relationship of the various parties involved in the oversight of repair stations. Concern has arisen about FAA’s oversight of repair stations for three reasons: Air carriers are relying on repair stations much more than in the past. Several recent accidents have involved aircraft maintained by repair stations. And FAA’s oversight of repair stations is comparatively limited. Steady growth in air carriers’ use of repair stations is one development that has focused additional attention on how FAA is carrying out its responsibility to oversee repair stations. Reliance on repair stations among air carriers has grown from an estimated 37 percent of total maintenance in 1990 to an estimated 46 percent in 1996. Reliance on repair stations has been particularly heavy among newer carriers such as ValuJet, Western Pacific, Reno Air, and Frontier Airlines. According to FAA officials with whom we spoke, newer carriers use repair stations extensively because they do not have enough repair work to make performing it themselves economical or because they want to ensure that they get an experienced cadre of mechanics with sound practices and procedures. For example, Reno Air uses AAR Oklahoma, Inc., to perform heavy airframe maintenance and major alterations of its MD-80s and MD-90s. Operating only 30 of these aircraft does not warrant Reno Air’s investing in the in-house repair capabilities for this type of maintenance. And even though established air carriers tend to use repair stations less extensively than smaller, newer air carriers, the amount of maintenance they conduct is so great that if only a small percentage of their maintenance is performed at repair stations, it still represents a substantial amount of work. For example, a United Airlines official estimated that while the company contracts out only about 7 percent of its maintenance budget to repair stations, this amounted to about $126 million worth of work in 1996. A second, and significant, reason for concern about FAA’s oversight of repair stations stemmed from domestic aviation accidents in 1995 and 1996. Table 1.3 describes four aviation accidents for which the National Transportation Safety Board found contributing factors that involved inadequate inspection or maintenance or improper handling of hazardous cargo by repair stations. A third reason for concern is the relatively limited amount of oversight that FAA gives repair stations compared with the oversight it gives air carriers. FAA is responsible for ensuring that repair stations comply with regulations, and the agency’s annual guidance for surveillance sets forth minimum inspection requirements for all certificate holders. For fiscal year 1997, each repair station was to have a minimum of one facility inspection, while each air carrier was required to have many more inspections. An air carrier such as Alaska Airlines, for instance, had to have a minimum of 62 inspections. The Ranking Minority Member of the Aviation Subcommittee of the Senate Committee on Commerce, Science, and Transportation, and Senator Ron Wyden asked us to examine FAA’s oversight of repair stations. Specifically, we were asked to address the following questions: What is the nature and scope of the oversight of repair stations conducted by FAA personnel? How well does FAA follow up on inspections to ensure that deficiencies in repair stations’ operations are corrected once they have been identified? What steps has FAA taken to improve the oversight of repair stations? Our analysis was based in part on agencywide data FAA provided and in part on a detailed review of a cross-section of airlines, repair stations, FAA offices, and FAA inspectors. In general, we did the following: We reviewed the use of repair stations by eight air carriers, chosen because, like the industry as a whole, they varied greatly in the extent to which they used repair stations. The number of aircraft operated by these carriers ranged from 3 to 659. We reviewed operations at 10 repair stations, chosen because they represented a wide variety of locations (both domestic and foreign), types of repair activities, and size of operations. The repair stations ranged from a wheel and brake specialist with about 20 employees to facilities conducting many types of maintenance and employing more than 3,000 workers. We examined oversight activities and discussed the oversight of repair stations at FAA headquarters, 4 of FAA’s 9 regional offices, 8 of FAA’s 86 Flight Standards district offices, and 6 of FAA’s 7 offices with international responsibilities. Our work at these offices included reviewing inspection files for nearly 500 repair stations. We conducted a survey of 275 FAA principal inspectors on their views about ways to improve the oversight of repair stations. Our survey had a response rate of 90 percent, and its results can be generalized to all FAA inspectors with responsibility for repair stations. We conducted our review from August 1996 through October 1997 in accordance with generally accepted government auditing standards. In September 1997, we provided the Department of Transportation and FAA with a draft of this report for their review and comment. We met with FAA officials, including the Deputy Associate Administrator for Regulation and Certification (acting on behalf of the FAA Administrator) to obtain FAA’s comments. Those comments and our responses are included in the executive summary and chapters 2, 3, and 4. For a more detailed discussion of our scope and methodology, see appendix I. Although FAA is meeting its oversight goal to inspect every domestic and foreign repair station at least once a year, the use of one-person inspections at large, complex facilities restricts the agency’s ability to identify deficiencies and ensure compliance with regulations. We reviewed 19 instances in which FAA conducted a special team inspection of a facility that had received a one-person inspection within the previous year. These special team inspections identified far more deficiencies than inspections done by individual inspectors. Team inspections tend to be more comprehensive and focused, and team members are more organizationally independent of the repair station and have a more standardized approach to ensuring that all aspects of compliance with rules and regulations are checked. Many inspectors acknowledged the advantages of using a team rather than an individual inspector to review such facilities, stating that the pressure of other duties keeps them from conducting inspections on their own that thoroughly identify deficiencies and, thus, ensure compliance. Some FAA offices we visited have developed ways to conduct inspections using teams rather than individual inspectors and to do so without adversely affecting other demands on inspectors’ time. Their actions hold promise as a “best practice” that FAA could examine for broader application. Surveillance is one of the most important functions FAA inspectors perform to ensure safety and regulatory compliance in the aviation system. Each year, FAA identifies specific surveillance activities that must be conducted during the year, including an inspection of each repair station. This inspection is conducted by the FAA Flight Standards district office that maintains a repair station’s certificate. According to FAA’s guidance, the inspection is to cover all aspects of a repair station’s operations, including the currency of technical data, facilities, calibration of special tooling and equipment, and inspection procedures. The inspection is also to ensure that the repair station is performing only work that it has approval to do. While FAA’s guidance does not prescribe precisely how each inspection must be conducted, it provides some direction on how to perform a repair station inspection. It does not require inspectors to follow checklists or other prescribed approaches to conduct the inspection. FAA’s guidance requires, at minimum, one maintenance or avionics facility inspection of each repair station per year. Those repair stations with both maintenance and avionics ratings receive at least two facility inspections, one examining maintenance capabilities and the other, avionics functions. The standard of one inspection per year has not changed in recent years as air carriers have increased their reliance on repair stations. All 2,800 repair stations in the United States and around the world doing work on aircraft flown by FAA-certified air carriers received the inspections FAA’s guidance required in fiscal year 1996, according to officials at FAA headquarters. As partial verification of the FAA officials’ statement, we reviewed FAA’s Program Tracking and Reporting Subsystem (PTRS) data from the 13 FAA offices we visited to determine if the offices had made the facility inspections of the repair stations assigned to them. In all, these 13 offices were responsible for more than 950 inspections at over 750 repair stations working for FAA-certified air carriers. Our analysis of the data confirmed that these minimum inspection requirements were met. How repair stations are inspected varies based on decisions made by both FAA managers and the inspectors themselves. The approach also varies depending on whether the repair station is in the United States or abroad. Moreover, review of some repair stations’ activities is not limited to the annual facility inspection. Each year, FAA selects a few facilities for special, in-depth inspections, which FAA officials stated complement the surveillance conducted by individual inspectors. In the past 4 years, an average of only 23 of these inspections have been conducted at repair stations per year (less than 1 percent of the repair stations performing work for air carriers). In practice, most facility inspections of domestic repair stations are conducted by the individual inspectors who have been assigned the oversight responsibility for the repair stations. This approach is FAA’s front line of surveillance of repair stations. The inspectors assigned responsibility for repair stations are also assigned oversight of other aviation activities such as air taxis, agricultural operators, helicopter operators, and training schools for pilots and mechanics. In addition, the inspectors have other duties such as certifying new operators and investigating accidents and incidents. In performing routine surveillance, an inspector may make repeated visits to a single facility to complete the inspection because there is too much to accomplish in just one visit. This is particularly true at larger, more complex repair stations. Inspectors responsible for such repair stations told us that they often make multiple visits to complete a single inspection. FAA’s guidance to inspectors also recognizes that because the size of repair stations can vary from a one-person operation to a large overhaul facility, the size and complexity of the facility may warrant the inspection being conducted by a team, rather than by an individual inspector. Some FAA offices do, in fact, assign teams to inspect some facilities. Like domestic repair stations, foreign repair stations are inspected every year. Unlike domestic repair stations, however, foreign repair stations must renew their certification with FAA at least every 2 years. The renewal inspection assesses whether the foreign repair station continues to meet Federal Aviation Regulations and fulfills FAA’s requirement for an annual facility inspection. The renewal inspection and the facility inspection cover the same aspects of repair station operations, according to FAA officials and inspectors with both domestic and foreign oversight experience. Like the facility inspection, the renewal inspection can be performed by an individual or by a team of inspectors. In the six offices we visited with responsibility for the oversight of foreign repair stations, both types of inspections were generally conducted by teams, particularly at larger repair stations. Each year, FAA does special, in-depth inspections at a small portion of the repair stations in the United States and abroad through its National Aviation Safety Inspection Program (NASIP) or its Regional Aviation Inspection Program (RASIP). FAA determines which facilities should receive additional oversight through these comprehensive reviews, selecting them on the basis of submissions from district and regional offices. In general, inspectors recommend, through their offices, facilities for special inspections based on inspection results or other reasons such as the size and complexity of operations. Although FAA’s emphasis has been on in-depth inspections of air carriers, repair stations have been part of the special inspection effort. In fiscal years 1993 through 1996, FAA conducted 428 special, in-depth inspections, 92 (or 21 percent) of which were of repair stations. Unlike the facility or renewal inspections, special inspections are performed by teams of inspectors that are independent of the district offices that have oversight responsibility for the carriers or facilities being inspected. Individual inspectors generally identify far fewer deficiencies than teams do. Although most repair stations are not inspected by both individuals and teams, at the FAA offices we reviewed, 16 repair stations routinely inspected by individuals were also inspected by one or more special teams during fiscal years 1993 through 1996. These teams found a total of 347 deficiencies, of which only 15 (or 4 percent) had been identified by the individual inspectors in the 12 to 18 months prior to the special facility inspections. Because many of the deficiencies relate to work on specific aircraft or components, and because aircraft or components at a repair station vary from day to day, some variation in inspection findings is to be expected. However, a close look at the results suggests that individual inspectors, even when they make multiple visits to repair stations, may not identify many of the deficiencies that teams find. The special inspections we reviewed turned up many systemic deficiencies, such as problems with training or quality assurance, that appeared to be long-standing and that therefore could have been detected in earlier inspections. For example, a team conducting a special inspection found that a repair station’s manual contained procedures for aircraft fuel servicing and fuel tank maintenance that may have been counter to the policies of the air carriers for which the work was done. The individual inspector, who had visited this repair station many times in the previous 18 months had not reported this problem. Often, the deficiencies identified in the special inspections but not in the regular inspections were significant. The findings of special inspections are categorized as (1) violations of Federal Aviation Regulations, (2) violations of the repair stations’ FAA-approved repair station manuals, or (3) lack of systems to ensure continuing compliance. Of the deficiencies reported in the 19 special inspections on 16 repair stations we reviewed, one-third involved violations of FAA regulations (see fig. 2.1). For example, an inspection team found that a repair station was not segregating new and serviceable parts from those parts that were not serviceable. In another case, a repair station on three occasions approved an aircraft for return to service following a major repair that, according to the inspector’s report, was not completed “based on FAA-approved technical data.” Violations of a repair station’s approved manual also accounted for about one-third of the deficiencies. For example, one team found a repair station did not inspect subcontracted work in accordance with its manual. A floor mechanic was performing these inspections, rather than the quality control inspector. We contacted 13 inspectors responsible for the repair stations covered by the 19 special inspection reports to obtain their views on why the special inspections found so many more deficiencies, including ones that appeared to be long-standing. They said the pressure of other duties kept their individual reviews from being more comprehensive. For example, one inspector was responsible for 7 other repair stations, 11 air taxi operators, 3 helicopter and agricultural operators, 11 executive aircraft, and more than 30 airmen. In addition, while they were at the repair stations, inspectors had to deal with employees’ questions or concerns about matters unrelated to the inspections. All 13 inspectors said that for reasons such as these, an individual inspector has a greater chance of not identifying deficiencies, even after repeated visits. The quality of repair station inspections is important because surveillance is one of FAA’s primary means for ensuring that repair stations continually meet Federal Aviation Regulations. FAA’s guidance to inspectors states that if surveillance is to meet its intended purpose, quality inspections are essential. We developed four characteristics of a quality inspection based on our initial discussions with FAA officials and inspectors, staff from the U.S. Department of Transportation’s Office of the Inspector General who were involved with repair station work, Department of Defense officials responsible for audits of carriers with contracts for transporting military personnel, and airline quality assurance officials. These four characteristics, explained in table 2.1, are independence, comprehensiveness, focus, and standardization. In subsequent discussions, FAA officials and inspectors agreed that a quality inspection should have these four characteristics. The size and complexity of many large repair stations are such that an individual inspector may have difficulty maintaining these quality characteristics. In examining FAA’s facility inspection records, and in discussions with inspectors, we found these four characteristics were more prevalent in facility inspections conducted by teams than in those conducted by individual inspectors. Inspectors assigned to teams have no ongoing responsibility for the repair station and have no relationship with its operator. By contrast, the individual inspector who conducts a facility inspection is usually the one assigned to manage the repair station’s certificate for an extended period of time. During this period, the primary contact the repair station has with the FAA is through this inspector. Inspectors we spoke with during field visits consistently stated that an inspector with a “fresh set of eyes” often identifies deficiencies that the principal inspector misses. Teams cover all subject areas during the course of their inspections, whereas individual inspectors’ other duties may limit the time they can spend and the extent of work they can do during their visits to repair stations. Many of the inspectors responding to our survey indicated that their ability to conduct a quality inspection was affected by factors related to comprehensiveness (see fig. 2.2). For example, 75 percent of the respondents said having too many inspection duties affected their ability to conduct comprehensive inspections to some degree, with 43 percent saying it was a major reason for the problem. (For a more detailed breakdown of the survey results for these and other survey topics, see app. III.) In addition, inspectors we spoke with at field offices said that it was very difficult to cover everything at a large or complex repair station. For example, one inspector said the week he spends at a large engine repair station is not enough time to complete a facility inspection. The size of the repair station and the complexity of the work being done, he said, makes it difficult to ensure that he is making a comprehensive inspection. In a team inspection, completing a portion of an inspection is the only duty of each team member. An inspector conducting an inspection alone faces work demands from other locations as well as divided responsibilities at the repair station being inspected. Inspectors’ responses to our survey also reflected concerns about their ability to focus sufficiently during inspections (see fig. 2.3). For example, 80 percent of the inspectors responding indicated that spending time on other duties had an effect on the quality of the inspections they performed. For example, during our interviews, inspectors said they needed to spend time during inspection visits answering questions or clarifying regulations for repair station employees. They said such duties were part of their job, but some noted that these conflicting demands can interfere with their ability to focus on the inspection they are trying to conduct. Inspection results can be more useful to inspectors and FAA if there is assurance that all areas have been adequately covered. If all areas are covered, inspectors have greater assurance that the repair station complies with regulations. Checklists or other similar job aids are one way to provide this assurance and to do so in a structured, consistent manner. A checklist or similar job aid for repair station inspections would include all areas that inspectors must review as part of the inspection as well as how the regulations governing repair station activities relate to these areas. At present, however, FAA does not require the use of a checklist during a repair station inspection. We found evidence from a number of sources that the use of an effective checklist plays an important role in a thorough inspection. Officials from FAA, industry, and the Department of Defense (which reviews air carriers before awarding defense contracts) told us that they would question the comprehensiveness of any facility inspection of a repair station that was not done using a job aid or checklist. Air carriers and the Department of Defense reported that their own inspectors use such aids to guide their work. They said the scope of the inspection of many repair stations is large enough that it is not difficult to overlook a portion of what must be covered. While FAA does not require the use of a checklist or job aid for routine surveillance, teams, whether conducting routine or special inspections, are more likely than individual inspectors to use checklists or other job aids that help ensure that all areas are covered, based on our observations. We found that during team inspections, team members use the same structured approach, typically in the form of an inspection job aid or checklist, such as the NASIP checklist. For example, one overseas office that conducts its inspections with in-house teams has a job aid covering each portion of the inspection. By contrast, we found that the approaches used by inspectors conducting their own inspections varied greatly, and individual inspectors were less likely to use checklists or other job aids to ensure that all areas had been covered. For example, while one inspector showed us a detailed checklist he developed combining guidance from the Airworthiness Inspector’s Handbook with the regulations applicable to repair stations, others said they do not use any job aid and work instead from memory when inspecting repair stations. We also found that when individual inspectors use a checklist, they tend to use one that is not detailed enough to ensure that compliance with regulations is checked. FAA’s standard, most commonly used job aid, which is available to inspectors through the Flight Standards Automated System, is not directly tied to the standards that repair stations must meet. Although it lists items to review, it does not provide references to the regulations governing repair stations. By contrast, the checklist used during NASIP inspections provides this link, as do the checklists and job aids the aviation industry uses to evaluate repair stations. Officials at the regional and office levels have indicated that knowing how an inspection finding relates to the regulations is important for pursuing enforcement action when a violation is identified. We found one office that requires all inspectors to use a job aid tied to the regulations. The office manager said that by having all inspectors use a standardized approach, he has greater assurance that effective and comprehensive inspections are being performed and that repair stations are in compliance with regulations. We asked FAA headquarters officials what they thought of encouraging inspectors to make greater use of checklists and other job aids. They said that guidance and job task lists provided to inspectors encourage the development of good work processes by each inspector without removing the flexibility required for them to evaluate a repair station’s compliance. However, the greater use of checklists or other job aids to help ensure that comprehensive inspections are being performed could be instituted in a way that does not diminish the inspectors’ flexibility. At a minimum, these types of tools would serve to remind the inspectors of the elements of the inspection that are the most critical to safety. Most inspectors responding to our survey responded favorably when asked for their general impressions about repair stations’ overall compliance with regulations. Sixteen percent of the inspectors put compliance at that top, or “excellent” level, 68 percent rated compliance as “good,” and 12.5 percent rated it as “fair.” (See fig. 2.4.) 1.5% Inspectors acknowledged, however, that there was room for improvement. We asked inspectors about eight areas of compliance, such as the repair stations’ use of up-to-date manuals from manufacturers and air carriers. In each of the eight areas, more than half of the inspectors surveyed saw the need for at least some improvement. Specifically, in none of the eight categories was the percentage higher than 38 percent for respondents who thought little or no improvement was needed. By contrast, the percentage of inspectors who saw a need for some or moderate improvement ranged from 39 to 52 percent, and those who saw the need for great or very great improvement ranged from 18.5 to 33 percent. (See fig. 2.5.) How could FAA offices, already facing a diverse and extensive mix of responsibilities, do a better job of inspecting repair stations without adversely affecting other operations? To determine if there were workable answers to that question, we turned to the field offices themselves. FAA field offices are given some flexibility by FAA headquarters in deciding how to accomplish their surveillance programs. We looked to see if some of these offices had developed alternative approaches that might hold promise for other locations. We identified several offices that had adopted approaches that might prove useful on a broader scale. In general, their practices fell into two main categories: (1) placing greater emphasis on the oversight of repair stations and (2) finding ways to shift local staff resources so that they could conduct more repair station inspections with teams rather than with individual inspectors. FAA headquarters is also examining a revised approach to surveillance that could help improve the inspection process. Some of the FAA field offices we reviewed, departing from the standard approach to assigning inspectors’ responsibilities, have developed new approaches on their own to place greater emphasis on repair stations. Typically, inspectors working in a field office are separated into two disciplines: general aviation and air carrier. General aviation inspectors are assigned to specific repair stations and also inspect operators covered by part 135 of the Federal Aviation Regulations—that is, air taxi operators. In addition, they inspect other aspects of the industry such as agricultural aircraft operators, technical schools for pilots and mechanics, and helicopter operators. Air carrier inspectors are responsible for operations covered by part 121 of the Federal Aviation Regulations—that is, for domestic air carriers. They are assigned specific carriers to inspect, and may, in that context, inspect the carriers’ in-house repair stations or those the carriers use, assessing whether repairs being made conform with the carriers’ FAA-approved maintenance manuals. Two FAA offices we visited have found this structure does not recognize the importance of overseeing repair stations and are pursuing other approaches that place a higher priority on it. Officials at FAA headquarters said they supported these efforts but will first evaluate the results and then, if appropriate, use the approaches at other offices. In the Western-Pacific Region, officials have approved a new organizational structure at the Flight Standards district office in Scottsdale, Arizona. Under the new structure, the district office is divided into an air transport and an air commerce unit. The air transport unit oversees air carriers and large repair stations, while the air commerce unit oversees air taxis, technical schools for pilots and mechanics, and other operators. Within the air transport unit, one team focuses its work on the five largest repair stations in the area, all of which perform heavy airframe maintenance. According to a district office supervisor, two additional staff members with significant repair station experience have been hired in the last 3 years. The expanded staff made it possible to establish a repair station team without asking for additional resources. Large-component repair stations, such as those working on landing gear or engine parts, may be added to the team’s responsibility at a future date, an official said. According to district office staff, the office has been concerned with FAA’s lack of surveillance of larger, more complex repair stations. Inspectors stated that the reorganization will allow them to spend more time on those facilities without affecting the surveillance of smaller repair stations. In conjunction with the reorganization, office management also redistributed the repair station workload among inspectors to allow them to provide more effective surveillance of larger facilities. The Seattle Flight Standards district office revised the position description of several inspectors to place a greater emphasis on the oversight of repair stations. Under these revised position descriptions, three maintenance inspectors, each with an assistant, will be responsible for the nine largest and most complex repair stations in the district. According to a district office official, FAA headquarters must approve this change because under the present set of position descriptions for inspectors, all repair stations are considered to have the same degree of complexity. In a letter to the regional office justifying the new positions, the district office manager stated that the office has not had the resources to “become proactive in the day-to-day activities of the facilities.” For example, at a repair station that works on over 400 aircraft annually with a staff of 2,000, adequate surveillance was not provided in several areas, such as compliance with customer airline procedures and regulatory requirements, according to office staff. In addition, adequate spot checks of maintenance performed by the company had not been made. The inspectors responsible for this facility were responsible for other facilities as well and did not have enough time to do a comprehensive review of the repair station. Under the new position descriptions, the principal inspectors have fewer responsibilities and so will be able to spend more time at each of the large facilities assigned to them. As in Scottsdale, the workload for the inspectors in Seattle will change dramatically. For example, one inspector will go from overseeing 16 repair stations, 8 air taxi operators, 4 executive aircraft operators, 2 helicopter operators, 2 agricultural operators, 45 airmen, and a pilot school to overseeing just 7 repair stations, all of which are facilities working on aircraft component parts. The remaining responsibilities will be distributed among existing and projected additional staff. The Eastern Region has four international field offices, three in Europe and one in New York. Because the European offices are not faced with many of the other responsibilities that domestic offices must handle—such as overseeing pilot and mechanic schools, agricultural aircraft, and certificate management of air carriers—the primary focus of their work program is on the certification and surveillance of repair stations along with limited surveillance of U.S. air carriers. (The New York office handles other responsibilities such as the oversight of foreign air carriers and the International Aviation Assessment Program.) Consequently, inspectors at the European offices are able to spend more time on the surveillance of repair stations than their U.S.-based counterparts. All of the inspectors we interviewed at the European offices said they spent 80 percent or more of their time on repair stations, whereas inspectors at domestic offices said they spent only about 30 percent of their time on surveillance of all types of facilities, including repair stations. A second and closely related development we observed was the use of locally based teams to conduct surveillance. The use of in-house teams in these offices ranges from making them the typical surveillance approach, as in the international field offices, to using them occasionally for areas in which problems have been identified. Because these teams are made up of local office staff, the cost is lower than for special inspections conducted by NASIP or RASIP teams assembled from around the country or around the region. Moreover, because local resources are used, the office can assess the effect of this approach on the office’s other responsibilities. The move toward team-based surveillance inspections was supported by the inspectors we surveyed. Officials at FAA headquarters also said they support these efforts but will assess them before asking other offices to make greater use of in-house teams. Prior to the office’s restructuring, staff at the Scottsdale Flight Standards district office routinely performed team inspections on the largest repair stations each year. They also performed team inspections on selected smaller facilities. According to one official at the office, team inspections are a big part of the overall surveillance program because the office believes such inspections are the only way it can ensure that the repair stations are meeting all applicable regulations. Use of team inspections is expected to increase under the new office organization. Team inspections at the Scottsdale office are led by the principal inspector, the person with the most knowledge about a repair station. The Seattle Flight Standards district office has increasingly relied on in-depth reviews conducted by teams of inspectors as a way to strengthen its oversight of repair stations. According to officials in the region’s Flight Standards Division, current surveillance of repair stations, as well as surveillance of other certificate holders, is not as effective as it should be. As evidence, they cite national statistics indicating that only five enforcement actions (such as a warning notice or a civil penalty) result from every 1,000 inspections FAA conducts (an enforcement rate of 0.5 percent). By contrast, NASIP inspections, which are more in-depth, result in an enforcement rate of 20 percent. District office officials said that the team approach is being used so that the staff is more aware of what is happening at the facilities they oversee. Moreover, the office has found team inspections conducted to date to be very successful. For example, a recent team inspection at a large component shop repair station identified 17 deficiencies that the principal inspector said he had not identified in several prior inspections. According to the inspector, his workload and the complexity of this repair station prevented him from performing an inspection comprehensive enough to identify the kinds of deficiencies found by a team. This inspector, along with others we interviewed at the district office, agreed that team inspections are necessary for adequate surveillance in some cases, particularly for larger, more complex repair stations. The Miami Flight Standards district office has established a quality assurance unit that, among other activities, performs team inspections of repair stations. The teams inspect air carriers, repair stations, and other operators in response to complaints or an inspector’s request. According to a regional office official and the district office supervisor of the inspection teams, the inspections are more objective and comprehensive than the routine inspections. In addition, the inspections allow the team to identify and correct potential problems that if left unaddressed could develop into compliance problems. From fiscal year 1993 through 1996, 32 in-depth team inspections were conducted by the office, 14 of them at repair stations. At all six of the offices we visited that oversee foreign repair stations, inspections are typically conducted by teams, although smaller repair stations with very few employees or capabilities may be assigned to only one inspector. For example, the Frankfurt office specifies that annual surveillance on a repair station with more than 100 employees be performed by a team of up to five inspectors. The team approach is used because the office does not believe an individual inspector can cover an entire facility. According to the office’s manager, a team provides broader, deeper coverage and the end result is that more deficiencies are identified. As in the NASIP and RASIP special inspections, segments of the facility inspection are divided among the participating inspectors. For example, one inspector will review the landing gear and window repair shops, while another will inspect the technical library and the calibration laboratory. The principal inspector assigned to the facility acts as the team leader and prepares the findings presented to the repair station at the conclusion of the inspection. Inspectors responsible for foreign repair stations said that although they may visit some repair stations only once a year, less than when they performed domestic repair station surveillance, the surveillance of foreign repair stations is more thorough because of the team approach. A substantial number of the inspectors we surveyed supported the use of more team inspections. Figure 2.6 shows survey responses on using team inspections to improve compliance. Results show that 71 percent of the inspectors responding favor using team inspections staffed from within the district office, and 50 percent favor an increase in NASIP or RASIP inspections staffed from offices nationwide or within the region. Opposition was weak both to locally based team inspections (11 percent) and to the increased use of NASIP or RASIP inspections (16 percent). This support was affirmed in our interviews with inspectors at the offices we visited. One inspector stated that while he worked in the airline industry, the company would never send fewer than two inspectors to a contract repair station. Still other inspectors stated that individually, they are unable to obtain reasonable assurance of compliance with regulatory requirements at larger facilities. Other developments within FAA may have future implications for how repair station inspections are conducted. One recommendation from FAA’s 90-Day Aviation Safety Review completed in September 1996 was the creation of the Certification Program Office, which would include a National Certification Team to assist local Flight Standards district offices in processing new air carrier certifications. In addition, the new office will also include a centralized safety analysis and information management office that will assist inspectors in targeting surveillance resources and taking necessary corrective actions to mitigate safety risks. These approaches to improving the surveillance of air carriers can also be applied to the surveillance of repair stations’ operations. In a separate effort, FAA is testing a method of surveillance that emphasizes the compliance with specific regulations rather than the completion of a series of inspections. According to an FAA official involved with this test, FAA is examining this new approach because it is concerned that the current approach does not adequately link inspections to specific regulations. The test is being done on air carriers, not repair stations, but it could potentially be extended to repair stations, according to FAA personnel. FAA’s current inspection approach is based on the National Program Work Guidelines, issued annually by FAA headquarters. These guidelines list specific inspections that must be completed. The guidance tells inspectors what types of inspections to perform, but it does not tell them what regulations they are to verify compliance with. The new approach, called “virtual recertification,” works in much the opposite way. Instead of specifying the types of inspections to perform, it specifies the applicable safety regulations to be checked and leaves it up to the inspector to determine how to verify compliance. Given this emphasis, the inspector must ensure that surveillance activities are comprehensive enough to cover all aspects of the regulations. For example, an inspector would verify that the repair station is meeting requirements under 145.47(b), specifically, that the repair station ensures that all inspection and test equipment is tested at regular intervals to ensure correct calibration to a standard derived from the National Bureau of Standards. This approach may prove more successful at ensuring that important safety requirements are not omitted from surveillance. FAA is testing the approach in one region, where it is being applied to two air carriers. The region would like to extend the test to one large repair station as well, according to FAA officials. Although it is too early to judge the effects of this test on FAA’s approach to surveillance and its potential effect on repair stations is unknown, it may influence how FAA headquarters and offices adjust their future oversight of repair stations to provide the maximum benefit with the limited resources available. FAA appears to have the opportunity to enhance the effectiveness of its repair station inspections. While just one inspector may be sufficient to conduct surveillance on smaller or more specialized repair stations, this approach does not appear to be nearly as effective at large, complex facilities. At such facilities, team inspections have proven more effective in identifying deficiencies. In addition, team inspections do a better job of incorporating the four characteristics of quality inspections, in that they are more independent, comprehensive, focused, and standardized than inspections conducted by individual inspectors. Acting on their own, several FAA offices are reconfiguring their staffs and adjusting their operations to conduct more team inspections. Their approaches hold promise both for making more efficient use of inspection staff and for improving the quality of surveillance. FAA headquarters officials support these efforts but will evaluate them before asking other offices to examine such an approach. We think it is appropriate for all district offices, especially those with high concentrations of repair stations, to reevaluate their organization and surveillance approach to determine if they can make better use of their current inspection resources. For example, an office may determine that local team inspections are appropriate and a good use of resources for repair stations that are large, complex, or have higher rates of noncompliance. An analysis of the widely varying inspection approaches also highlights the importance of a standardized checklist or other effective job aid in ensuring that inspections are comprehensive. Repair stations can be very complex, and a checklist can help ensure that all applicable areas are covered and that this coverage is consistent from facility to facility. Such checklists are in widespread use by other organizations, such as air carriers and the Department of Defense, that conduct similar types of inspections. Where they are already in use within FAA, they appear to improve both comprehensiveness and standardization. Wider use of such checklists appears to be another appropriate way to increase the effectiveness of FAA’s inspection effort. We recommend that the Secretary of Transportation instruct the Administrator of FAA to (1) expand the use of locally based teams to conduct routine facility inspections, particularly for facilities that are large, complex, have higher rates of noncompliance, or meet predetermined risk indicators; and (2) develop and use checklists or job aids for inspectors that allow a greater degree of comprehensiveness, standardization, and assurance that the repair station complies with regulatory requirements. FAA agreed with the recommendations. With regard to expanding the use of locally based teams to conduct inspections, FAA headquarters officials said they support field office efforts currently under way but will assess these efforts before asking other offices to make greater use of in-house teams. While agreeing with the recommendation to provide better job aids for inspectors, FAA officials did not provide specific details on how or when they would implement this recommendation. In addition, FAA cited several agency initiatives that it said are under way to enhance its oversight of the repair station sector of the aviation industry. FAA said its 90-day safety review conducted last year recommended the creation of an analytical unit that could provide safety trend data to inspectors. FAA said an office within the Flight Standards Service was created on May 20, 1997, to provide data that will help focus inspection and other resources. The review also recommended that field and division managers be given flexibility to determine the skills needed in a particular field office to ensure the appropriate mix of technical, paratechnical, support, and clerical expertise. FAA said that this flexibility will be supported through the establishment of new staffing standards—a long-term project that is already under way. FAA also said that it had recognized the need to evaluate the air operators safety systems, including those of repair stations, and had initiated a Surveillance Improvement Program. Under this program, a team of safety inspectors, technical personnel, and managers, aided by Sandia National Laboratories, investigated ways to improve the surveillance process. The team recommended improvements in standardization and communication, as well as other areas that will allow FAA to evaluate compliance more effectively. Efforts are under way to implement the fundamental changes to surveillance that were recommended by this team. In many instances, we were unable to determine how well FAA was following up to ensure that repair stations corrected deficiencies identified during inspections. Particularly for domestic repair stations, the lack of documentation made it impossible to assess how quickly or thoroughly repair stations brought themselves into compliance. Documentation was better for foreign repair stations, which generally appeared to be correcting deficiencies quickly to qualify for renewal of their certificates. Resolving problems with documentation is particularly important because FAA is taking new steps to use its management information systems to determine where inspection resources should be targeted. Incomplete data can make such efforts less effective. Much of the value of inspection activity is not in finding and listing problems but in resolving the problems effectively, according to FAA field office managers and supervisors. They said that although much of the resolution may hinge on the working relationship between the FAA inspector or inspectors and the repair station’s personnel, effective documentation of the actions taken is a necessary part of demonstrating what problems were found, what was done to resolve them, and whether all parties are in agreement that deficiencies have been corrected. FAA officials acknowledged that effective documentation of inspection and follow-up activity is needed. FAA’s guidance is limited in specifying for inspectors what documents to include in repair station files. FAA’s files on repair stations are the agency’s official record of inspection-related activity—and therefore the backbone of any system that uses management information to help spot trends, identify problems, and target inspection resources, according to field office managers and supervisors. The guidance points out generally that the kinds of documentation of inspections and surveillance activities include inspection reports and related correspondence, but the guidance does not specifically require that any document be included. The closest thing to a requirement is a statement in the Airworthiness Inspector’s Handbook that the letter to the repair station describing all deficiencies should be included in the case file. After analyzing FAA’s inspection and follow-up program, we determined that, at a minimum, the files need to contain the following if the extent to which repair stations are correcting problems in a timely manner is to be monitored: a memo to the file or other documentation showing that an inspection was performed, what was inspected, and the results; a deficiency letter from FAA informing the repair station of the problems that needed to be corrected; a response from the repair station indicating what actions it was taking to address the deficiencies; and a memo to the file or other acknowledgment that the repair station’s actions were an acceptable response and that the deficiencies had been resolved. FAA officials agreed that these items are important in developing complete supporting information about the extent to which deficiencies were being resolved in a timely fashion. We believe—and FAA officials agreed—that beyond effective documentation in the repair station files, FAA also needs an effective management information system for capturing this basic information, combining it with information from other activities, and synthesizing it in ways that allow management to plan surveillance activities, schedule manpower resources, evaluate accomplishments, analyze results for patterns or trends, and modify planned activities. FAA’s management information tool for its inspection activity is its Program Tracking and Reporting Subsystem (PTRS). To provide data for planning and oversight of FAA’s inspection program, inspectors record inspection results in the computer-based PTRS. FAA’s PTRS Procedures Manual requires that inspectors record comprehensive reports demonstrating that inspections were performed, including inspection results, whether the repair station took any action, and whether the inspector took any follow-up action to ensure that deficiencies were corrected. Our analysis of the system showed that the key items of information needed for useful management reporting are the following: an indication that a repair station was inspected and the results; an indication that all deficiencies were communicated to the repair station in a deficiency letter; and an indication that the deficiency letter was “closed out” when corrective actions by the repair station were determined to be acceptable by the inspector. FAA officials agreed that PTRS should contain these items of information if the system’s reports are to be of substantial use. We did not find sufficient information in FAA’s repair station files to assemble a clear picture of how quickly and completely deficiencies found during the inspections of repair stations were being corrected. This was particularly true for domestic repair stations. In all, we reviewed the files on 331 domestic and 157 foreign repair stations for fiscal years 1993 through 1996. Determining the speed and completeness with which deficiencies were corrected was not possible for the following reasons: When there was evidence that problems had been found, evidence of corrective action was usually absent. Of the 331 domestic files reviewed, 96 contained deficiency letters, indicating that the facility had been notified that problems existed. Response letters from repair stations were present for 73 percent of the deficiency letters. However, only 22 percent of the deficiency letters were accompanied by documentation showing that the repair stations’ responses about resolving deficiencies were acceptable (see fig. 3.1). When there was no evidence in a file of a problem at a facility, this alone could not be taken as assurance that no problems had been found. Even for the 235 files that did not contain deficiency letters, it was not possible to assume that FAA inspectors had not identified deficiencies because the files contained no documentation showing that an inspection had been completed. Our review of files on foreign repair stations found more complete documentation that follow-up had occurred (see fig. 3.2). We reviewed 157 files and found deficiency letters in 135. Response letters from repair stations were present for nearly 80 percent of the 356 deficiency letters in these 135 files. An even higher percentage—85 percent—contained some form of documentation indicating that FAA had followed up. For most repair stations, this documentation took a form not found in domestic files—a certificate renewal letter. Unlike domestic repair stations, foreign repair station certificates are subject to renewal by FAA at least every 24 months. In practice, many are renewed every year, according to FAA personnel. As part of the renewal, the FAA office issues a new certificate once it is satisfied that the repair station has taken appropriate actions to resolve the deficiencies. While certificate renewal letters were the most common form of follow-up documentation, nearly one-fourth of the files with deficiency letters also contained additional evidence of FAA’s analysis of the repair stations’ responses. One office has taken a further step to tie the renewal letter more closely to the resolution of deficiencies. According to the manager of the Frankfurt field office, the office recognized in 1996 that files contained no formal documentation that a repair station had taken corrective action because the renewal letters did not specifically mention it. As a result, the office revised the renewal letter, adding a statement that reads, “We are pleased to inform you that the corrective actions and corrective action plan developed subsequent to the Frankfurt International Field Office repair station inspection, has been reviewed and accepted by the principal inspector(s).” The office began using these letters in August 1996. Documentation in PTRS is even less complete than documentation in the individual files on repair stations. We examined PTRS records to determine the degree to which they contained inspection and follow-up information for the deficiency letters we found in our review of domestic and foreign repair station files. PTRS generally showed that an inspection had been conducted, but responses on actions to correct deficiencies were less frequently recorded than in the files, as were indications that closure had been reached. A great deal of inconsistency was reflected in the data entered into the system. Some inspectors entered inspection results in great detail, others entered only partial data, and still others entered no data at all about the deficiencies found. For example, the PTRS entry for one inspection said, “Discrepancies listed in letter dated 04/16/96,” and provided no indication whether deficiencies had been corrected. In another example, the deficiency letter showed the inspector had documented nine deficiencies, but PTRS showed only three of these deficiencies and did not show if any had been corrected. As far back as 1987, we have reported on FAA’s shortcomings in having current and reliable information on key program elements. In 1991, we reported that the data in PTRS were unreliable for providing information on the performance of FAA’s inspection program and were inadequate for ensuring the accomplishment of key elements of the inspection program.In 1995, we concluded that FAA may be building its future information management system from a number of databases that contain incomplete, inconsistent, and inaccurate data. Again in 1996, we reported that until FAA implements a strategy to improve the quality of its data, problems with data quality may limit the usefulness of the system and prevent FAA from realizing its full potential for targeting limited inspection resources to higher-risk activities. In response to our reports, FAA has developed and implemented a comprehensive strategy to improve data quality. The Department of Transportation’s Inspector General has made similar observations. In March 1994, the Inspector General reported that FAA inspectors do not routinely document items inspected at repair stations or follow-up actions taken. In 1995, the Inspector General found that FAA inspectors were not interpreting PTRS reporting procedures consistently, resulting in inaccurate, inconsistent reports. The quality of PTRS data is important because PTRS is expected to provide data for FAA’s new information management initiative, the Safety Performance Analysis System (SPAS). SPAS is a computer-based analysis system designed to assist FAA in applying its limited inspection resources to those entities and areas that pose the greatest risk to aviation safety. This system, estimated to cost $32 million to develop and install, is also expected to highlight particular types of repair stations for increased surveillance or oversight because they are experiencing problems at rates that exceed the averages for that group. However, if the data on which SPAS is based are not complete and accurate, FAA could be limited in its ability to identify trends and target inspection resources. In the past, we have recommended data improvements as a preliminary step to implementing SPAS. Our 1995 report, which concluded that SPAS will not be effective if the quality of its data is not improved, recommended that FAA develop and implement a comprehensive strategy to make such improvements. FAA agreed with this recommendation. Although FAA initially intended to have its approach in place by the end of 1995, it was October 1996 when FAA issued a strategy that provides clear and measurable objectives for data quality, accurate assessments of the quality of the current data in each database (including an analysis and possible redirection of FAA’s existing initiatives to improve data quality), milestones for attaining the stated quality objectives, and estimates of the resources required. According to headquarters officials, full deployment of SPAS will be completed in December 1999, as required by legislation. Even so, until FAA completes the implementation of its strategy to improve data quality, problems with data quality will limit SPAS’ usefulness and prevent it from realizing its full potential. While the lack of good documentation precludes a precise comparison of FAA’s follow-up of deficiencies at foreign and domestic repair stations, some inspectors said that compliance comes more quickly at foreign repair stations. We interviewed 34 FAA inspectors who had conducted inspections of both foreign and domestic repair stations, and they were unanimous in concluding that compliance came more quickly at foreign stations. They said quicker compliance meant inspectors spent less time on follow-up and had more time for other work. The inspectors attributed this quicker compliance to the renewal requirement for foreign repair stations. Under FAA regulations, foreign repair stations must renew their certificates within 12 months of initial issuance and then at least every 24 months thereafter. By comparison, domestic repair stations retain their certificates indefinitely unless their operations are so badly run that FAA elects to take legal action to suspend or revoke their certificates. According to some inspectors, because new certificates cannot be issued until problems are resolved, foreign repair stations have an incentive to correct problems more quickly. Because of the poor documentation of the inspection results for domestic repair stations, however, we were unable to validate the inspectors’ views or to verify whether foreign repair stations achieve compliance in a more timely fashion than domestic repair stations. Within FAA, the strongest support for extending the certificate renewal requirement to domestic repair stations comes from inspectors who have inspected both foreign and domestic repair stations. They solidly supported extending renewal to domestic repair stations to gain quicker resolution of noncompliance issues. Of the inspectors responding to our mail survey who had experience with foreign repair stations in fiscal year 1996, 89 percent supported extending the requirement. Similarly, 31 of the 34 inspectors we interviewed who had inspected both kinds of repair stations said they favored a domestic renewal requirement. In our discussions with inspectors, we were told that the lack of a renewal requirement makes inspectors less efficient because they must spend more time following up on repair stations with deficiencies and less time on much needed surveillance or other responsibilities. A specific deadline for correcting deficiencies to retain certification creates an incentive or sense of urgency to resolve deficiencies in a timely manner. Inspectors with experience only with domestic repair stations were somewhat less favorable toward certificate renewal. Our survey results show that 48 percent of the respondents who had experience only with domestic repair stations in fiscal year 1996 were not in favor of renewing domestic repair station certificates on a regular basis (for example, every 24 months) as a way to improve compliance. Our follow-up discussions with 39 inspectors who had experience only with domestic repair stations identified their reason for opposing such a requirement was a concern that substantially more work would be generated. However, this perception appears to be unfounded. The 34 inspectors we interviewed who had inspected both kinds of repair stations indicated that extending the requirement would not place additional requirements on inspectors. These inspectors said inspection requirements for renewal were the same as those for the annual facility inspection. Support for extending the renewal requirement was lowest among FAA management. They did not agree with inspectors who said that renewal would improve safety by obtaining quicker resolution of noncompliance problems. The Acting Manager of the Aircraft Maintenance Division said, for example, “No one has demonstrated that FAA would get one added ounce of safety if it revised the rule to require recertification of domestic repair stations.” They also raised several concerns about adopting this approach. Additional resources would be needed. According to the Acting Manager of the Aircraft Maintenance Division, it would take too many resources (staff time, etc.) to recertify every repair station. We pointed out that according to inspectors who had done both facility and renewal inspections, the requirements were the same. For the most part, he did not provide us with further information about what additional resources would be needed if the recertification requirement were extended. FAA attorneys, however, said they would need additional resources to process any cases stemming from the denial of recertification. Current procedures already allow certificates to be revoked. The current enforcement process utilizes a range of enforcement actions—from educational and remedial to punitive legal enforcement remedies, including fines and criminal sanctions in the most serious cases. When FAA determines that an immediate need exists to protect public safety, it can issue an emergency order revoking or suspending a certificate. However, although revoking a domestic repair station’s certificate is a possibility if the facility remains out of compliance, it is a time-consuming process that can often take years. In a forthcoming GAO report on FAA enforcement actions, we analyzed all 2,200 certificate actions (this figure includes airlines, repair stations, pilots, etc.) taken during fiscal year 1996 and found that it took an average of 13 months to close an enforcement case. Our point is not that a sizeable number of repair stations have such serious deficiencies that FAA should undertake enforcement actions. Rather, it is that certificate renewal appears to operate as a sort of “gate” that helps ensure that repair stations quickly fix their problems, big or small, thus helping to bring their operations up to the quality intended by Federal Aviation Regulations. Due process could be a concern. A headquarters official said that if FAA allows an inspector to make the decision about whether a repair station keeps or loses its certificate, it could infringe on the due process requirements afforded domestic repair station operators. However, according to FAA attorneys, due process would not be a concern. The manager of the FAA Airworthiness Law Branch explained that as currently is the case with foreign repair stations, the final decision not to renew a certificate would rest with the Administrator. The same due process rights accorded to foreign repair stations would apply to domestic repair stations. Our audit work and recent work by the Department of Transportation’s Inspector General have identified continuing problems with the documentation of inspections and the quality of data entered into the Program Tracking and Reporting Subsystem, FAA’s tracking system. FAA’s guidance is very limited in specifying what documentation offices should keep. As a result, the documentation contained in the files on domestic repair stations, which acts as the official record of dealings between FAA and repair stations, did not contain sufficient data for us to determine how quickly and completely deficiencies found during inspections were being corrected. While FAA’s computer-based tracking system gives the agency means for overseeing the inspection program, problems with the quality of its data could jeopardize the reliability of FAA’s new computerized system, the Safety Performance Analysis System, in determining when to target greater inspection resources to repair stations that warrant more intensive oversight than others. In previous reports, we have recommended that FAA develop and implement a comprehensive strategy to improve the quality of all data used in its databases. Until FAA completes the implementation of this strategy, the extent and the impact of the problems with the quality of the system’s data will remain unclear. Data problems notwithstanding, there is some anecdotal evidence that foreign repair stations may have greater incentive than domestic repair stations to quickly fix deficiencies found during inspections because foreign repair stations are faced with a certificate renewal requirement and domestic repair stations are not. However, we were unable to verify this because of FAA’s poor documentation, particularly for domestic repair stations. Quick correction of all problems, large or small, helps to ensure better repair station operations, and having to do less follow-up to determine whether repair stations have taken corrective action frees FAA inspectors to conduct other work. Views within FAA vary widely as to whether a certificate renewal requirement, which appears to be at the heart of quicker compliance, should be extended to domestic repair stations. Although the evidence is not complete enough to support a recommendation that FAA take such a step, extending the certificate renewal requirement remains a potential option for consideration. To ensure that FAA inspectors are effectively documenting and resolving deficiencies found during inspections, we recommend that the Secretary of Transportation instruct the Administrator of FAA to take the following actions: Specify what documentation should be kept in files on repair stations to record complete inspection results and follow-up actions. The documentation should include inspection results, deficiency letters, repair station responses to deficiencies, and FAA’s responses indicating that the deficiencies were corrected. Monitor the implementation of the strategy to improve data quality to ensure it is completed as soon as possible so that the data used in SPAS are reliable when the system is fully implemented in 1999. FAA agreed with these recommendations but did not indicate how or when it would implement them. Following the May 1996 crash of a ValuJet airplane in the Florida Everglades, FAA announced six initiatives to upgrade the oversight of repair stations. These initiatives are not aimed at the inspection and follow-up activities discussed in the previous chapters. Instead, the initiatives are aimed at clarifying and augmenting the oversight role of air carriers, which, under FAA regulations, share responsibility for ensuring that repair stations are qualified to do the work and are performing responsibly. FAA did not intend that these initiatives would provide for any significant improvements in FAA’s own inspections of repair stations. However, other efforts now under way, coupled with our recommendations in the previous chapters, could help address problems with current inspections. For many years, FAA officials have acknowledged that regulations governing the inspection of repair stations need to be improved. Since 1989, FAA has been in the process of revising these regulations. Though progress has been made, FAA officials remain uncertain about when the proposed regulations will be published for review and comment. Inspectors responding to our survey said overwhelmingly that revised regulations would help the oversight effort. FAA is also adding more than 700 inspectors to its ranks who will, in part, oversee repair stations. Survey responses from current inspectors indicated that the success of this effort will depend in part on the qualifications of new inspectors and on the training available to all those in the inspector ranks. Finally, FAA is revising its regulations to require that repair station mechanics receive more training. FAA announced the improvements to its inspection policies on June 18, 1996. These improvements consist of six specific initiatives designed, according to FAA, to “toughen the FAA’s oversight of airlines that rely on contract maintenance and training.” Under Federal Aviation Regulations, air carriers share with FAA the responsibility of ensuring that repair stations are conducting work that meets safety standards. FAA is responsible for ensuring that repair stations comply with regulations; air carriers are responsible for ensuring that repair stations perform maintenance in accordance with the air carriers’ manuals. The six initiatives were issued because FAA identified problems in the way some air carriers provided oversight of repair stations, according to FAA’s Deputy Associate Administrator for Regulation and Certification. Accordingly, FAA’s initiatives focus on strengthening the oversight role of air carriers, not on modifying FAA’s own approach to inspecting repair stations and ensuring that corrective action is taken. The six initiatives involve actions to be taken by the air carriers or by FAA inspectors overseeing air carriers (see fig. 4.1). Collectively, these initiatives require that (1) air carriers demonstrate regulatory compliance for each of their contract facilities doing substantial heavy maintenance or repairs; (2) FAA ensure that air carriers list all contractors performing substantial maintenance for them; and (3) air carriers audit repair stations they want to begin using. They also call for additional review by FAA inspectors—mainly those inspectors who oversee air carriers. Because these initiatives were directed at air carriers, they had little or no effect on FAA’s direct oversight of repair stations. In fact, all 72 repair station inspectors who responded specifically to our question about the impact of FAA’s initiatives said that the initiatives and guidance have had no impact on the extent of their surveillance activities. They told us that because the initiatives were directed at the air carriers and the FAA inspectors responsible for overseeing the air carriers, rather than at the inspectors overseeing repair stations, their oversight activities have not changed. FAA implemented these initiatives through two major efforts—issuing guidelines and issuing a handbook bulletin. In July 1996, FAA headquarters issued the National Flight Standards Work Program Guidelines. These guidelines stated that air carriers would be required to demonstrate that programs at each major repair station complied with regulations. The guidelines required air carriers to list all repair stations performing substantial heavy maintenance in their operations specifications. For the FAA inspectors whose duties involve monitoring the air carriers (as opposed to monitoring the repair stations themselves), the guidelines stressed the importance of careful oversight but did not require specific actions on the inspectors’ part. FAA headquarters officials said the guidelines left it to inspectors to decide whether to place more emphasis on the surveillance of repair stations as part of their oversight of air carriers. Matters in the guidance for inspectors to consider in making their decisions included a particular FAA office’s work demands and the complexities or problem areas of the repair stations involved. Inspectors overseeing air carriers told us these initiatives have increased their awareness of the need to oversee repair stations working for air carriers, but inspectors overseeing repair stations told us the initiatives had not changed their oversight activities. FAA augmented the guidelines a month later with a handbook bulletin that provided more specific guidance for the last two initiatives shown in figure 4.1. The handbook bulletin defined “substantial maintenance” for air carriers, thereby clarifying which repair stations needed to be included on an air carrier’s operations specifications or audited by an air carrier prior to adding them to the list. The handbook bulletin’s more specific guidance on these matters was as follows: To implement the initiative that all repair stations performing significant maintenance be listed, FAA inspectors were to list, by October 1, 1996, the repair stations that performed substantial maintenance, ensure that each repair station had had a current audit, include the repair stations as part of the operations specifications, and update FAA’s Vital Information Subsystem database with the new operation specification information. To implement the initiative that air carriers conduct audits of any repair stations added to the list, FAA inspectors were to ensure, effective September 1, 1996, that air carriers audit any new maintenance repair station they want to add to their operations specifications. The audits’ purpose was to ensure that the repair stations are capable of performing the contracted work in accordance with the carriers’ approved programs. Under the handbook’s procedures, FAA must also review and accept the audit before an air carrier can use the contractor. FAA officials told us about 150 air carriers needed to comply with the bulletin by identifying the repair stations performing substantial maintenance for them. The officials said all of the carriers had complied by late September or early October 1996. Subsequent to that, air carriers have added other repair stations to their operations specifications after having their audits of the repair stations approved by FAA inspectors. For example, one air carrier recently added two repair stations to its operations specifications after the FAA inspector reviewed and approved both repair station audits. In contrast, another FAA inspector responsible for an air carrier denied use of two new repair stations when he found deficiencies in the audit reports for both repair stations. FAA officials stated that the review of air carriers’ audits of repair stations is something the inspectors will be doing on an ongoing basis. Any time an air carrier wants to add a repair station that does substantial maintenance, the carrier must audit the repair station and the principal maintenance inspector for that air carrier will need to accept the audit before the repair station can be used. Moreover, every time a new repair station is added, the air carrier’s operations specifications must be changed. FAA headquarters officials and all of the 86 repair station inspectors we interviewed told us current regulations governing the oversight of repair stations are out of date in a number of respects. According to FAA, the current repair station regulations are based primarily on concepts that were developed during the infancy of the aviation industry. Aircraft, power plants, maintenance, alteration concepts, and technology have progressed substantially in the last three decades. However, very few substantive changes have been made to the regulations since 1962. Portions of the regulations are no longer appropriate or have become increasingly difficult to administer, while some other portions no longer make a significant contribution to aviation safety. As a result, FAA has had to grant exemptions and create special administrative procedures to handle situations not provided for adequately in the regulations. In 1975, FAA and industry officials recommended revising substantial requirements of the repair station regulations. According to FAA, minor amendments to the regulations were subsequently adopted, but no major revision was made. In 1989, in light of public meetings that were part of its regulatory review, FAA decided to revise the regulations completely. However, it has taken 8 years to prepare the revisions, FAA officials said. They attributed the delays to the project being preempted by other rulemaking and policy projects. FAA hopes to begin implementing revised regulations in the coming months. It has prepared revised regulations, and headquarters officials told us the revisions are now being reviewed by the Department of Transportation and the Office of Management and Budget. Officials did not know when the revisions would be published for comment in the Federal Register. FAA had established a target of summer 1997 for publishing these revisions, but this target was not met. FAA will consider the comments received before taking action on the proposed revisions. The Deputy Associate Administrator for Regulation and Certification anticipated that FAA would receive voluminous comments, necessitating considerable time for review and response. FAA headquarters officials outlined several things they hoped to accomplish with the proposed regulations. First, they are proposing that domestic repair stations be required to have a quality control system that is based on the Joint Aviation Authorities’ (JAA) system. Second, the proposed regulations simplify the repair station rating system and make the ratings less confusing than the existing system. Third, the proposed regulations impose training requirements for entry-level personnel. Existing regulations do not require that entry-level personnel be trained. They require only that repair stations use practical tests or employment records to determine the abilities of uncertified employees. Finally, the proposed regulations make repair stations responsible for controlling and evaluating their vendors. Existing regulations do not require that repair stations evaluate their subcontractors or vendors. They require only that repair stations have a method of inspecting incoming material to ensure that it is free from apparent defects or malfunctions. FAA attorneys noted that the proposed rule will remove the distinction between most domestic and foreign repair stations. There are indications that some in the repair station industry may oppose many of these changes. For example, the National Air Transportation Association, an industry association, stated that it expects that the proposed regulations will require new training programs, additional record-keeping requirements, and the implementation of quality assurance systems like the air carriers’ quality assurance systems. This, the association predicts, will increase repair station costs, causing as many as a third of them to turn in their repair station certificates. The association contends that the anticipated proposed regulations will “cripple the maintenance industry,” and it plans to fight them. This opposition indicates that completing the rulemaking process may take a significant amount of time. The importance of completing this project can be seen in inspectors’ responses to our survey. As figure 4.2 shows, most inspectors believe that various changes in the regulations would help them carry out their inspection duties. Of the inspectors we surveyed, most (88 percent) favored updating the regulations as a way to improve repair station regulatory compliance. In particular, most inspectors (77 percent) favored changes to require repair stations to notify FAA of the names of air carriers for which they do work. Most inspectors (78 percent) also favored changing regulations to require air carriers to provide their manuals or procedures along with the parts to be repaired by repair stations. Inspectors provided examples of why revised regulations are needed. One inspector said the regulations do not address new repair techniques such as nondestructive testing and repair of composite materials, which means that the inspector must evaluate a repair station’s practices using his or her own judgment. Two inspectors noted that regulations require repair stations to have an FAA-approved inspection procedure manual but do not require repair stations to follow it. As a result, an inspector who finds that a repair station failed to follow its approved manual cannot write a violation. The Congress has provided FAA with additional resources to hire more inspectors. FAA increased the number of inspectors from 2,324 in fiscal year 1994 to an estimated 3,062 at the end of fiscal year 1997, a 32-percent increase. FAA’s approved budget for fiscal year 1995 authorized 201 additional inspectors; for fiscal year 1996, 237 additional inspectors, and for fiscal year 1997, 300 additional inspectors. To fill the additional authorizations and to rehire for attrition, FAA hired 302 inspectors in fiscal year 1995 and 361 in fiscal year 1996. About 63 percent of the inspectors hired were airworthiness inspectors. According to the manager of the Human Resource Programs Branch, most airworthiness inspectors have the oversight of repair stations as part of their duties. FAA has requested 235 additional inspectors in its fiscal year 1998 budget estimate. If the request is approved, this would represent a 42-percent increase in inspector staffing since fiscal year 1994. Responses to our survey indicate that current FAA inspectors believe the impact of these new inspectors will depend mainly on how strong the applicants’ qualifications are. As figure 4.3 shows, current inspectors believe that aviation industry experience, particularly supervisory experience, is important. For example, 81 percent of inspectors responding to our survey strongly or generally favored having inspectors with hands-on technical experience in industry as a way to improve repair stations’ compliance. FAA’s current qualifications for entry-level inspectors require maintenance experience in a repair station, air carrier facility, or military repair facility, and 3 years of supervisory experience. The manager of the Human Resources Program Branch told us FAA requires that inspectors have 3 years of supervisory experience because they must be able to communicate orally and in writing with mechanics, engineers, and managers. We did not determine whether FAA’s newly hired inspectors met the agency’s qualification standards for new hires. The training of new and existing inspectors is another area that has been a focus of attention. We and others have reported for several years that FAA’s aviation safety inspectors are not receiving needed training. Most recently, in October 1996 we issued a report recommending that FAA evaluate the impact of recent budget reductions on critical safety-related functions, including training, and report the results to the Congress through the appropriations process. FAA inspectors’ responses to our survey indicate that most inspectors continue to be concerned about the need for improved training. Specifically, 82 percent of the inspectors surveyed said they strongly or generally favored providing inspectors with maintenance and avionics training, including hands-on training, as a way to improve repair stations’ compliance with regulations. Over three-quarters of the inspectors (80 percent) favored more training on inspection skills. Additionally, 45 percent said that the inability to get needed training is at least a minor reason why inspectors are not able to ensure repair stations’ compliance with all aspects of the regulations. These results add support for our 1996 recommendation. Inspectors also expressed their concern about inadequate training in written comments on our survey forms. For example, one inspector stated that inspectors need specific training on aircraft and systems. Another inspector wrote, “I have completed FAA repair station certification and surveillance course; however, that course does not educate in the procedures for overhaul. To understand the product, I am relying on personal experience I had before I joined FAA, with no recurrent training on the actual product.” Another inspector stated he needed more hands-on training on a turbine engine before he was sent to inspect it. Because of significant technological advances in the aviation industry, current FAA regulations that prescribe the certification requirements for an estimated 145,000 mechanics and repairmen need to be updated. Aviation maintenance is one of the most complex areas of the industry, and aviation maintenance personnel must possess many technical skills. Changes in aircraft technology have also significantly increased the need for specialized training. FAA has been updating, consolidating, and clarifying all its certification, training, experience, and currency requirements for aviation maintenance personnel for a new rule (14 C.F.R. part 66) entitled “Certification: Aviation Maintenance Personnel.” According to FAA, some of the key features of this proposed rule include the creation of additional certificates and ratings for aviation maintenance expansion of current certification requirements, and establishment of additional training and recurrent training requirements for certified aviation maintenance personnel. Initially, on August 17, 1994, the proposed rule was published in the Federal Register for public comment. However, the final issuance of the rule has been delayed because FAA officials decided that to avoid confusion they need to combine the proposed rule with other rule revisions. According to FAA headquarters officials, FAA plans to reissue the revised proposed rule in the Federal Register for public comment in December 1997. Although the various activities FAA has under way may help strengthen the oversight of repair stations, none of them directly addresses the concerns about inspection and follow-up that we discussed in chapters 2 and 3—namely the limited success in identifying problems through reviews by individual inspectors of large facilities and the inadequate documentation of efforts to correct deficiencies found during inspections. FAA’s initiatives may help the air carriers—and the FAA inspectors who monitor those air carriers—be more attentive to the work being performed by repair stations, but they do not appear to have any direct link to improving the quality of FAA’s inspections of repair stations or the speed and thoroughness with which problems are resolved. Also, as FAA has struggled to deal with a growing workload caused by new airlines and the greater complexities of a deregulated environment, FAA has received a 32-percent increase in the number of its inspectors since fiscal year 1994. To use these additional resources as effectively as possible, FAA needs to overcome its inspection program’s weaknesses in identifying problems at repair stations and in documenting inspection results that need follow-up. The results of our work also underscore the need for progress in several areas that FAA is addressing by updating repair station regulations, hiring new inspectors, and improving training programs. Progress on initiatives for updating regulations on the oversight of repair stations and the certification and training requirements for maintenance personnel has been slow. These efforts may require additional management attention. To ensure that outdated regulations governing the oversight of repair stations and certification and training requirements for maintenance personnel are updated as soon as possible, we recommend that the Secretary of Transportation instruct the Administrator of FAA to expedite the efforts to update the regulations and to establish and meet schedules for completing the updates. FAA agreed with the recommendation but did not indicate how or when it would be implemented. | Pursuant to a congressional request, GAO examined the Federal Aviation Administration's (FAA) oversight of the aviation repair station industry, focusing on: (1) the nature and scope of the oversight of repair stations conducted by FAA personnel; (2) how well FAA follows up on inspections to ensure that the deficiencies in repair station operations are corrected once they have been identified; and (3) the steps taken by FAA to improve the oversight of repair stations. GAO noted that: (1) FAA's records indicate that the agency is meeting its goal of inspecting every repair station at least once a year; (2) GAO examined FAA's 1996 inspection records on about one-fourth of the 2,800 repair stations doing work for air carriers and confirmed that minimum inspection requirements had been met; (3) in addition, 84 percent of the inspectors GAO surveyed stated that they believed the overall compliance of repair stations was good or excellent; (4) however, more than half of the inspectors stated that there were areas of compliance that repair stations could improve; (5) FAA relies primarily on reviews by individual inspectors of most domestic repair stations; (6) in a few cases, FAA also uses teams to assess compliance at large, complex facilities; (7) at such facilities, a team approach has been shown to be more effective at identifying problems than visits by individual inspectors, uncovering more systemic and long-standing deficiencies; (8) a few of FAA's offices have recognized that the traditional approach of relying on one inspector may be inadequate in such situations and have begun to use teams to inspect large repair stations; (9) FAA officials acknowledge and support these initiatives; (10) GAO could not find sufficient documentation to determine how well FAA followed up to ensure that the deficiencies found during the inspections of repair stations were corrected; (11) FAA does not tell its inspectors what documentation to keep, and the resulting information gaps lessen the agency's ability to determine how well its inspection activities are working or to identify and react to trends; (12) these gaps in documentation are particularly important because FAA is spending more than $30 million to develop a reporting system that, among other things, is designed to use the documentation to make inspection decisions, such as where to apply the agency's inspection resources to address those areas that pose the greatest risk to aviation safety; (13) following the May 1996 crash of a ValuJet DC-9 in the Florida Everglades, FAA announced new initiatives to upgrade the oversight of repair stations; (14) these initiatives were directed at clarifying and augmenting air carriers' oversight of repair stations, not at ways in which FAA's own inspection resources could be better utilized; and (15) however, FAA does have three other efforts under way that would have a more direct bearing on its own inspection activities at repair stations. |
CBP’s SBI program is to leverage technology, tactical infrastructure, and people to allow CBP agents to gain control of the nation’s borders. Within SBI, SBInet is the program for acquiring, developing, integrating, and deploying an appropriate mix of (1) surveillance technologies, such as cameras, radars, and sensors, and (2) command, control, communications, and intelligence (C3I) technologies. The initial focus of SBInet has been on addressing the requirements of CBP’s Office of Border Patrol, which is responsible for securing the borders between the established ports of entry. The longer-term SBInet systems solution also is to address requirements of CBP’s two other major components—the Office of Field Operations, which controls vehicle and pedestrian traffic at the ports of entry, and the Office of Air and Marine Operations, which operates helicopters, fixed-wing aircraft, and marine vessels used in securing the borders. Figure 1 provides a high-level, operational concept of the long-term SBInet systems solution. Surveillance technologies are to include a variety of sensor systems that improve CBP’s ability to detect, identify, classify, and track items of interest along the borders. Unattended ground sensors are to be used to detect heat and vibrations associated with foot traffic and metal associated with vehicles. Radars mounted on fixed and mobile towers are to detect movement, and cameras on fixed and mobile towers are to be used to identify, classify, and track items of interest detected by the ground sensors and the radars. Aerial assets are also to be used to provide video and infrared imaging to enhance tracking of targets. The C3I technologies are to include software and hardware to produce a Common Operating Picture (COP)—a uniform presentation of activities within specific areas along the border. The sensors, radars, and cameras are to gather information along the border, and the system is to transmit this information to the COP terminals located in command centers and agent vehicles and assemble this information to provide CBP agents with border situational awareness. More specifically, the COP technology is to allow agents to (1) view data from radars and sensors that detect and track movement in the border areas, (2) control cameras to help identify and classify illegal entries, (3) correlate entries with the positions of nearby agents, and (4) enhance tactical decision making regarding the appropriate response to apprehend an entry, if necessary. Initially, COP information is to be distributed to terminals in command centers. We observed that these terminals look like a standard computer workstation with multiple screens. From this workstation, an operator is to be able to view an area of interest in several different ways. For example, the operator is to see different types of maps, satellite images, and camera footage on the multiple screens. The operator is also to be able to move the cameras to track images on the screen. According to program officials, eventually, when the radars detect potential items of interest, the system is to automatically move the cameras so the operator does not always need to initiate the search in the area. We observed that COP data are also available on laptop computers, known as mobile data terminals, mounted in select agent vehicles in the field. These terminals are to enable field agents to see information similar to that seen by command center operators. Eventually, the COP technology is to be capable of providing distributed surveillance and tactical decision- support information to other DHS agencies and stakeholders external to DHS, such as local law enforcement. Figure 2 shows examples of COP technology in a command station and an agent vehicle. The first SBInet capabilities were deployed under a pilot or prototype effort known as “Project 28.” Project 28 is currently operating along 28 miles of the southwest border in the Tucson Sector of Arizona. Project 28 was accepted by the government for deployment 8 months behind schedule (in February 2008); this delay occurred because the contractor- delivered system did not perform as intended. As we have previously reported, reasons for Project 28 performance shortfalls and delays include the following: System requirements were not adequately defined, and users were not involved in developing the requirements. System integration testing was not adequately performed. Contractor oversight was limited. Project scope and complexity were underestimated. To manage SBInet, DHS established a program office within CBP. The program office is led by a program manager and deputy program managers for program operations and mission operations. The program manager is responsible for the execution of the program, including developing, producing, deploying, and sustaining the system to meet the users’ needs. Among other things, this includes developing and analyzing requirements and system alternatives, managing system design and development, evaluating the system’s operational effectiveness, and managing program risk. A system life cycle management approach typically consists of a series of phases, milestone reviews, and related processes to guide the acquisition, development, deployment, and operation and maintenance of a system. Among other things, the phases, reviews, and processes cover such important life cycle activities as requirements development and management, design, software development, and testing. Based on available program documentation, augmented by program official briefings and statements, key aspects of the SBInet system life cycle management approach are described below. In general, SBInet surveillance systems are to be acquired through the purchase of commercially available products, while the COP systems involve development of new, customized systems and software. Together, both categories are to form a deployable increment of the SBInet capabilities, which the program office refers to as a “block.” Each block is to include a release or version of the COP. SBInet documentation shows that the program office is acquiring the blocks incrementally using a “spiral” approach, under which an initial system capability is to be delivered based on a defined subset of the system’s total requirements. This approach is intended to allow CBP agents access to new technological tools sooner rather than later for both operational use and feedback on needed enhancements or changes. Subsequent spirals or iterations of system capability are to be delivered based on feedback and unmet requirements, as well as the availability of new technologies. Figure 3 illustrates conceptually how the different capabilities are to come together to form a block and how future blocks are to introduce more capabilities. The approach used to design and develop SBInet system capabilities for each block includes such key activities as requirements development, system design, system acquisition and development, and testing. The approach, as explained by program officials and depicted in part in various documents, also includes various reviews, or decision points, to help ensure that these activities are being done properly and that the system meets user needs and requirements. These reviews are to be used in developing both the overall SBInet Block 1 capability and the COP software. Table 1 provides a high-level description of the major reviews that are to be performed in designing and developing the system prior to deployment to the field and in the order that they occur. Before a set of capabilities (i.e., block) is deployed to a specific area or sector of the border, activities such as site selection, surveys, and environmental impact assessments are conducted to determine the area’s unique environmental requirements. The border area that receives a given block, or set of system capabilities, is referred to as a “project.” Each project is to have a given block configured to its unique environmental requirements, referred to as a project “laydown.” The deployment approach is to include such key activities as requirements development, system design, project laydown, integration, testing, and installation. The deployment approach is also to entail various reviews, or decision points, to help ensure that these activities are being done properly and that the system meets user needs and requirements. Table 2 provides a high-level description of the major reviews that are to be part of project laydown in the order that they occur. Among the key processes provided for in the SBInet system life cycle management approach are processes for developing and managing requirements and for managing testing activities. With respect to requirements development and management, SBInet requirements are to consist of a hierarchy of six types of requirements, with the high-level operational requirements at the top. These high-level requirements are to be decomposed into lower-level, more detailed system, component, design, software, and project requirements. Having a decomposed hierarchy of requirements is a characteristic of complex information technology (IT) projects. The various types of SBInet requirements are described in table 3. Figure 4 shows how each of these requirements relate to or are derived from the other requirements. With respect to test management, SBInet testing consists of a sequence of tests that are intended to verify first that individual system parts meet specified requirements, and then verify that these combined parts perform as intended as an integrated and operational system. Such an incremental approach to testing is a characteristic of complex IT system acquisition and development efforts. Through such an approach, the source of defects can be isolated more easily and sooner, before they are more difficult and expensive to address. Table 4 summarizes these tests. Important aspects of SBInet remain ambiguous and in a continued state of flux, making it unclear and uncertain what technology capabilities will be delivered, when and where they will be delivered, and how they will be delivered. For example, the scope and timing of planned SBInet deployments and capabilities have continued to change since the program began and, even now, remain unclear. Further, the approach that is being used to define, develop, acquire, test, and deploy SBInet is similarly unclear and has continued to change. According to SBInet officials, schedule changes are due largely to an immature system design, and the lack of a stable development approach is due to insufficient staff and turnover. The absence of clarity and stability in these key aspects of SBInet introduces considerable program risks, hampers DHS’s ability to measure program progress, and impairs the ability of the Congress to oversee the program and hold DHS accountable for program results. One key aspect of successfully managing large IT programs, like SBInet, is establishing program commitments, including what capabilities are to be deployed and when and where they are to be deployed. Only when such commitments are clearly established can program progress be measured and can responsible parties be held accountable. The scope and timing of planned SBInet deployments and capabilities that are to be delivered have not been clearly established, but rather have continued to change since the program began. Specifically, as of December 2006, the SBInet System Program Office planned to deploy an “initial” set of capabilities along the entire southwest border by late 2008 and planned to deploy a “full” set of operational capabilities along the southern and northern borders (a total of about 6,000 miles) by late 2009. As of March 2007, the program office had modified its plans, deciding instead to deploy the initial set of capabilities along the southwest border by the end of fiscal year 2007 (almost a year earlier than originally planned) and delayed the deployment of the final set of capabilities for the southern and northern borders until 2011. In March 2008, the program office again modified its deployment plans, this time significantly reducing the area to which SBInet capabilities are to be deployed. At this time, DHS planned to complete deployments to three out of nine sectors along the southwest border—specifically, to Tucson Sector by 2009, Yuma Sector by 2010, and El Paso Sector by 2011. According to program officials, other than the dates for the Tucson, Yuma, and El Paso Sectors, no other deployment dates have been established for the remainder of the southwest or northern borders. (Figure 5 shows the changes in the planned deployment areas.) The figure also shows the two sites within the Tucson Sector, Tucson 1 and Ajo 1, at which an initial Block 1 capability is to be deployed. Together, these two deployments cover 53 miles of the 1,989-mile-long southern border. According to the March 2008 SBI expenditure plan and agency documentation as of June 2008, these two sites were to have been operational by the end of 2008. However, as of late July 2008, program officials reported that the deployment schedule for these two sites has again been modified, and they will not be operational until “sometime” in 2009. According to program officials, the slippage in the deployment schedule is due to the need to complete environmental impact assessment documentation for these locations. The slippages in the dates for the first two Tucson deployments, according to a program official, will, in turn, delay subsequent Tucson deployments, although revised dates for these subsequent deployments have not been set. Just as the scope and timing of planned deployments have not been clear and have changed over time, the specific capabilities that are to be deployed have been unclear. For example, in April 2008, program officials stated that they would not know which of the SBInet requirements would be met by Block 1 until the Critical Design Review, which at that time was scheduled for June 2008. At that time, program officials stated that the capabilities to be delivered would be driven by the functionality of the COP. In June, the review was held, but according to available documentation, the government did not consider the design put forth by the contractor to be mature. As a result, the system design was not accepted in June as planned. Among the design limitations found was a lack of evidence that the system requirements were used as the basis for the Tucson 1 and Ajo 1 design, lack of linkage between the performance of surveillance components and the system requirements, and incomplete definition of system interfaces. As of late July 2008, these issues were unresolved, and thus the design still had not been accepted. In addition, in late July 2008, agency officials stated that the capabilities to be delivered will be driven by the functionality of the surveillance components, not the COP. In addition, the design does not provide key capabilities that are in requirements documents and were anticipated to be part of the Block 1 deployments to Tucson 1 and Ajo 1. For example, the first deployments of Block 1 will not have the mobile data terminals in border patrol vehicles, even though (1) such terminals are part of Project 28 capabilities and (2) workshops were held with the users in February 2008 and June 2008 to specifically define the requirements for these terminals for inclusion in Block 1. According to program officials, these terminals will not be part of Block 1 because the wireless communications infrastructure needed to support these terminals will not be available in time for the Tucson 1 deployment. Rather, they expect the wireless infrastructure to be ready “sometime” in 2009 and said that they will include the mobile data terminals in Block 1 deployments when the infrastructure is ready. Without the mobile data terminals, agents will not be able to obtain key information from their vehicles, such as maps of activity in a specific area, incident reports, and the location of other agents in the area. Instead, the agents will have to use radios to communicate with the sector headquarters to obtain this information. In addition, program officials told us that a number of other requirements cannot be included in the Block 1 version of the COP, referred to as version 0.5, due to cost and schedule issues. However, we have yet to receive a list of these requirements. According to program officials, they hope to upgrade the COP in 2009 to include these requirements. Without clearly establishing program commitments, such as capabilities to be deployed and when and where they are to be deployed, program progress cannot be measured and responsible parties cannot be held accountable. Another key aspect of successfully managing large programs like SBInet is having a schedule that defines the sequence and timing of key activities and events and is realistic, achievable, and minimizes program risks. However, the program office does not yet have an approved integrated master schedule to guide the execution of SBInet, and according to program officials, such a schedule has not been in place since late 2007. In the absence of an approved integrated master schedule, program officials stated in mid-August 2008 that they have managed the program largely using task-order-specific baselined schedules, and have been working to create a more integrated approach. A program official also stated that they have recently developed an integrated master schedule but that this schedule is already out of date and undergoing revision. For example, the deployment of the SBInet system to the Tucson Sector will not be completed in 2009 as planned. To understand where the program is relative to established commitments, we analyzed schedule-related information obtained from other available program documents, briefings, and interviews. In short, our analysis shows a schedule in which key activities and events are subject to constant change, as depicted in the following two figures. Figure 6 shows the changes to the schedule of planned and held reviews and anticipated deployment dates, and figure 7 shows the changes to the schedule of testing activities. In May 2008, program officials stated that the schedule changes were due largely to the fact that the contractor had not yet provided a satisfactory system-level design. They also noted that the contractor’s workforce has experienced considerable turnover, including three different program managers and three different lead system engineers. They also stated that the System Program Office has experienced attrition, including turnover in the SBInet Program Manager position. Without stability and certainty in the program’s schedule, program cost and schedule risks increase, and meaningful measurement and oversight of program status and progress cannot occur, in turn, limiting accountability for results. System quality and performance are in large part governed by the processes followed in developing and acquiring the system. To the extent that a system’s life cycle management approach and related development and acquisition processes are well-defined, the chances of delivering promised system capabilities and benefits on time and within budget are increased. To be well-defined, the approach and processes should be fully documented, so that they can be understood and properly implemented by those responsible for doing so. The life cycle management approach and processes being used by the SBInet System Program Office to manage the definition, design, development, testing, and deployment of system capabilities has not been fully and clearly documented. Rather, what is defined in various program documents is limited and not fully consistent across these documents. Moreover, in discussions with agency officials to clarify our understanding of these processes, new terms and processes have been routinely introduced, indicating that the processes are continuing to evolve. Agency officials acknowledge that they are still learning about and improving their processes. Without a clearly documented and universally understood life cycle management approach and supporting processes, the program is at increased risk of not meeting expectations. Key program documentation that is to be used to guide acquisition and development activities, including testing and deployment activities, is incomplete, even though SBInet acquisition and development are already under way. For example, officials have stated that they are using the draft Systems Engineering Plan, dated February 2008, to guide the design, development, and deployment of system capabilities, and the draft Test and Evaluation Master Plan, dated May 2008, to guide the testing process—but both of these documents are lacking sufficient information to clearly guide system activities, as the following examples explain: The Systems Engineering Plan includes a diagram of the engineering process; however, the steps of the process and the gate reviews are not defined or described in the text of the document. For example, this document does not contain sufficient information to understand what occurs at key reviews, such as the Preliminary Design Review, the Critical Design Review, and the Test Readiness Review. The Test and Evaluation Master Plan describes in more detail some of the reviews that are not described in the Systems Engineering Plan, but the reviews included are not consistent between the documents. For example, the Test and Evaluation Master Plan includes a System Development and Demonstration Review that is not listed in the Systems Engineering Plan. In addition, it is not clear from the Test and Evaluation Master Plan how the reviews fit into the overall engineering process. Statements by program officials responsible for system development and testing activities, as well as briefing materials and diagrams that these officials provided, did not add sufficient clarity to describe a well-defined life cycle management approach. Moreover, these descriptions were not always consistent with what was contained in the documentation, as the following examples demonstrate: Component testing is not described in the Test and Evaluation Master Plan in a manner consistent with how officials described this testing. Specifically, while the plan states that components will be tested against the corresponding component requirements to ensure all component performance can be verified, program officials stated that not all components will undergo component testing. Instead, they said that testing is not required if component vendors submit a certificate of compliance for certain specifications. Functional qualification testing was described to us by program officials in July 2008 as a type of testing to be performed during software development activities. However, this type of testing is not defined in available program documentation, and it was not included in any versions of the documentation associated with the life cycle management approach and related engineering processes. Certain reviews specified in documentation of the life cycle management process are not sufficiently defined. For example, the Systems Engineering Plan shows a Production Readiness Review as part of the system-level process and an Operational Readiness Review as part of the project-level process. However, program officials stated that these reviews are not completely relevant to SBInet because they are targeted for informational systems rather than tactical support systems, such as SBInet. According to the officials, they are in the process of determining how to apply the reviews to SBInet. For example, in July 2008, officials reported that they may move the Production Readiness Review from the system-level set of activities, as shown in the Systems Engineering Plan, to the project-level set of activities. Program officials also stated that they are working to better define these reviews in the Systems Engineering Plan. Program officials told us that the SBInet life cycle management approach and related engineering processes are understood by both government and contractor staff through the combination of the draft Systems Engineering Plan and government-contractor interactions during design meetings. Nevertheless, they acknowledged that the approach and processes are not well documented, citing a lack of sufficient staff to both document the processes and oversee the system’s design, development, testing, and deployment. They also told us that they are adding new people to the project with different acquisition backgrounds, and that they are still learning about, evolving, and improving the approach and processes. According to these officials, a revised and updated Systems Engineering Plan should be finalized by September 2008. The lack of definition and stability in the approach and related processes being used to define, design, develop, acquire, test, and deploy SBInet introduce considerable risk that both the program officials and contractor staff will not understand what needs to be done when, and thus that the program will not consistently employ disciplined and rigorous methods. Without the use of such methods, the risk of delivering a system that does not meet operational needs and does not perform as intend is increased. Moreover, without a well-defined approach and processes, it is difficult to gauge progress and thus promote performance and accountability for results. Well-defined and managed requirements are a cornerstone of effective system development and acquisition. According to recognized guidance, documenting and implementing a disciplined process for developing and managing requirements can help reduce the risks of developing a system that does not meet user needs, cannot be adequately tested, and does not perform or function as intended. Such a process includes, among other things, eliciting user needs and involving users in the development process; ensuring that requirements are complete, feasible, verifiable, and approved by all stakeholders; documenting and approving the requirements to establish a baseline for subsequent development and change control; and ensuring that requirements are traceable both back to operational requirements and forward to detailed system requirements and test cases. To the program office’s credit, it recently developed guidance for developing and managing requirements that is consistent with recognized leading practices. For example, the program’s guidance states that a requirements baseline should be established and that requirements are to be traceable both back to higher-level requirements and forward to verification methods. However, this guidance was not finalized until February 2008 and thus was not used in performing a number of key requirements-related activities. In the absence of well-defined guidance, the program’s efforts to implement leading practices for developing and managing requirements have been mixed. For example, while the program has elicited user needs as part of its efforts to develop high-level operational requirements, it has not baselined all requirements. Further, it has not ensured that the operational requirements were, for example, verifiable, and it has not made certain that all of the different levels of requirements are aligned to one another. As a result, the risk of SBInet not meeting mission needs and performing as intended is increased, as are the chances of expensive and time-consuming system rework. The SBInet program office has developed guidance for developing and managing requirements that is generally consistent with recognized leading practices. According to these practices, effectively developing and managing requirements includes, among other things, eliciting users’ needs early in the development process and involving them throughout the process; ensuring that requirements are complete, feasible, verifiable, and approved by all stakeholders; documenting and approving the requirements to establish a baseline for subsequent development and change control; and ensuring that requirements are traceable both back to operational requirements and forward to detailed system requirements and test cases. In February 2008, the program office approved its SBInet Requirements Development and Management Plan. According to the plan, its purpose is to describe a comprehensive approach to developing and managing requirements for the SBInet program. Our analysis of this plan shows that it is consistent with leading practices. For example, the plan states that users should provide input to the requirements definition process through early and ongoing participation in integrated product teams, user conferences, and other requirements-gathering and verifying activities; requirements developers are to ensure that requirements are complete, unambiguous, achievable, verifiable, and not redundant; a requirements baseline should be created to provide a common understanding of the system to be built and to prevent deviations to the requirements from entering during design, development, or testing; and bidirectional traceability both back to higher-level requirements and forward to detailed test methods should be established and maintained and that the requirements management team is responsible for maintaining the requirements management database and holding the contractor responsible for any traceability issues. Moreover, the plan defines procedures and steps for accomplishing each of these goals. For example, the procedure for requirements development outlines the purpose of the procedure, who is involved, what documentation is necessary to begin the procedure, and what outputs are expected at the end. The procedure then describes 16 steps necessary to achieve the requirements development activities. A separate procedure is provided for requirements verification and validation. However, the plan was not approved until after key SBInet requirements documents were written and baselined. Specifically, user operational requirements were approved and baselined in March 2007; system requirements were first baselined in March 2007; and several component requirements were baselined in June, August, and October 2007. As a result, the plan was not used to guide these requirements development and management efforts. As noted above, one of the leading practices associated with effective requirements development and management is engaging system users early and continuously. In doing so, the chances of defining, designing, and delivering a system that meets their needs and performs as intended are increased. In developing the operational requirements, the System Program Office involved SBInet users in a manner that is consistent with leading practices and that reflects lessons learned from Project 28. Specifically, it conducted requirements-gathering workshops from October 2006 through April 2007 to ascertain the needs of Border Patrol agents. In addition, it established work groups in September 2007 to inform the next revision of the operational requirements by soliciting input from both the Office of Air and Marine Operations and the Office of Field Operations. Further, to develop the COP technology for SBInet, the program office is following a software development methodology that allows end users to be directly involved in software development activities and, thereby, permits software solutions to be tailored to users’ needs. Through such efforts to identify and elicit user needs in developing high- level requirements, the chances of developing a system that will meet user needs are increased. The creation of a requirements baseline is important for providing a stable basis for system design, development, and testing. Such a baseline establishes a set of requirements that have been formally reviewed and agreed on and thus serve as the basis for further development or delivery. Until requirements are baselined, they remain unclear and subject to considerable and uncontrolled change, which in turn makes system design, development, testing, and deployment efforts equally uncertain. According to SBInet program officials, the SBInet Requirements Development and Management Plan, and leading practices, requirements should be baselined before key system design activities begin, since the requirements are intended to inform, guide, and constrain the system’s design. For SBInet, while many of the requirements have been baselined, two types have not yet been baselined. According to the System Program Office, the operational requirements and the system requirements were approved and baselined in March 2007. In addition, various system component requirements were baselined in June, August, and October of 2007. However, the program had not baselined its COP software requirements as of July 2008, although according to program officials, the COP has been designed and is under development. Further, it has yet to baseline its project-level requirements, which define the requirements for the system configuration to be deployed to a specific geographical area, such as Tucson 1. With respect to the COP, requirements for the software and hardware had not been baselined as of the end of July 2008, despite the fact that a combined Preliminary Design Review and Critical Design Review for the COP was held in February 2008 and a Critical Design Review for the system as whole was held in June 2008. According to agency officials and the SBInet Requirements Development and Management Plan, requirements should be baselined before the Critical Design Review. Regardless, program officials state that the contractor has developed several “builds” (i.e., versions) of the COP, which are currently being tested. According to program officials, the requirements were not complete because certain interface requirements had not yet been completely identified and defined. Without baselined requirements, the basis of the system design and the degree to which it satisfies requirements are unclear. Moreover, the risk of the design not aligning to requirements is increased. According to the results of the Critical Design Review, this risk was realized. Specifically, the System Program Office notified the contractor that there was no evidence linking the performance of surveillance components to the system requirements, that the review could not be completed until the interface requirements had been finalized, and that a mature design had not been presented at the review. With respect to project-level (i.e., geographic area) deployment requirements, baselined requirements do not yet exist. Specifically, requirements for the Tucson Sector, which includes Tucson 1 and Ajo 1, have yet to be baselined. According to the SBInet Requirements Development and Management Plan, requirements should be baselined before the Project Requirements Review, and a new requirements baseline should be created following the subsequent Deployment Design Review. However, project-level requirements were not baselined at a Project Requirements Review held for the Tucson Sector Project in March 2007 or at a Deployment Design Review in June 2007. Officials stated that this is because the plan was not approved until February 2008 and thus was not in effect. However, since the plan became effective, Deployment Design Reviews were held for Tucson 1 and Ajo 1 in April 2008 and May 2008, respectively, but the project-level requirements were not baselined. Despite the absence of baselined requirements, the System Program Office has proceeded with development, integration, and testing activities for the Block 1 capabilities to be delivered to Tucson 1 and Ajo l. As a result, it faces an increased risk of deploying systems that do not align well with requirements and thus may require subsequent rework. The lack of project requirements has already had an effect on testing activities. Specifically, the draft system integration test plan notes that, without project requirements, testing will have to be guided by a combination of other documents, including engineering development requirements, related component requirements, and architectural design documents. As stated above, one of the leading practices for developing and managing requirements—which is reflected in the program office’s own plan—is that requirements should be sufficiently analyzed to ensure that the requirements are, among other things, complete, unambiguous, and verifiable. However, an independent review of SBInet operational requirements reported numerous problems. Specifically, a review of the SBInet program commissioned by the Office of the Deputy Secretary of Homeland Security found that several requirements were unaffordable and unverifiable. Examples of these requirements include the following: Allow for complete coverage of the specified area or zone to be surveilled. Maximize intended deterrence and minimize countermeasure effectiveness. Function with high reliability under reasonably foreseeable circumstances. Reliably provide the appropriate power and bandwidth at the least cost that will support the demand. In April 2008, a program official stated that the operational requirements document is currently being rewritten to address concerns raised by this review. For example, we were told that certain system performance requirements are being revised in response to a finding that the requirements are insufficient to ensure delivery of a properly functioning system. Program officials stated that they expect to finalize the revised operational requirements document in October 2008. However, given the number and types of problems associated with the operational requirements—which are the program’s most basic customer requirements and form the basis for all lower-level requirements—it is unclear how the system, component, and software requirements can be viewed as verifiable, testable, or affordable. Until these problems are addressed, the risk of building and deploying a system that does not meet mission needs and customer expectations is increased, which in turn increases the chances of expensive and time-consuming system rework. As noted above, one of the leading practices associated with developing and managing requirements is maintaining bidirectional traceability from high-level operational requirements through detailed low-level requirements to test cases. The SBInet Requirements Development and Management Plan recognizes the importance of traceability, stating that a traceability relationship should exist among the various levels of requirements. For example, it states that operational requirements should trace to the system requirements, which in turn should trace to component requirements. Further, it states that component requirements should trace to design requirements and to a verification method. In addition, the SBInet System Program Office established detailed guidance for populating and maintaining the requirements database for maintaining linkages among the various levels of requirements and test verification methods. To provide for requirements traceability, the prime contractor established such a requirements management database. However, the reliability of the requirements in this database is questionable, and the SBInet System Program Office has not effectively overseen the contractor’s management of requirements through this database. Specifically, we attempted to trace requirements in the version of this database that the program office received in March 2008 and were unable to trace large percentages of component requirements to either higher-level or lower-level requirements. For example, an estimated 76 percent (with a 95 percent degree of confidence of being between 64 and 86 percent) of the component requirements that we randomly sampled could not be traced to the system requirements and then to the operational requirements. In addition, an estimated 20 percent (with a 95 percent degree of confidence of being between 11 and 33 percent) of the component requirements in our sample failed to trace to a verification method. See table 5 for the failure rates for each of our tracing analyses, along with the related confidence intervals. While program officials could not explain the reason for this lack of traceability in most cases, they did attribute the 100-percent failure in tracing component requirements to the design requirements to the absence of any design requirements in the program office’s copy of the database. A contributing factor to the program office’s inability to explain why requirements were not traceable is its limited oversight of the contractor’s efforts to manage requirements through this database. According to program officials, the contractor created the SBInet requirements management database in December 2006, but the program office did not receive a copy of the database until March 2008, despite requests for it beginning in fall 2007. In early May 2008, the Chief Engineer told us the contractor had been reluctant to provide the database because it viewed the database’s maturity level as low. Moreover, the program office’s direct access to the database had not been established because of security issues, according to this official. Following our efforts to trace requirements, the program office obtained direct access to the contractor’s database and initiated efforts with the contractor to resolve the traceability gaps. However, program officials told us that they are still not certain that the database currently contains all of the system requirements or even the reduced Block 1 system requirements. As a result, they did not rely on it during the recent Critical Design Review to verify requirements traceability. Instead, they said that manual tracking methods were used. Without ensuring that requirements are fully traceable, the program office does not have a sufficient basis for knowing that the scope of the contractor’s design, development, and testing efforts will produce a system solution that meets operational needs and performs as intended. As a result, the risk of expensive and time-consuming system rework is increased. To be effectively managed, testing should be planned and conducted in a structured and disciplined fashion. This includes, among other things, having an overarching test plan or strategy as a basis for managing system testing, developing well-defined and approved plans for executing testing activities, and testing individual system components to ensure that they satisfy defined requirements prior to integrating them into the overall system. The SBInet System Program Office is not effectively managing its testing activities. Specifically, it has not tested individual system components prior to integrating these components with other components and the COP software. In addition, although the program’s draft Test and Evaluation Master Plan is currently being used as the program’s overall strategy to manage SBInet testing, the plan is incomplete and unclear with respect to several test management functions. As a result, the chances of SBInet testing being effectively performed are reduced, which in turn increases the risk that the delivered and deployed system will not meet operational needs and not perform as intended. To be effectively managed, relevant federal guidance states that testing should, among other things, be governed by a well-defined and approved plan, and it should be executed in accordance with this plan. Further, integration testing should be preceded by tests of system components (whether acquired or developed) that are to be integrated to form the overall system. Once the components are tested to ensure that they satisfy defined requirements, the integrated system can be tested to verify that it performs as required. For SBInet, this has not occurred. As a result, the risk of the system not meeting operational needs and not performing as intended is increased, which in turn is likely to introduce the need for expensive and time-consuming system rework. The SBInet Systems Program Office reports that it began Block 1 system integration testing in June 2008. However, it still does not have an approved system integration test plan. Specifically, the system’s Critical Design Review, which was held in June 2008, found numerous problems with the contractor’s plan for system integration testing, and as a result, the program office did not accept the plan. Examples of problems were that the test plan refers to other test plans that the contractor had yet to deliver and the plan identified system components that were not expected to be part of Block 1. As a result, the program office decided that the system integration plan needed to be revised to document and describe the full set of actual testing activities that were to occur, including identifying where and to what level the different phases of integration tests would occur. Notwithstanding these problems and the absence of an approved plan, the contractor began integration testing in June 2008. According to program officials, this was necessary to meet the tight time frames in the schedule. However, without an accepted system integration test plan in place, testing cannot be effectively managed. For example, the adequacy of the test scope cannot be assured, and the progress in completing test activities cannot be measured. As a result, there is an increased risk that the delivered system will not meet operational needs and will not perform as intended and that expensive and time-consuming system rework will be required. Moreover, the SBInet draft Test and Evaluation Master Plan describes system integration testing as first testing individual components to verify that the smallest defined module of a system works as intended (i.e., meets functional and performance requirements). This allows defects with individual components to be identified and corrected before they are integrated with other system components. Once the components are tested, their respective hardware and software interfaces are to be tested before subsystems are tested in combination with the COP software. Such an incremental approach to testing permits system defects to be found and addressed before system components are integrated and component problems become more expensive and time-consuming to correct. However, the SBInet System Program Office has not performed individual component testing as part of integration testing. As of July 2008, agency officials reported that component-level tests had not been completed and were not scheduled to occur. Instead, officials stated that Block 1 components were evaluated based on what they described as “informal tests” (i.e., contractor observations of cameras and radar suites in operation at a National Guard facility in the Tucson Sector) and stated that the contractors’ self-certification that the components meet functional and performance requirements was acceptable. However, this approach is not consistent with the Test and Evaluation Master Plan. Moreover, program officials acknowledged that this approach did not verify if the individual components in fact met requirements. Nevertheless, they said that they have recently modified their definition of component testing to allow the contractor’s certification to be used. In our view, relying solely on contractor certification is not a sufficient substitute for component testing—as defined in the Test and Evaluation Master Plan—because it increases the risk that components, and thus the entire system, will not perform as intended. This risk is already starting to be realized. Specifically, the results of the Block 1 Critical Design Review performed in early in June 2008 show that design documents did not link components’ performance to the system requirements. To ensure that system testing is effectively performed, federal guidance provides for having an overarching test plan or strategy to use as a basis for managing system testing. Among other things, this test management plan should define the schedule of high-level test activities in sufficient detail to allow for more detailed test planning and execution to occur and to ensure that test progress can be tracked and results can be reported and addressed. The plan should also define the roles and responsibilities of the various groups responsible for different levels of testing and include a description of how the test organization manages and oversees these groups in their activities. The SBInet Test and Evaluation Master Plan, which documents the program’s test strategy and is being used to manage system testing, has yet to be approved by the SBInet Acting Program Manager. As of July 2008, program officials told us that they did not expect the draft plan to be approved until August 2008, even though testing activities began in June 2008. Moreover, the draft Test and Evaluation Master Plan is not complete. For example, it does not contain an accurate and up-to-date test schedule with milestones and completion dates for all levels of test activities. Rather, the schedule information included in the plan has been overtaken by events, to the point that program officials stated that many of the dates on the schedules have changed or are not accurate. Moreover, they described attempting to have an accurate schedule of testing activities and events as “futile” because the program’s schedule is constantly changing. As a another example, the draft Test and Evaluation Master Plan does not identify any metrics for measuring testing progress for any type of testing to be performed. According to federal guidance, an accurate schedule is necessary to inform planning for and sequencing of each type of testing to be performed, including ensuring that test resources are available when needed and that predecessor test events occur before successor events begin. This guidance also states that without performance metrics, it is difficult to understand where test activities stand and what they show in a manner that can inform program decision making. As another example, the draft Test and Evaluation Master Plan does not clearly define the roles and responsibilities of various entities that are involved in system testing. Specifically, the plan identifies seven entities, but it only provides vague descriptions of their respective roles and responsibilities that are not meaningful enough to effectively guide their efforts. For example, the plan identifies two entities that are to be involved in operational testing: the DHS Science and Technology Test and Evaluation Office and the U.S. Army Test and Evaluation Command. According to the plan, the DHS office is to function as the operational test authority and will be responsible for initial planning of “dedicated initial” and “follow-on” operational testing and evaluation, and the Army group is to conduct operational testing. With no further clarification, it is not clear what is expected of each of these entities, including how they are to interact. Table 6 lists each of the identified entities and provides their respective roles and responsibilities copied from the draft plan. Besides being vague, the descriptions of roles and responsibilities are also incomplete and not consistent with other program documents. For example, according to the draft plan, the Test and Evaluation Division of the SBInet System Program Office is responsible only for developing test and evaluation reports. However, according to the draft SBInet Systems Engineering Plan, this entity is to act as a subject matter expert for the oversight or conduct of various testing activities. Beyond this lack of clearly defined roles and responsibilities, there are other problems with the groups assigned testing roles. First, some of the entities identified in the draft plan are not yet operational and thus are unavailable to participate and perform their assigned roles and responsibilities. According to program officials, the independent verification and validation agent has not been selected, the Integrated Project Teams have not been chartered, and DHS is still in the process of establishing the DHS Science and Technology Test and Evaluation Office. Second, although CBP has an interagency agreement with the U.S. Army Test and Evaluation Command for operational testing, no such agreement exists with the SBInet program specifically for Block 1 testing. Finally, neither the draft Test and Evaluation Master Plan nor the draft Systems Engineering Plan clearly defines the program office’s role and responsibilities for managing and overseeing each of the other six test entities and their respective test activities. The SBInet System Program Office is responsible and accountable for ensuring that the system is successfully deployed and operates as intended. Given the criticality of testing in ensuring a successful program, this means that the program office must ensure that each of these entities executes its assigned roles effectively. However, the draft Test and Evaluation Master Plan does not recognize this role and its associated responsibilities. Further, while the draft Systems Engineering Plan states that the program office is responsible for engaging external test agents, it provides no further description of the program office’s roles and responsibilities. Without clearly defined roles and responsibilities for all entities involved in SBInet testing, the risk of test activities not being effectively and efficiently performed increases. As a result, the chances are increased that the deployed system will not meet operational requirements and perform as intended. Ultimately, this could lead to expensive and time-consuming system rework. A fundamental aspect of successfully implementing a large program like SBInet is establishing program commitments, including what capabilities will be delivered and when and where they will be delivered. Only through establishing such commitments and by adequately defining the approach and processes to be used in delivering these commitments, can DHS effectively position itself for measuring progress, ensuring accountability for results, and delivering a system solution with its promised capabilities and benefits on time and within budget constraints. For SBInet, this has not occurred to the extent that it needs to for the program to have a meaningful chance of succeeding. In particular, commitments to the timing and scope of system capabilities remain unclear and continue to change, with the program committing to far fewer capabilities than originally envisioned. Further, how the SBInet system solution is to be delivered has been equally unclear and inadequately defined. Moreover, while the program office has defined key practices for developing and managing requirements, these practices were developed after several key requirements activities were performed. In addition, efforts performed to date to test whether the system meets requirements and functions as intended have been limited. Collectively, these limitations are significant in that they increase the risk that the delivered system solution will not meet user needs and operational requirements and will not perform as intended. These consequences, in turn, increase the chances that the system will require expensive and time-consuming rework. In light of these circumstances and risks surrounding SBInet, it is important for the program office to reassess its approach to and plans for the program—including its associated exposure to cost, schedule, and performance risks—and to disclose these risks and alternative courses of action for addressing them to DHS and congressional decision makers. It is also important for the program to correct the weaknesses discussed in this report surrounding the program’s unclear and constantly changing commitments and its life cycle management approach and processes, including the processes and efforts performed to date relating to requirements development and management and testing. While doing so will not guarantee a successful program, it will minimize the program’s exposure to risk and thus decrease the likelihood that it will fall short of expectations. For SBInet, living up to expectations is important because the program is a large, complex, and integral component of DHS’s border security and immigration control strategy. To improve DHS’s efforts to acquire and implement SBInet we are making eight recommendations. To permit meaningful measurement and oversight of and accountability for the program, we recommend that the Secretary of Homeland Security direct the CBP Commissioner to ensure that (1) the risks associated with planned SBInet acquisition, development, testing, and deployment activities are immediately assessed and (2) the results, including proposed alternative courses of action for mitigating the risks, are provided to the Commissioner and DHS’s senior leadership, as well as to the department’s congressional authorization and appropriation committees. We further recommend that the Secretary of Homeland Security direct the CBP Commissioner to have the Acting SBInet Program Manager take the following additional actions: Establish and baseline the specific program commitments, including the specific system functional and performance capabilities that are to be deployed to the Tucson, Yuma, and El Paso Sectors, and establish when these capabilities are to be deployed and are to be operational. Finalize and approve an integrated master schedule that reflects the timing and sequencing of the work needed to achieve these commitments. Revise and approve versions of the SBInet life cycle management approach, including the draft Systems Engineering Plan and draft Test and Evaluation Management Plan, and in doing so, ensure that these revised and approved versions are consistent with one another, reflect program officials’ recently described changes to the engineering and testing approaches, and reflect relevant federal guidance and associated leading practices. Ensure that the revised and approved life cycle management approach is fully implemented. Implement key requirements development and management practices to include (1) baselining requirements before system design and development efforts begin; (2) analyzing requirements prior to being baselined to ensure that they are complete, achievable, and verifiable; and (3) tracing requirements to higher-level requirements, lower-level requirements, and test cases. Implement key test management practices to include (1) developing and documenting test plans prior to the start of testing; (2) conducting appropriate component level testing prior to integrating system components; and (3) approving a test management strategy that, at a minimum, includes a relevant testing schedule, establishes accountability for testing activities by clearly defining testing roles and responsibilities, and includes sufficient detail to allow for testing and oversight activities to be clearly understood and communicated to test stakeholders. In written comments on a draft of this report, signed by the Director, Departmental GAO/Office of Inspector General Liaison and reprinted in appendix II, the department stated that it agrees with seven of our eight recommendations, and partially disagrees with one aspect of the remaining recommendation. The department also stated that our report is factually sound and that it is working to address our recommendations and resolve the management and operational challenges identified in the report as expeditiously as possible. In this regard, it described actions recently completed, underway, and planned that it said addresses our recommendations. It also provided technical comments that we have incorporated in the report, as appropriate. Regarding our recommendation to implement key test management practices, including conducting appropriate component-level testing prior to integrating system components, DHS commented that its current test strategy provides for the appropriate degree of technical confidence for commercially available products, as evidenced by either certificates of conformance from the original equipment manufacturer, test documentation from independent government laboratories, or the prime contractor’s component/integration level testing. We support DHS’s current test strategy, as it is consistent with our recommendation. Specifically, it expands on the department’s prior strategy for component testing, which was limited to manufacturer self-certification of component conformance and informal observations of system components, by adding the use of independent government laboratories to test the components. We would emphasize, however, that regardless of the method used, it is important that confidence be gained in components prior to integrating them, which our recommendation recognizes. As our report states, component-level testing was not performed for Block 1 components prior to initiating integration testing. Federal guidance and the SBInet program office’s own Test and Evaluation Master Plan recognize the need to first test individual components to verify that the system modules work as intended (i.e., meet functional and performance requirements) before conducting integration testing. By adopting such a hierarchical approach to testing, the source of any system defects can be discovered and isolated sooner rather than later, thus helping to avoid the potential for expensive and time-consuming system rework. We are sending copies of this report to the Chairmen and Ranking Members of the Senate and House Appropriations Committees and other Senate and House committees and subcommittees that have authorization and oversight responsibilities for homeland security. We will also send copies to the Secretary of Homeland Security, the Commissioner of U.S. Customs and Border Protection, and the Director of the Office of Management and Budget. In addition, this report will be available at no cost on the GAO Web site at http://www.gao.gov. Should your offices have any questions on matters discussed in this report, please contact me at (202) 512-3439 or at hiter@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. Our objectives were to determine whether the Department of Homeland Security (DHS) (1) has defined the scope and timing of planned SBInet capabilities and how these capabilities will be developed and deployed, (2) is effectively defining and managing SBInet requirements, and (3) is effectively managing SBInet testing. To determine the extent to which DHS has defined the scope and timing of planned SBInet capabilities and how these capabilities will be developed and deployed, we reviewed program documentation, such as the draft Systems Engineering Plan, the Systems Engineering Management Plan, the Operational Requirements Document, the Mission Engineering Process, the draft Test and Evaluation Master Plan, and the 2008 SBI Expenditure Plan to understand the SBInet engineering process and the scope and timing of planned deployments. We also interviewed SBInet officials and contractors to gain clarity beyond what was included in the program documentation and to obtain schedule information in the absence of an integrated master schedule for the program. To determine if DHS is effectively defining and managing SBInet requirements, we reviewed relevant documentation, such as the Requirements Development and Management Plan, the Requirements Management Plan, the Configuration and Data Management Plan, the Operational Requirements Document, System of Systems A-Level Specification, B-2 Specifications, and Vendor Item Control Drawings, and compared them to industry best practices to determine the extent to which the program has effectively managed the systems requirements and maintained traceability backwards to high-level operational requirements and system requirements, and forward to system design and verification methods. To assess reliability of the requirements data, we reviewed quality and access controls of the requirements database. We then randomly selected 59 requirements from a sample of 1,666 component requirements and traced them backwards to the system requirements and then to the operational requirements and forward to design requirements and verification methods. Because we followed a probability procedure based on random selection, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. We used statistical methods appropriate for audit compliance testing to estimate 95 percent confidence intervals for the traceability of requirements in our sample. In addition, we interviewed program and contractor officials involved in requirements management to understand their roles and responsibilities. We also visited a contractor development facility in Huntsville, Alabama, to understand the contractor’s role in requirements management and development and the use of its requirements management tool, known as the Dynamic Object-Oriented Requirements System (DOORS). In addition, we attended a demonstration of SBInet Rapid Application Development/Joint Application Design to understand how the users are involved in developing requirements. To determine if DHS is effectively managing SBInet testing, we reviewed relevant documentation, such as the SBInet Test and Evaluation Master Plan, the Systems Integration Test Plan, the Quality Assurance Surveillance Plan, the Requirements Verification Plan, the Characterization Test Plan, and the Prime Mission Product Design, and compared them to relevant federal guidance to determine the extent to which the program has effectively managed its testing activities. We also interviewed SBInet officials to gain clarity beyond what was included in the program documentation and to obtain schedule information in the absence of a formal testing schedule. In addition, we visited a contractor facility in Huntsville, Alabama, to better understand the contractor’s role in testing activities and to observe the test lab and how testing is performed. In addition, we visited the Tucson Sector Border Patrol Headquarters in Tucson, Arizona, to see the technology that was deployed as a prototype to understand the scope of the technology, how the Border Patrol agents use the technology, and future plans. To assess data reliability, we reviewed related program documentation to substantiate data provided in interviews with knowledgeable agency officials, where available. For the information contained in the DHS independent study on SBInet, we interviewed the individuals responsible for conducting the review to understand their methodology, and determined that the information derived from this study was sufficiently reliable for the purposes of this report. We have made appropriate attribution indicating the data’s sources. We performed our work at the U.S. Customs and Border Protection headquarters and contractor facilities in the Washington, D.C., metropolitan area; the Tucson Sector Border Patrol headquarters in Tucson, Arizona; and a contractor facility in Huntsville, Alabama. We conducted this performance audit from August 2007 to September 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Deborah Davis (Assistant Director), Carl Barden, Neil Doherty, Lee McCracken, Jamelyn Payan, Karl Seifert, Sushmita Srikanth, Karen Talley, and Merry Woo made key contributions to this report. | The Department of Homeland Security's (DHS) Secure Border Initiative (SBI) is a multiyear, multibillion-dollar program to secure the nation's borders through, among other things, new technology, increased staffing, and new fencing and barriers. The technology component of SBI, which is known as SBInet, involves the acquisition, development, integration, and deployment of surveillance systems and command, control, communications, and intelligence technologies. GAO was asked to determine whether DHS (1) has defined the scope and timing of SBInet capabilities and how these capabilities will be developed and deployed, (2) is effectively defining and managing SBInet requirements, and (3) is effectively managing SBInet testing. To do so, GAO reviewed key program documentation and interviewed program officials, analyzed a random sample of requirements, and observed operations of a pilot project. Important aspects of SBInet remain ambiguous and in a continued state of flux, making it unclear and uncertain what technology capabilities will be delivered, when and where they will be delivered, and how they will be delivered. For example, the scope and timing of planned SBInet deployments and capabilities have continued to change since the program began and, even now, are unclear. Further, the program office does not have an approved integrated master schedule to guide the execution of the program, and GAO's assimilation of available information indicates that the schedule has continued to change. This schedule-related risk is exacerbated by the continuous change in and the absence of a clear definition of the approach that is being used to define, develop, acquire, test, and deploy SBInet. The absence of clarity and stability in these key aspects of SBInet impairs the ability of the Congress to oversee the program and hold DHS accountable for program results, and it hampers DHS's ability to measure program progress. SBInet requirements have not been effectively defined and managed. While the program office recently issued guidance that defines key practices associated with effectively developing and managing requirements, such as eliciting user needs and ensuring that different levels of requirements and associated verification methods are properly aligned with one another, the guidance was developed after several key activities had been completed. In the absence of this guidance, the program has not effectively performed key requirements definition and management practices. For example, it has not ensured that different levels of requirements are properly aligned, as evidenced by GAO's analysis of a random probability sample of component requirements showing that a large percentage of them could not be traced to higher-level system and operational requirements. Also, some of SBInet's operational requirements, which are the basis for all lower-level requirements, were found by an independent DHS review to be unaffordable and unverifiable, thus casting doubt on the quality of lower-level requirements that are derived from them. As a result, the risk of SBInet not meeting mission needs and performing as intended is increased, as are the chances of expensive and time-consuming system rework. SBInet testing has not been effectively managed. For example, the program office has not tested the individual system components to be deployed to the initial deployment locations, even though the contractor initiated integration testing of these components with other system components and subsystems in June 2008. Further, while a test management strategy was drafted in May 2008, it has not been finalized and approved, and it does not contain, among other things, a clear definition of testing roles and responsibilities; a high-level master schedule of SBInet test activities; or sufficient detail to effectively guide project-specific test planning, such as milestones and metrics for specific project testing. Without a structured and disciplined approach to testing, the risk that SBInet will not satisfy user needs and operational requirements, thus requiring system rework, is increased. |
Homeland security is a complex mission that involves a broad range of functions performed throughout government, including law enforcement, transportation, food safety and public health, information technology, and emergency management, to mention only a few. Federal, state, and local governments have a shared responsibility in preparing for catastrophic terrorist attacks as well as other disasters. The initial responsibility for planning, preparing, and response falls upon local governments and their organizations—such as police, fire departments, emergency medical personnel, and public health agencies—which will almost invariably be the first responders to such an occurrence. For its part, the federal government has principally provided leadership, training, and funding assistance. The federal government’s role in responding to major disasters has historically been defined by the Stafford Act, which makes most federal assistance contingent on a finding that the disaster is so severe as to be beyond the capacity of state and local governments to respond effectively. Once a disaster is declared, the federal government—through the Federal Emergency Management Agency (FEMA)—may reimburse state and local governments for between 75 and 100 percent of eligible costs, including response and recovery activities. In addition to post disaster assistance, there has been an increasing emphasis over the past decade on federal support of state and local governments to enhance national preparedness for terrorist attacks. After the nerve gas attack in the Tokyo subway system on March 20, 1995, and the Oklahoma City bombing on April 19, 1995, the United States initiated a new effort to combat terrorism. In June 1995, Presidential Decision Directive 39 was issued, enumerating responsibilities for federal agencies in combating terrorism, including domestic terrorism. Recognizing the vulnerability of the United States to various forms of terrorism, the Congress passed the Defense Against Weapons of Mass Destruction Act of 1996 (also known as the Nunn-Lugar-Domenici program) to train and equip state and local emergency services personnel who would likely be the first responders to a domestic terrorist event. Other federal agencies, including those in FEMA; the departments of Justice, Health and Human Services, and Energy; and the Environmental Protection Agency, have also developed programs to assist state and local governments in preparing for terrorist events. As emphasis on terrorism prevention and response grew, however, so did concerns over coordination and fragmentation of federal efforts. More than 40 federal entities have a role in combating and responding to terrorism, and more than 20 in bioterrorism alone. Our past work, conducted prior to the establishment of an Office of Homeland Security and the current proposals to create a new Department of Homeland Security, has shown coordination and fragmentation problems stemming largely from a lack of accountability within the federal government for terrorism-related programs and activities. Further, our work found there was an absence of a central focal point that caused a lack of a cohesive effort and the development of similar and potentially duplicative programs. Also, as the Gilmore Commission report notes, state and local officials have voiced frustration about their attempts to obtain federal funds from different programs administered by different agencies and have argued that the application process is burdensome and inconsistent among federal agencies. President Bush has taken a number of important steps in the aftermath of the terrorist attacks of September 11th to address the concerns of fragmentation and to enhance the country’s homeland security efforts, including creating of the Office of Homeland Security in October 2001, proposing the Department of Homeland Security in June 2002, and issuing a national strategy in July 2002. Both the House and Senate have worked diligently on these issues and are deliberating on a variety of homeland security proposals. The House has passed (H.R. 5005), and the Senate will take under consideration, after the August recess, legislation (S. 2452) to create a Department of Homeland Security. While these proposals would both transfer the functions, responsibilities, personnel, and other assets of existing agencies into the departmental structure, each bill has unique provisions not found in the other. For example, while both bills establish an office for State and Local Government Coordination and a first responder council to advise the department, the Senate bill also establishes a Chief Homeland Security Liaison Officer appointed by the Secretary and puts federal liaisons in each state to provide coordination between the department and the state and local first responders. The proposal to create a statutorily based Department of Homeland Security holds promise to better establish the leadership necessary in the homeland security area. It can more effectively capture homeland security as a long-term commitment grounded in the institutional framework of the nation’s governmental structure. As we have previously noted, the homeland security area must span the terms of various administrations and individuals. Establishing homeland security leadership by statute will ensure legitimacy, authority, sustainability, and the appropriate accountability to the Congress and the American people. The proposals call for the creation of a Cabinet department that would be responsible for coordination with other executive branch agencies involved in homeland security, including the Federal Bureau of Investigation and the Central Intelligence Agency. Additionally, the proposals call for coordination with nonfederal entities and direct the new Secretary to reach out to state and local governments and the private sector in order to: ensure adequate and integrated planning, training, and exercises occur, and that first responders have the necessary equipment; attaining interoperability of the federal government’s homeland security communications systems with state and local governments’ systems; oversee federal grant programs for state and local homeland security efforts; and coordinate warnings and information to state and local government entities and the public. Many aspects of the proposed consolidation of homeland security programs are in line with previous recommendations and show promise towards reducing fragmentation and improving coordination. For example, the new department would consolidate federal programs for state and local planning and preparedness from several agencies and place them under a single organizational umbrella. Based on our prior work, we believe that the consolidation of some homeland security functions makes sense and will, if properly organized and implemented, over time lead to more efficient, effective, and coordinated programs, better intelligence sharing, and a more robust protection of our people, borders, and critical infrastructure. However, as the Comptroller General has recently testified,implementation of the new department will be an extremely complex task, and in the short term, the magnitude of the challenges that the new department faces will clearly require substantial time and effort, and will take additional resources to make it effective. Further, some aspects of the new department, as proposed, may result in yet other concerns. For example, as we reported on June 25, 2002, the new department could include public health assistance programs that have both basic public health and homeland security functions. These dual-purpose programs have important synergies that should be maintained and could potentially be disrupted by such a change. The recently issued national strategy for homeland security states it is intended to answer four basic questions: what is “homeland security” and what missions does it entail; what does the nation seek to accomplish, and what are the most important goals of homeland security; what is the federal executive branch doing now to accomplish these goals and what should it do in the future; and what should non-federal governments, the private sector, and citizens do to help secure the homeland. Within the federal executive branch, the key organization for homeland security will be the proposed Department of Homeland Security. The Department of Defense will contribute to homeland security, as well other departments such as the Departments of Justice, Agriculture, and Health and Human Services. The national strategy also makes reference to using tools of government such as grants and regulations to improve national preparedness. The national strategy defines homeland security as a concerted national effort to 1) prevent terrorist attacks within the United States, 2) reduce America’s vulnerability to terrorism, 3) minimize the damage, and 4) recover from attacks that do occur. This definition should help the government more effectively administer, fund, and coordinate activities both inside and outside the proposed new department and ensure all parties are focused on the same goals and objectives. The three parts of the definition form the national strategy’s three objectives. The strategy identifies six critical mission areas, and outlines initiatives in each of the six mission areas. It further describes four foundations that cut across these mission areas and all levels of government. These foundations— law; science and technology; information sharing and systems; and international cooperation— are intended to provide a basis for evaluating homeland security investments across the federal government. Table 1 summarizes key intergovernmental roles in each of the six mission areas as presented in the strategy. With regard to the costs of Homeland Security, the national strategy emphasizes government should fund only those homeland security activities that are not supplied, or are inadequately supplied, in the market, and cost sharing between different governmental levels should reflect federalism principles and different tools of government. In terms of the financial contributions made by state and local government to homeland security, the strategy acknowledges that state and local governments are incurring unexpected costs defending or protecting their respective communities. These costs include protecting critical infrastructure, improving technologies for information sharing and communications, and building emergency response capacity. At this time, the National Governors’ Association estimates that additional homeland security- related costs, incurred since September 11th and through the end of 2002, will reach approximately $6 billion. Similarly, the U.S. Conference of Mayors has estimated the costs incurred by cities during this time period to be $2.6 billion. The proposed department will be a key player in the daunting challenge of defining the roles of the various actors within the intergovernmental system responsible for homeland security. In areas ranging from fire protection to drinking water to port security, the new threats are prompting a reassessment and shift of longstanding roles and responsibilities. However, until this time, proposed shifts in roles and responsibilities have been considered on a piecemeal and ad hoc basis without benefit of an overarching framework and criteria to guide this process. The national strategy recognizes that the process is challenging because of the structure of overlapping federal, state, and local governments given that our country has more than 87,000 jurisdictions. The national strategy further notes that the challenge is to develop interconnected and complementary systems that are reinforcing rather than duplicative. The proposals for a Department of Homeland Security call for the department to reach out to state and local governments and the private sector to coordinate and integrate planning, communications, information, and recovery efforts addressing homeland security. This is important recognition of the critical role played by nonfederal entities in protecting the nation from terrorist attacks. State and local governments play primary roles in performing functions that will be essential to effectively address our new challenges. Much attention has already been paid to their role as first responders in all disasters, whether caused by terrorist attacks or natural hazards. The national strategy emphasizes the critical role state and local governments play in homeland security and the need for coordination between all levels of government. The national strategy emphasizes that homeland security is a shared responsibility. In addition, the national strategy has several initiatives designed to improve partnerships and coordination. Table 1 provides several examples of areas with key intergovernmental roles and coordination. For example, there are initiatives to improve intergovernmental law enforcement coordination and enabling effective partnerships with state and local governments and the private sector in critical infrastructure protection. States are asked to take several legal initiatives, such as coordinating suggested minimum standards for state driver’s licenses and reviewing quarantine authorities. Many initiatives are intended to develop or enhance first responder capabilities, such as initiatives to improve the technical capabilities of first responders or enable seamless communication among all responders. In many cases, these initiatives will rely on federal, state, and local cooperation, some standardization, and the sharing of costs. Achieving national preparedness and response goals hinges on the federal government’s ability to form effective partnerships with nonfederal entities. Therefore, federal initiatives should be conceived as national, not federal in nature. Decision makers have to balance the national interest of prevention and preparedness with the unique needs and interests of local communities. A “one-size-fits-all” federal approach will not serve to leverage the assets and capabilities that reside within state and local governments and the private sector. By working collectively with state and local governments, the federal government gains the resources and expertise of the people closest to the challenge. For example, protecting infrastructure such as water and transit systems lays first and most often with nonfederal levels of government. Just as partnerships offer opportunities, they also pose risks based upon the different interests reflected by each partner. From the federal perspective, there is the concern that state and local governments may not share the same priorities for use of federal funds. This divergence of priorities can result in state and local governments simply replacing (“supplanting”) their own previous levels of commitment in these areas with the new federal resources. From the state and local perspective, engagement in federal programs opens them up to potential federal preemption and mandates. From the public’s perspective, partnerships if not clearly defined, risk blurring responsibility for the outcome of public programs. Our fieldwork at federal agencies and at local governments suggests a shift is potentially underway in the definition of roles and responsibilities between federal, state, and local governments with far reaching consequences for homeland security and accountability to the public. The challenges posed by the new threats are prompting officials at all levels of government to rethink long-standing divisions of responsibilities for such areas as fire services, local infrastructure protection, and airport security. Current homeland security proposals recognize that the unique scale and complexity of these threats call for a response that taps the resources and capacities of all levels of government as well as the private sector. In many areas, these proposals would impose a stronger federal presence in the form of new national standards or assistance. For instance, the Congress is considering proposals to mandate new vulnerability assessments and protective measures on local communities for drinking water facilities. Similarly, new federal rules have mandated local airport authorities to provide new levels of protection for security around airport perimeters. The block grant proposal for first responders would mark a dramatic upturn in the magnitude and role of the federal government in providing assistance and standards for fire service training and equipment. Additionally, the national strategy suggests initiatives for an expanded state role in several areas. For example, there are no national or agreed upon state standards for driver’s license content, format, or acquisition procedures. The strategy states that the federal government should support state-led efforts to develop suggested minimum standards for drivers’ licenses. In another example, in order to suppress money laundering, the strategy recommends that states assess the current status of their regulation regarding providers of financial services and work to adopt uniform laws as necessary. Governments at the local level are also moving to rethink roles and responsibilities to address the unique scale and scope of the contemporary threats from terrorism. Numerous local general-purpose governments and special districts co-exist within metropolitan regions and rural areas alike. Many regions are starting to assess how to restructure relationships among contiguous local entities to take advantage of economies of scale, promote resource sharing, and improve coordination of preparedness and response on a regional basis. In our case studies of five metropolitan areas, we have identified several common forms of regional cooperation and coordination including special task forces or working groups, improved collaboration among public health entities, increased countywide planning, mutual aid agreements, and communications. These partnerships are at varying stages of development and are continuing to evolve. Table 2 summarizes these initiatives. Although promising greater levels of protection than before, these shifts in roles and responsibilities have been developed on an ad hoc piecemeal basis without the benefit of common criteria. An ad hoc process may not capture the real potential each actor in our system offers. Moreover, a piecemeal redefinition of roles risks the further fragmentation of the responsibility for homeland security within local communities, blurring lines of responsibility and accountability for results. While federal, state, and local governments all have roles to play, care must be taken to clarify who is responsible for what so that the public knows whom to contact to address their problems and concerns. Current homeland security initiatives provide an opportunity to more systematically identify the unique resources and capacities of each level of government and better match these capabilities to the particular tasks at hand. If implemented in a partnerial fashion, the national strategy can also promote the participation, input, and buy in of state and local partners whose cooperation is essential for success. The proposed department, in fulfilling its broad mandate, has the challenge of developing a national performance focus. The national strategy is a good start in defining strategic objectives and related mission areas, plus foundations that cut across the mission areas. The national strategy’s initiatives to implement the objectives under the related mission and foundation areas extend from building capabilities to achieving specific outcomes. According to the national strategy, each department and agency is to be held accountable for its performance on homeland security efforts. However, the initiatives often do not provide a baseline set of goals and measures upon which to assess and improve many of its initiatives to prevent attacks, reduce the nation’s vulnerability to attacks, or minimize the damage and recovering from attacks that do occur. For example, the initiative of creating “smart borders” requires a clear specification of what is expected of a smart border, including consideration of security and economic aspects of moving people and goods. Specific performance goals and measures for many initiatives will occur at a later date. The strategy states that each department or agency will create benchmarks and other performance measures to evaluate progress and allocate future resources. Performance measures will be used to evaluate the effectiveness of each homeland security program, allowing agencies to measure their progress, make resource allocation decisions, and adjust priorities. As the national strategy and related implementation plans evolve, we would expect clearer performance expectations to emerge. Given the need for a highly integrated approach to the homeland security challenge, national performance goals and measures may best be developed in a collaborative way involving all levels of government and the private sector. Assessing the capability of state and local governments to respond to catastrophic terrorist attacks is an important feature of the national strategy and the responsibilities of the proposed new department. The President’s fiscal year 2003 budget proposal acknowledged that our capabilities for responding to a terrorist attack vary widely across the country. The national strategy recognizes the importance of standards and performance measures in areas such as training, equipment, and communications. For example, the national strategy proposes the establishment of national standards for emergency response training and preparedness. These standards would require certain coursework for individuals to receive and maintain certification as first responders and for state and local governments to receive federal grants. Under the strategy, the proposed department would establish a national exercise program designed to educate and evaluate civilian response personnel at all levels of government. It would require individuals and government bodies to complete successfully at least one exercise every year. The department would use these exercises to measure performance and allocate future resources. Standards are being developed in other areas associated with homeland security, yet formidable challenges remain. For example, national standards that would apply to all ports and all public and private facilities are well under way. In preparing to assess security conditions at 55 U.S. ports, the Coast Guard’s contractor has been developing a set of standards since May 2002. These standards cover such things as preventing unauthorized persons from accessing sensitive areas, detecting and intercepting intrusions, and checking backgrounds of those whose jobs require access to port facilities. However, challenges remain in finalizing a complete set of standards for the level of security needed in the nation’s ports, resolving issues between key stakeholders that have conflicting or competing interests, and establishing mechanisms for enforcement. Moreover, because security at ports is a concern shared among federal, state, and local governments, as well as among private commercial interests, the issue of who should pay to finance antiterrorism activities may be difficult to resolve. Communications is an example of an area for which standards have not yet been developed, but various emergency managers and other first responders have continuously highlighted that standards are needed. State and local governments often report that there are deficiencies in their communications capabilities, including the lack of interoperable systems. The national strategy recognizes that it is crucial for response personnel to have and use equipment, systems, and procedures that allow them to communicate. Therefore, the strategy calls for the proposed Department of Homeland Security to develop a national communication plan to establish protocols (who needs to talk to whom), processes, and national standards for technology acquisition. According to the national strategy, this is a priority for fiscal year 2003 funding which ties all federal grant programs that support state and local purchase of terrorism-related communications equipment to this communication plan. The establishment of specific national goals and measures for homeland security initiatives, including preparedness, will not only go a long way towards assisting state and local entities in determining successes and areas where improvement is needed, but could also be used as goals and performance measures as a basis for assessing the effectiveness of federal programs. The Administration should take advantage of the Government Performance and Results Act (GPRA) and its performance tools of strategic plans, annual performance plans and measures, and accountability reports for homeland security implementation planning. At the department and agency level, until the new department is operational, GPRA can be a useful tool in developing homeland security implementation plans within and across federal agencies. Given the recent and proposed increases in homeland security funding, as well as the need for real and meaningful improvements in preparedness, establishing clear goals and performance measures is critical to ensuring both a successful and fiscally responsible effort. The choice and design of the policy tools the federal government uses to engage and involve other levels of government and the private sector in enhancing homeland security will have important consequences for performance and accountability. Governments have a variety of policy tools including grants, regulations, tax incentives, and information-sharing mechanisms to motivate or mandate other levels of government or the private sector to address security concerns. The choice of policy tools will affect sustainability of efforts, accountability and flexibility, and targeting of resources. The design of federal policy will play a vital role in determining success and ensuring that scarce federal dollars are used to achieve critical national goals. The national strategy acknowledges the shared responsibility of providing homeland security between federal, state, and local governments, and the private sector and recognizes the importance of using tools of government such as grants, regulations, and information sharing to improve national preparedness. The federal government often uses grants to state and local governments as a means of delivering federal assistance. Categorical grants typically permit funds to be used only for specific, narrowly defined purposes. Block grants typically can be used by state and local governments to support a range of activities aimed at achieving a broad, national purpose and to provide a great deal of discretion to state and local officials. In designing grants, it is important to (1) target the funds to states and localities with the greatest need based on highest risk and lowest capacity to meet these needs from their own resource bases, (2) discourage the replacement of state and local funds with federal funds, commonly referred to as supplantation, with a maintenance-of-effort requirement that recipients maintain their level of previous funding, and (3) strike a balance between accountability and flexibility. At their best, grants can stimulate state and local governments to enhance their preparedness to address the unique threats posed by terrorism. Ideally, grants should stimulate higher levels of preparedness and avoid simply subsidizing local functions that are traditionally state or local responsibilities. One approach used in other areas is the “seed money” model in which federal grants stimulate initial state and local activity with the intent of transferring responsibility for sustaining support over time to state and local governments. Recent funding proposals, such as the $3.5 billion block grant for first responders contained in the president’s fiscal year 2003 budget, have included some of these provisions. This grant would be used by state and local governments to purchase equipment; train personnel; and exercise, develop, or enhance response plans. Once the details of the grant have been finalized, it will be useful to examine the design to assess how well the grant will target funds, discourage supplantation, and provide the appropriate balance between accountability and flexibility, and whether it provides temporary “seed money” or represents a long-term funding commitment. Other federal policy tools can also be designed and targeted to elicit a prompt, adequate, and sustainable response. In the area of regulatory authority, the federal, state, and local governments share authority for setting standards through regulations in several areas, including infrastructure and programs vital to preparedness (for example, transportation systems, water systems, and public health). In designing regulations, key considerations include how to provide federal protections, guarantees, or benefits while preserving an appropriate balance between federal and state and local authorities and between the public and private sectors. Regulations have recently been enacted in the area of infrastructure. For example, a new federal mandate requires that local drinking water systems in cities above a certain size provide a vulnerability assessment and a plan to remedy vulnerabilities as part of ongoing EPA reviews, while the Transportation and Aviation Security Act grants the Department of Transportation authority to order deployment of local law enforcement personnel in order to provide perimeter access security at the nation’s airports. In designing a regulatory approach, the challenges include determining who will set the standards and who will implement or enforce them. Several models of shared regulatory authority offer a range of approaches that could be used in designing standards for preparedness. Examples of these models range from preemption through fixed federal standards to state and local adoption of voluntary standards formulated by quasi- official or nongovernmental entities. As the administration noted, protecting America’s infrastructure is a shared responsibility of federal, state, and local government, in active partnership with the private sector, which owns approximately 85 percent of our nation’s critical infrastructure. To the extent that private entities will be called upon to improve security over dangerous materials or to protect critical infrastructure, the federal government can use tax incentives to encourage or enforce their activities. Tax incentives are the result of special exclusions, exemptions, deductions, credits, deferrals, or tax rates in the federal tax laws. Unlike grants, tax incentives do not generally permit the same degree of federal oversight and targeting, and they are generally available by formula to all potential beneficiaries who satisfy congressionally established criteria. Since the events of September 11th, a task force of mayors and police chiefs has called for a new protocol governing how local law enforcement agencies can assist federal agencies, particularly the FBI. As the U.S. Conference of Mayors noted, a close working partnership of federal and local law enforcement agencies, which includes the sharing of information, will expand and strengthen the nation’s overall ability to prevent and respond to domestic terrorism. The USA Patriot Act provides for greater sharing of information among federal agencies. An expansion of this act has been proposed (S1615; H.R. 3285) that would provide for information sharing among federal, state, and local law enforcement agencies. In addition, the Intergovernmental Law Enforcement Information Sharing Act of 2001 (H.R. 3483), which you sponsored, Mr. Chairman, addresses a number of information-sharing needs. For instance, the proposed legislation provides that the Attorney General expeditiously grant security clearances to Governors who apply for them and to state and local officials who participate in federal counterterrorism working groups or regional task forces. The national strategy also includes several information-sharing and systems initiatives to facilitate dissemination of information from the federal government to state and local officials. For example, the strategy supports building and sharing law enforcement databases, secure computer networks, secure video teleconferencing capabilities, and more accessible websites. It also states that the federal government will make an effort to remove classified information from some documents to facilitate distribution to more state and local authorities. The recent publication of the national strategy is an important initial step in defining homeland security, setting forth key strategic objectives, and specifying initiatives to implement them. The proposals for the Department of Homeland Security represent recognition by the administration and the Congress that much still needs to be done to improve and enhance the security of the American people and our country’s assets. The proposed department will clearly have a central role in the success of efforts to strengthen homeland security, and has primary responsibility for many of the initiatives in the national homeland security strategy. Moreover, given the unpredictable characteristics of terrorist threats, it is essential that the strategy be implemented at a national rather than federal level with specific attention given to the important and distinct roles of state and local governments. Accordingly, decision makers will have to balance the federal approach to promoting homeland security with the unique needs, capabilities, and interests of state and local governments. Such an approach offers the best promise for sustaining the level of commitment needed to address the serious threats posed by terrorism. This completes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information about this testimony, please contact me at (202) 512-9573 or JayEtta Hecker at (202) 512-2834. Other key contributors to this testimony include Matthew Ebert, Thomas James, David Laverny- Rafter, Yvonne Pufahl, Jack Schulze, and Amelia Shachoy. Port Security: Nation Faces Formidable Challenges in Making New Initiatives Successful. GAO-02-993T. Washington, D.C.: August 5, 2002. Aviation Security: Transportation Security Administration Faces Immediate and Long-Term Challenges. GAO-02-971T. Washington, D.C.: July 25, 2002. Homeland Security: Critical Design and Implementation Issues. GAO- 02-957T. Washington, D.C.: July 17, 2002. Homeland Security: New Department Could Improve Coordination but Transferring Control of Certain Public Health Programs Raises Concerns. GAO-02-954T. Washington, D.C.: July 16, 2002. Critical Infrastructure Protection: Significant Homeland Security Challenges Need to Be Addressed. GAO-02-918T. Washington, D.C.: July 9, 2002. Homeland Security: New Department Could Improve Biomedical R&D Coordination but May Disrupt Dual-Purpose Efforts. GAO-02-924T. Washington, D.C.: July 9, 2002. Homeland Security: Title III of the Homeland Security Act of 2002. GAO-02-927T. Washington, D.C.: July 9, 2002. Homeland Security: Intergovernmental Coordination and Partnership Will Be Critical to Success. GAO-02-901T. Washington, D.C.: July 3, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Priority Setting. GAO-02-893T. Washington, D.C.: June 28, 2002. Homeland Security: New Department Could Improve Coordination but May Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Homeland Security: Proposal for Cabinet Agency Has Merit, But Implementation Will Be Pivotal to Success. GAO-02-886T. Washington, D.C.: June 25, 2002. Homeland Security: Key Elements to Unify Efforts Are Underway but Uncertainty Remains. GAO-02-610. Washington, D.C.: June 7, 2002. National Preparedness: Integrating New and Existing Technology and Information Sharing into an Effective Homeland Security Strategy. GAO-02-811T. Washington, D.C.: June 7, 2002. Homeland Security: Integration of Federal, State, Local, and Private Sector Efforts Is Critical to an Effective National Strategy for Homeland Security GAO-02-621T. Washington, D.C.: April 11, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Homeland Security: Progress Made, More Direction and Partnership Sought. GAO-02-490T. Washington, D.C.: March 12, 2002. Homeland Security: Challenges and Strategies in Addressing Short- and Long-Term National Needs. GAO-02-160T. Washington, D.C.: November 7, 2001. Homeland Security: A Risk Management Approach Can Guide Preparedness Efforts. GAO-02-208T. Washington, D.C.: October 31, 2001. Homeland Security: Need to Consider VA’s Role in Strengthening Federal Preparedness. GAO-02-145T. Washington, D.C.: October 15, 2001. Homeland Security: Key Elements of a Risk Management Approach. GAO-02-150T. Washington, D.C.: October 12, 2001. Homeland Security: A Framework for Addressing the Nation’s Issues. GAO-01-1158T. Washington, D.C.: September 21, 2001. Combating Terrorism: Intergovernmental Cooperation in the Development of a National Strategy to Enhance State and Local Preparedness. GAO-02-550T. Washington, D.C.: April 2, 2002. Combating Terrorism: Enhancing Partnerships Through a National Preparedness Strategy. GAO-02-549T. Washington, D.C.: March 28, 2002. Combating Terrorism: Critical Components of a National Strategy to Enhance State and Local Preparedness. GAO-02-548T. Washington, D.C.: March 25, 2002. Combating Terrorism: Intergovernmental Partnership in a National Strategy to Enhance State and Local Preparedness. GAO-02-547T. Washington, D.C.: March 22, 2002. Combating Terrorism: Key Aspects of a National Strategy to Enhance State and Local Preparedness. GAO-02-473T. Washington, D.C.: March 1, 2002. Combating Terrorism: Considerations for Investing Resources in Chemical and Biological Preparedness. GAO-01-162T. Washington, D.C.: October 17, 2001. Combating Terrorism: Selected Challenges and Related Recommendations. GAO-01-822. Washington, D.C.: September 20, 2001. Combating Terrorism: Actions Needed to Improve DOD’s Antiterrorism Program Implementation and Management. GAO-01-909. Washington, D.C.: September 19, 2001. Combating Terrorism: Comments on H.R. 525 to Create a President’s Council on Domestic Preparedness. GAO-01-555T. Washington, D.C.: May 9, 2001. Combating Terrorism: Observations on Options to Improve the Federal Response. GAO-01-660T. Washington, D.C.: April 24, 2001. Combating Terrorism: Comments on Counterterrorism Leadership and National Strategy. GAO-01-556T. Washington, D.C.: March 27, 2001. Combating Terrorism: FEMA Continues to Make Progress in Coordinating Preparedness and Response. GAO-01-15. Washington, D.C.: March 20, 2001. Combating Terrorism: Federal Response Teams Provide Varied Capabilities; Opportunities Remain to Improve Coordination. GAO-01-14. Washington, D.C.: November 30, 2000. Combating Terrorism: Need to Eliminate Duplicate Federal Weapons of Mass Destruction Training. GAO/NSIAD-00-64. Washington, D.C.: March 21, 2000. Combating Terrorism: Observations on the Threat of Chemical and Biological Terrorism. GAO/T-NSIAD-00-50. Washington, D.C.: October 20, 1999. Combating Terrorism: Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attack. GAO/NSIAD-99-163. Washington, D.C.: September 7, 1999. Combating Terrorism: Observations on Growth in Federal Programs. GAO/T-NSIAD-99-181. Washington, D.C.: June 9, 1999. Combating Terrorism: Analysis of Potential Emergency Response Equipment and Sustainment Costs. GAO-NSIAD-99-151. Washington, D.C.: June 9, 1999. Combating Terrorism: Use of National Guard Response Teams Is Unclear. GAO/NSIAD-99-110. Washington, D.C.: May 21, 1999. Combating Terrorism: Observations on Federal Spending to Combat Terrorism. GAO/T-NSIAD/GGD-99-107. Washington, D.C.: March 11, 1999. Combating Terrorism: Opportunities to Improve Domestic Preparedness Program Focus and Efficiency. GAO-NSIAD-99-3. Washington, D.C.: November 12, 1998. Combating Terrorism: Observations on the Nunn-Lugar-Domenici Domestic Preparedness Program. GAO/T-NSIAD-99-16. Washington, D.C.: October 2, 1998. Combating Terrorism: Threat and Risk Assessments Can Help Prioritize and Target Program Investments. GAO/NSIAD-98-74. Washington, D.C.: April 9, 1998. Combating Terrorism: Spending on Governmentwide Programs Requires Better Management and Coordination. GAO/NSIAD-98-39. Washington, D.C.: December 1, 1997. Homeland Security: New Department Could Improve Coordination but may Complicate Public Health Priority Setting. GAO-02-883T. Washington, D.C.: June 25, 2002. Bioterrorism: The Centers for Disease Control and Prevention’s Role in Public Health Protection. GAO-02-235T. Washington, D.C.: November 15, 2001. Bioterrorism: Review of Public Health and Medical Preparedness. GAO-02-149T. Washington, D.C.: October 10, 2001. Bioterrorism: Public Health and Medical Preparedness. GAO-02-141T. Washington, D.C.: October 10, 2001. Bioterrorism: Coordination and Preparedness. GAO-02-129T. Washington, D.C.: October 5, 2001. Bioterrorism: Federal Research and Preparedness Activities. GAO-01-915. Washington, D.C.: September 28, 2001. Chemical and Biological Defense: Improved Risk Assessments and Inventory Management Are Needed. GAO-01-667. Washington, D.C.: September 28, 2001. West Nile Virus Outbreak: Lessons for Public Health Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Need for Comprehensive Threat and Risk Assessments of Chemical and Biological Attacks. GAO/NSIAD-99-163. Washington, D.C.: September 7, 1999. Chemical and Biological Defense: Program Planning and Evaluation Should Follow Results Act Framework. GAO/NSIAD-99-159. Washington, D.C.: August 16, 1999. Combating Terrorism: Observations on Biological Terrorism and Public Health Initiatives. GAO/T-NSIAD-99-112. Washington, D.C.: March 16, 1999. Disaster Assistance: Improvement Needed in Disaster Declaration Criteria and Eligibility Assurance Procedures. GAO-01-837. Washington, D.C.: August 31, 2001. FEMA and Army Must Be Proactive in Preparing States for Emergencies. GAO-01-850. Washington, D.C.: August 13, 2001. | The challenges posed by homeland security exceed the capacity and authority of any one level of government. Protecting the nation against these threats calls for a truly integrated approach, bringing together the resources of all levels of government. The proposed Department of Homeland Security will clearly have a central role in efforts to enhance homeland security. The proposed consolidation of homeland security programs has the potential to reduce fragmentation, improve coordination, and clarify roles and responsibilities. Realistically, the challenges that the new department faces will clearly require substantial time and effort, and it will take additional resources to make it effective. Moreover, formation of a department should not be considered a replacement for the timely issuance of a national homeland security strategy to guide implementation of the complex mission of the department. Appropriate roles and responsibilities within and between the levels of government and with the private sector are evolving and need to be clarified. New threats are prompting a reassessment and shifting of long-standing roles and responsibilities, but these shifts are being considered on a piecemeal basis without benefit of an overarching framework and criteria to guide the process. A national strategy could provide such guidance by more systematically identifying the unique capacities and resources of each level of government to enhance homeland security and by providing increased accountability within the intergovernmental system. The nation does not yet have performance goals and measures upon which to assess and improve preparedness and develop common criteria that can demonstrate success, promote accountability, and determine areas where additional resources are needed, such as improving communications and equipment interoperability. A careful choice of the most appropriate tools is critical to achieve and sustain national goals. The choice and design of policy tools, such as grants, regulations, and tax incentives, can enhance the capacity of all levels of government to target areas of highest risk and greatest need, promote shared responsibilities, and track progress toward achieving preparedness goals. |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.